Have you done the tax, estate and charitable math?
· Collectibles are considered “tangible personal property” and are, therefore, taxed differently than other capital assets.
· For collectibles, the long-term capital gains tax is at 28 percent (not 20 percent) as it is for stocks or real estate.
· Gifting collectibles to charity requires a qualified appraisal and the recipients must be used for its charitable purposes. If not, you’ll have to take a less valuable deduction.
It is estimated that 30-percent of high net worth families collect art, antiques, coins, classic cars or other valuable assets that aren’t traded on an open exchange. Often referred to as passionate assets, they represent both a challenge and an opportunity for advisors and their clients.
Many enthusiasts don’t think of their collectables as they do their other assets – collectibles are loved, cherished, and coveted. They hold a meaning and identity that is incomparable to their economic value.
If you’ve ever been to a classic car show and stayed less than an hour, you did it wrong – to put it bluntly. Ask an owner about their gleaming, perfect specimen of a 1940 Duesenberg and you’ll get a detailed rundown of its history from the factory floor to present day, sparing no details in between. This is true for most collectors – be it toy trains, fine art or baseball cards.
That visceral connection is what makes planning for the “succession” of the collection so challenging. Yet, plan they must. Is the next generation even interested in the collection? Better find out. Who owns the collection? Better find that out, too. It’s the planner’s chance to make a huge difference in the final value to the family.
VERY IMPORTANT: Collectibles are considered “tangible personal property” and are, therefore, taxed differently than other capital assets are. For collectibles, the long-term capital gains tax is at 28 percent, not 20 percent, like it is for stocks or real estate – that’s a significant bump. Furthermore, gifting your collectibles to charity gets complicated because you need a qualified appraisal of the collectible at the time of the gift. Further, the charity must be able to use the gift for its charitable purpose in order for the deduction to be at fair market value instead of the less valuable cost basis.
Proper planning can address these issues and you need to make sure your advisor can assist you properly, or have access to an expert specializing in this area. Keeping the collection in the family can be accomplished only with solid planning – as well as preventing a fire sale to create liquidity to pay estate taxes at the death of the collector.
What matters is aligning your goals for their collectibles with the tools and strategies that will accomplish them.
Make sure your advisors can help you with questions like these:
· Do we use a pooled income fund to sell of the collection little by little?
· Do we transfer to a private operating foundation and endow it with capital to keep the collection in the family?
· Do we utilize monetized installment sales to defer capital gains tax for 30 years as we liquidate?
Any or all of these strategies may be applicable to your situation. If he or she hasn’t done so already, make sure you open the dialogue with your advisor(s) about your valuable collections.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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