Are You Managing Your Art as an Asset? You Should Be
A proper asset management strategy can help you maximize value of art and collectibles
In March of 2020, a Michael Jordan NBA rookie card sold for $48,600. Two months later, in May of 2020, it sold for $87,825 – a 180% return.
That appreciation is just one example of how online and private sales of art and collectibles have skyrocketed during the COVID-19 pandemic. Everything from paintings and sculptures to Hermes Birkin bags and antique rugs – and of course NFTs – have seen increases in valuations in recent months.
Much of this growth can be attributed to collectors looking for a place to invest their money amid market volatility. In addition, art and collectibles can help to diversify a portfolio – although they do have their own risks and volatility to consider.
Whether you’ve purchased artwork, collectibles, or non-fungible tokens (aka NFTs) purely for pleasure or as an investment, they are a part of your asset portfolio, and you should include them in your financial and estate planning conversations with your advisors. You should also have a strategy for managing them as you do with other assets, so you can maximize their value.
“Collectibles are a financial asset, and need to be treated as such,” says Susan Hunter, senior director of appraisals at Winston Art Group. “You would consult your accountant or tax advisor before purchasing a new property, a private plane, or a yacht. And you would maintain it properly. You need the same level of discipline with art.”
The following are 10 asset management tips to consider as you plan for the future of your collection.
- Understand NFTs – One of the hottest art trends of 2021, non-fungible tokens are a type of asset that merges the idea of arts and collectibles. An NFT can be created from digital assets, such as a drawing, music or video clip, a GIF animation, digitized brain scan, a tweet, a digital trading card, etc. Practically anything that can be created in digital format can be turned into an NFT, as long as it is non-fungible – in other words, somehow unique. These assets come with their own set of unique risks and considerations around record-keeping, valuations and security. Do your homework before you dive in.
- Maintain organized records – You should maintain proper documentation, including any information about an item’s provenance (such as a certificate of authenticity or historical research), your purchase receipt, records of all appraisals, as well as receipts for and records of collection maintenance. This applies to NFTs as well. Do not solely rely on the blockchain that your NFT is attached to, or the digital information encoded in the NFT itself. Keep records of the NFT’s value and what you paid for it. Do the same when you sell it. If you paid for an NFT in a cryptocurrency or sell it in exchange for cryptocurrency, keep records of the cryptocurrency’s dollar exchange rate on that day. Good documentation will facilitate the appraisal process. If you decide to sell an item, it can increase the amount the buyer will pay. In the future, recordkeeping may be even more important, as know-your-customer, anti-money-laundering and beneficial ownership knowledge requirements are increasingly being applied within the art world.
- Establish a schedule for having your art or collectible appraised – Art and collectibles can be volatile assets, and regular appraisals will help you to maintain the appropriate insurance value; know when to consider selling; and consider whether you need to make any changes to estate, gift and tax planning. Also, if you’re planning a sale, it’s generally a good idea to obtain at least two appraisals. Coordinate with your tax or financial professional, who can help you prepare for and obtain a more accurate appraisal as well as help you understand whether you need to take any action afterward.
- Obtain appropriate insurance – Many collectors don’t have the right level of insurance coverage for the value of their art and collectible assets – they are often underinsured. A financial professional or advisor with experience in insurance can assist you in obtaining appropriate coverage from both an asset protection and wealth preservation standpoint.
- Include art and collectibles in your estate and tax planning – Art and collectibles can be subject to income and estate taxes. In most cases, an heir’s tax basis for art and collectibles is determined by the fair-market value on the date of your death. Assuming the asset appreciated in value between the date you purchased it and the date of your death, this “stepped-up” basis may reduce the income tax an heir pays upon selling the item. However, the date-of-death value of the item also adds to the value of your estate, which could trigger additional estate tax. In some cases, art and collectibles may be difficult to liquidate, which (in the absence of adequate life insurance) could make it difficult to pay the estate tax. It’s a good idea to note in your estate planning documents who should bear the estate tax and the cost of storing or shipping these items. Finally, if you know of dealers or auction houses that specialize in your type of art or collectible, consider leaving this information for your executors or heirs. This will help them to value the items properly and to obtain the best price if the items are sold.
- Consider specific allocation of each artwork or collectible in your estate plan – When you pass away, do you want this asset to be sold, passed to an heir or donated? Artworks and collectibles are in many ways subjective. Your heirs may have different taste in art or ascribe a different level of sentimental value to a specific piece than you do. It may be best to leave these items to specific individuals or to a charity. Consider asking potential heirs which pieces they would prefer, if any. If artworks and collectible items are not specifically devised in your estate planning documents, it can lead to delays in estate settlement, disagreements among heirs and legal disputes. In addition, up-to-date appraisals of these assets help you allocate the financial value of your estate in the way you want to.
- Take care of the asset, both to maintain and add value – Be careful to store, conserve and ship your item to minimize the effects of time, sunlight, oxygen and other factors that can degrade its condition and, therefore, its value. Consider whether you need hurricane-proof storage or display space. Consider investing in periodic restoration, which not only improves the current condition of an item, but may slow down its deterioration. Consider obtaining condition reports as well. If you are relocating the asset, work with a professional to plan the relocation, minimize the chances of harm and obtain appropriate security. Secure the asset with appropriate systems, such as a safe, burglar alarms, cameras, or glass enclosures. If your collectible is an NFT, you’ll need to consider what type of cybersecurity you require. Finally, consider how institutional loans, exhibits, media coverage and gallery exhibits might help to increase an asset’s value.
- Consider whether to use it as loan collateral – Artworks, in particular, are often used as collateral to secure loans. This allows you to generate more liquidity against a non-liquid asset. For instance, your financial plan might include borrowing against art for cash to invest in the market.
- Be mindful of changes in value – Art and collectible assets can go up or down in value based on market trends, popularity, additional similar items coming onto the market and other factors. Periodic appraisals can help you stay aware of changes and keep your records up to date.
- Manage art and collectibles like any other asset – From sculptures to NFTs and everything in between, art and collectibles are a part of your asset portfolio and need an asset management strategy. You should include them in your financial and estate planning, and manage them with the same care – and assistance from your advisors – as you do with other valuable physical or financial assets.
Kaufman Rossin’s Family Office & Business Services team offers a variety of services to help you manage, maintain and value your art and collectible assets. Our Estate and Trust Tax team can also help you plan for the inclusion of these items in your estate, including any related tax implications. Contact us to learn more.