Collections are different from most other investments and assets people own. Your collection could be rare stamps, comic books, baseball cards, fine artworks, jewelry, antiques, coins, or a library of rare books. Often, people who have one collection have others, compounding the situation.
The problems start when you pass away, and the heirs have no knowledge or interest in your lifelong passion. They have no idea where to start or even who to contact when dealing with your specialized interest.
· How do they value what you have spent years collecting?
· How should they sell your precious items?
· What documentation must be changed or needed for the full value of the asset to be realized in a sale?
· What are the tax implications they need to consider, and how will it affect the rest of the estate?
· Who will take care of the collection while its disposition is decided?
· Should any or all of the collection be donated to charity or a museum?
· What insurance is needed while all of this is being figured out?
This is only a partial list of the details that should be decided in advance for a spouse or the children who are likely the executor(s) of your estate. Often that is not the case, and the task is so overwhelming that the collection is sold at fire sale prices just to get rid of the problem. Sometimes it is ignored, and the collection is stuffed away and forgotten. We’ve all heard of priceless artwork being found in a basement or attic. For those in the classic car world, they may dream of discovering a barn with a classic Jaguar or Ferrari. Sometimes entire collections of cars have been locked away for decades. There are TV shows dedicated to just this topic. Every barn find car was someone’s pride and joy that was left behind and neglected.
What is there to do about it?
1. Document, Document, Document
The first and most crucial step is to document what you have. Make sure anyone who comes after you can easily understand what is in your collection and what it is worth. This record needs to be updated when the collection grows, and the values change. If possible, include details about your collection in your records. This will help them to understand why your 1966 Shelby Cobra is worth $1,200,000 and not $600,000. History and condition are often the difference between these values be it a classic car or a baseball card.
2. Who And Where?
The next bread crumb you need to leave is who they should contact to sell your collection. Executors find it easier to send everything to auction in one lot, without regard to what is being sold. This fire sale approach can severely decrease what your heirs and estate net. Often, you will want specific items to go to the specialist or venue that will maximize the sale price. These specialists can also value the collection more accurately for estate tax purposes. This is especially important for people with a high net worth, where a federal estate tax may apply. A 40 percent tax is serious business and having the wrong value can cost dearly! I am sure you don’t want the IRS looking up the values out of a book or off of eBay! Make sure you include who to contact in your notes.
3. The Tax Man
Even if there is no federal estate tax due, there can often be capital gains taxes. Without knowing the cost of the items in your collection, your spouse could end up paying hefty capital gains on the sale of your life’s passion that they have no interest or knowledge of. Here again, keeping good notes and documentation is critical to not giving the IRA more than necessary. Planning can also help to reduce the tax impact. Most collectors would rather see part of their collection gifted to a museum rather than be sold off to pay taxes to the IRS. If you leave instructions on what items and where to donate them, the tax deductions could offset most or all the tax due on the sale of the rest of your collection. Often donating the whole collection to one or more museums can offset other estate taxes that may be due. Consulting with your estate planner and accountant will help you make the correct decisions for your situation.
4. Keep It Safe
Artwork needs to be safely stored in a correct climate-controlled environment while it is waiting to be sold or donated. A car collection needs maintenance and care. Jewelry, coins, or any other valuables must be locked up for safekeeping. Often, collections are huge, need a large amount of space, and it can take more time to figure out their disposition than the home or property where they were being held. The where, who, and how are important for the executor to know.
5. Cover It
While we are at it, let’s discuss the insurance that must be carried while everything is being settled. The owner of the collection has died. In some cases, their insurance coverage ends when they do. The executor will need to buy an insurance policy to cover the collection from theft, fire, and other perils. Without it, all can be lost, and it is often overlooked in an estate.
6. Legal Documents And Records
Finally, make sure your legal documentation is up to date and in a safe known location. Receipts, letters of provenance, and titles of ownership need to be accessible by the executor. Often in the classic car world, titles are signed over but not processed into the collector’s name. This can be a nightmare when the details needed to prove ownership die with the collector. It can be made worse when both the prior owner and the collector have both passed. Do yourself and your heirs a favor and make sure everything is in order.
7. Find A Specialist
The Law Office of Joseph M. Barton can help ease the burden on families who are forced to deal with these types of situations. We help create a plan that reduces the tax burden and makes a complex problem simple. Schedule a complimentary consultation today by calling 415-235-9162 or online at joebartonlaw.com and make your family’s life a bit easier.