Palm Springs Law Blog

Monday, September 14, 2015

The Art of Collecting Art - Under the Law

The Art of Collecting Art – Under the Law

Most of us will never own a million dollar art or antique collection, but we always wonder if our own little treasures – 141 different vintage nutcrackers, a sketch by that street artist in Quebec, 17 stuffed pigs in all shapes and sizes, cocktail napkins from every major bar in Chicago - might someday be worth a tidy sum. Here are some interesting facts about art collections of all kinds:

Building your Collection - Art, antiques and collectibles are available from a wide range of sources. Established dealers and auction houses such as Bonham’s and Butterfields’, Sotheby’s and Christie’s have long handled direct sales, auctions and transfers of art. Now it is possible to buy or sell art online at all kinds of sites from to to It is unlikely that any expert or art connoisseur would recommend picking up important pieces from these internet sites, but if you are just putting together a little collection of comic books or a few interesting watercolors by unknown artists, it might get you off to a good start.

If you are, or hope to become a serious collector, it is necessary to keep detailed records and attend to all the other issues of managing what is really a business. Your records should give details and description of the item, where and when it was purchased, its provenance (ownership history), what and how you paid for it, and where you keep it. There should be photographs and it should be listed in an inventory together with all of the other art pieces you own.

Each piece in your collection should be appraised and insured. You may want to create an LLC to hold the collection and all its transactions, so it is separate and protected from your personal finances and assets. And the IRS must, of course, be a part of your planning. Are your collection activities for profit or for pleasure? Do you have to report on-line sales? Do you meet the definition of being a “dealer”? The way you buy, sell and manage your collection will determine how it will be taxed if you sell it, or when you pass away. Check with your CPA as soon as you decide to become a collector, and before making any declarations to the IRS or state tax board.

The Criminal Element - According to the US Department of Justice and UNESCO, art crime is the third highest-grossing criminal trade, just after drug and weapons traffic. Art trade is a lawful business, but almost totally unregulated around the world. There is little or no paper trail when art changes hands. Few transaction records. No public listing of art sales or transfers. It is an open invitation to shady deals, unscrupulous dealers and thieves.

Private art sales are estimated at $30 billion per year; and art crime may account for $6 to $8 billion of this total. Art thieves count on resale or ransom of the stolen pieces. Around the world, as many as 100,000 works of valuable art are stolen each year. It is likely that only 10% are ever recovered. There are also thousands of fakes and forgeries on the market, and many are likely to be found in museums or private collections everywhere. Dealers and private sellers are sometimes unethical, or prone to look the other way when questions of authenticity or true ownership come up.

Art crime and museum heists have been the focus of many popular films over the years. Topkapi, How to Steal a Million, The Thomas Crown Affair, Entrapment, The Monuments Men, and the Grand Budapest Hotel are a few of the films that have fascinated us, often clever and full of Hollywood glamour and intrigue. Captivating, but they also make us think about the serious side. How do you know if your art piece or collection is authentic, or truly valuable? How do you protect it? And what do you do with it when you die?

Where Will My Collection Go? Art is a unique possession, an asset that family members and friends may feel a strong emotional connection to. It is a part of your estate that requires special thought and planning for its future after you pass on. For a few pieces or small collections, you may wish to pass them along in your Living Trust to family and friends who will value and care for them. But depending on the dollar value of your art pieces or collection, there can be substantial tax implications for your estate based on how and when they are distributed to your beneficiaries.

Many serious collectors choose to make a charitable gift of their art pieces to a museum or other organization that can accept and maintain them. You could make the gift prior to your death, or gift it from your estate after you pass away. The tax laws regarding non-cash charitable gifts are especially complex, and you will need to consider the best way to donate your collection with a minimum of tax liability. Something as simple as whether you received an art piece as a gift or purchased it can make a difference in whether it is a deductible donation. The legal status of the organization receiving your gift, how it will be used, and whether the art is capital gain property or ordinary income property are a few of the many other issues that will affect the tax treatment of your art.

Whether your art collection is small or substantial, check with your attorney and CPA before deciding how to plan for its future and protect your estate.

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