One of the most difficult problems in Estate Planning is determining how to handle personal collections and similar special assets. Often the owner has devoted more than money to these assets. The collection is a special interest that consumed much time and attention, and there probably is an emotional investment as well. The owner had to learn a lot to build the collection, enjoyed the process, and is proud of it. Building the collection was more of a hobby and pastime than an investment. Yet, the collection also could be valuable.
The difficult-to-handle assets can include art, antiques, baseball cards, comic books, and anything else a person collects. I have a friend who has been collecting political campaign buttons for decades and is wondering what to do with them. The items often are considered to be of little value to most people. But they are valuable to people with that hobby, especially when assembled into a collection.
There are three widely-used options for handling these collections in your estate planning. In general, you should begin estate planning the fate of your valued collection early if you want the collection preserved or you want your heirs to receive the highest value from it.
• Charitable donation. This is the obvious choice of many, but people who look into it often are surprised at the difficulty of giving away a collection. That’s one reason you need to make plans years ahead of time. Collectors often assume that they’ll find a museum, university, or similar non-profit organization that will be happy to accept a donation of the collection and display it to the public. A collector might imagine that there will be a wing or at least a room devoted to the hobby, perhaps including a brief biography.
Museums and charities often have a different view. Many museums have more items than they can display. I’ve seen estimates that 20% or less of the items held by museums ever are put on display. Instead, they are stored.
It costs a non-profit money to accept items into inventory, store them, provide security and maintain them in good condition. Also, an institution might want only part of a collection or a few select items that complement what they already own. Many of them will want the collection to be accompanied by a cash donation that can be used to maintain the collection.
Consider also the tax aspects of donating the collection. A donation during your lifetime can provide an income tax deduction. But the rules for donating a collection can be tricky.
When you donate appreciated tangible personal property that you held more than one year, the fair market value is deductible. But you can deduct in the year of your gift only an amount up to 30% of your adjusted gross income. If the amount of the donation exceeds 30% of your AGI, the amount you can’t deduct this year can be carried forward and deducted in the same way for up to five years or until the deduction is exhausted.
The donation must be to a public charity recognized by the Internal Revenue Service (IRS). It can’t go to a private foundation or similar entity if you want the deduction. In addition, you deduct the full fair market value only if the donee uses the property for a purpose related to its tax-exempt functions. If the charity sells the collection, for example, you aren’t allowed to take the deduction. That’s why it is a good idea to have a written agreement with the institution that the property will be retained and used for its exempt purpose.
You also will need to have the property appraised and will need an acknowledgement from the charity that you donated the property and didn’t receive anything of value in return.
• Selling the collection. You also can sell the collection or direct that your executor sell it. That’s often easier said than done. Selling a collection is much like selling a small business or an expensive home. You have to wait a long time to find a buyer willing to pay something close to fair value.
A mistake many people make is to direct the executor to sell the collection (or leave the executor the option to sell it) but appoint an executor who doesn’t know much about the collection and might not even appreciate it. In those cases, the collection often is sold quickly for a fraction of the value that could have been obtained.
When you plan to retain the collection for life and have the estate sell it, take some precautions. Require the executor to obtain at least one independent appraisal, and designate the appraisers who can be considered. You want to name only appraisers who are familiar with that type of asset. An alternative is to direct some specifics of the sale in your will. Name one or more dealers you trust and have the executor enter into a contract with a dealer. The dealer takes possession of the items and has a reasonable time period of 12 months or more to liquidate the collection. The dealer deducts a commission, submits the rest of the proceeds to the estate and provides an accounting.
You also should maintain a written or computerized inventory of your collection and compile as much documentation as you can to help establish the maximum value of the items.
If you plan to sell the collection yourself, remember that the assets are likely to be considered collectibles by the IRS. Collectibles incur a higher long-term capital gains tax rate of 28%, compared to a maximum rate of 20% for other assets. You also will need a record of your cost of each item to establish how much of the sale price is a gain.
• Handing it down. Most collectors hope that a younger family member or friend has as much interest in the collection as they do and will keep it going. In that case, you can bequeath the collection to that person in your will.
Unfortunately, that’s the least likely outcome.
When you value the collection, care must be taken before giving it to someone. Of course, the person must be interested in having the collection and in maintaining it. To maintain it, the person needs at least a minimum knowledge of the field and the motivation to expand that knowledge. The person also needs the resources to maintain and perhaps expand the collection. Those resources include enough of both time and money to store, display, preserve and insure the collection. Those costs will depend on the collection. Some items, for example, need a temperature-controlled environment or might require regular maintenance.
When the collection is valuable, there might be an issue of fairness in the distribution of the estate. Are there enough other assets in the estate to allow an equal distribution of wealth to the children or other heirs? Or is it fair for one heir to inherit primarily the collection while others inherit liquid assets they can spend or invest?
What about the rare situation when more than one heir is interested in the collection and qualified to take it over? In that case, you might split the collection between them, provided that doesn’t substantially reduce the collection’s value.
A more likely situation is when someone has the interest and knowledge to maintain the collection but doesn’t have the financial resources. In that case, you might consider leaving him or her both the collection and a separate endowment for the support of the collection. But that again presents the issue of whether there is a fair and equitable distribution to all the heirs.
When you plan to hand down the collection, decisions can’t be made until the collection is appraised. That’s the first step. Then, you need to estimate the annual costs of maintaining the collection. With that information, you can start to decide if it is feasible to keep the collection among friends or family.