Mastering the Art of Estate Planning: Tips for Art Collectors in New York

For many collectors and artists who have spent a lifetime painstakingly building an art collection, the collection is a work in progress, an ongoing project without final form. So too, then, should the collector's estate plan be dynamic, evolving with both the collection and its collector over time. Both the seasoned collector with a storied collection and the fledging collector who is only just beginning to amass their treasured works can benefit from a thorough review of their assets, their goals and their motivations by a trusted advisor. The resulting plan to structure (or restructure) an art collection will address not only how the artwork should be held, but where, and eventually, by whom. Many of these important considerations are the same for both artists and collectors, and are further discussed below.

How to own art

As with any asset, the determination of the best way to structure an art collection or to hold a specific work will depend on the collector's universe of assets and overall goals. Such a determination will require an in-depth analysis of what the collector is trying to accomplish and why, which assets may be best suited to a particular planning technique, and the interpersonal dynamics of those individuals who may stand to benefit at the next generation. No one approach will suit every situation.

Generally, outright ownership of artwork will provide the collector with the most control, but the least privacy, least creditor protection, and least tax savings. The ownership of artwork in an entity like a Limited Liability Corporation (LLC) or Family Limited Partnership (FLP) creates greater privacy for the owner, allows for shared ownership of an art collection or single artwork among family members and creates the opportunity for fractional interest discount planning, but ever-developing reporting requirements (eg, the Corporate Transparency Act) and the possible formation of a tiered or multiple entity structure can increase the administrative burden of maintaining the collection. An irrevocable trust affords the grantor more control over the disposition of trust assets after their lifetime, can facilitate efficient tax-planning, and afford its beneficiaries creditor protection, but is perhaps the least flexible option to accommodate changing life circumstances over the years. Further, in certain states, the vehicle in which the artwork is held can affect its taxation at the owner's death. Thus, the cost/benefit of each ownership vehicle must be weighed against the characteristics of each asset and what the owner hopes to achieve.

Where to own art

Diligent planning considers not only the best way to own artwork, but the best place to do so. Deciding where to own art involves balancing lifetime considerations of access, enjoyment and anticipated expenses against the practical realities of estate administration at the collector's death.

New York State imposes an estate tax on the assets of a New York decedent, and is structured such that, generally, an estate that exceeds the exemption amount (USD7,350,000 in 2026) will be taxed not only on the assets exceeding the exemption amount, but on the entire value of the estate. Further, though any unused Federal Estate Tax exemption is "portable" between spouses, the unused New York State exemption amount is not. As a result, any unused New York State exemption amount remaining at the death of the first spouse cannot be recaptured at the death of the second spouse.

New York also imposes estate tax on certain assets (eg, real estate and tangible personal property such as artwork) of a non-resident decedent that are located in New York. A New York non-resident collector must consider that storing artwork in a Manhattan apartment or a storage facility in New York can subject the work to New York estate tax at the death of the collector. Therefore, though a collector with New York ties can mitigate estate taxes owed at death with careful planning, a collector who is not a New York resident may wish to avoid subjecting any portion of their collection to New York estate tax at all.

Even if a collector is based in New York, it is more than likely that their collection touches different corners of the world. For example, a New York collector may have more than one residence in the United States or abroad, or store different works of art in facilities worldwide. Others may have works loaned to museums or other institutions across the globe that are properly considered New York situs assets. Attention must be paid not only to the laws of New York with regard to such assets, but also to the laws of the foreign jurisdictions to which the collection might be connected. For example, if a work is culturally significant to the country in which it is located, a country could deem it a national treasure and restrict its export. Without careful planning and consultation with a trusted advisor, a transaction involving artwork and its subsequent movement across borders could trigger significant Sales & Use Tax or VAT Tax. Collectors must take care to ensure that their advisors are coordinated in planning and reporting across jurisdictions to ensure records of the collection are current and consistent.

It is important to consider the physical location of artwork not only in the collector's life but also at their death to determine where probate might be required or to which authorities death taxes may be due. Certain states (eg, Connecticut) charge probate fees based on the value of the decedent's assets, and certain states (eg, New Jersey) may require filing a tax return based on the relationship of the beneficiaries to the decedent. Neither of these requirements are necessarily neutralised by the use of revocable trust as a testamentary substitute. Even in states where a revocable trust can help the executor of the decedent's estate avoid probate, care must be taken to ensure assets have been properly assigned to the trust during the decedent's lifetime.

Beyond the transactional, tax and probate costs to consider, the collector (or their executor/trustee) should be aware of the logistical challenges that may arise in managing an art collection physically located in multiple jurisdictions (eg, obtaining access to artwork stored abroad after the collector's death and arranging for a timely appraisal) and factor these logistics into the plan for moving the collection forward.

Complex issues in the transfer of art to the next generation

Perhaps as important as deciding how and where to own an art collection during a collector's life is to consider its continued existence at the next generation. As noted earlier in this Article, it is essential for the collector's advisors to understand the collector's goals in order to effectuate their wishes for the next chapter in the collection's life.

There are those for whom it is essential that their children make a family tradition of art collecting (regardless of the children's interest in doing so). An important aspect to consider in transferring art to the next generation is the family dynamics at play. A collector's adult children may have varying expertise in the art world, varying tastes in artwork, or even varying levels of interest in collecting significant works of art.

In deciding which specific works to bequeath to specific children, a collector should consider that some children will place greater importance on the emotional value of a work while others will prioritise monetary value. It is important that a collector revisit specific bequests to children often to address any values that may have fluctuated significantly in the intervening years or any emotional considerations that may have changed. For example, did a collector many years ago specifically bequeath different works to two children which had the same cost basis, but one has since skyrocketed in value while the other has not? Do the children get along? Or will a perceived slight fuelled by small differences in bequests ignite decades of repressed anger and frustration among family members?

Perhaps it would be better to consider gifting the children equal shares of an entity that holds the entire art collection. The children could then manage the collection (and weather any fluctuation in value) as co-owners. If a single painting were sold, the children would share in the proceeds of sale. Or if the children some day decided they can no longer maintain the collection, it could be brought to auction as a whole, thereby increasing its marketability and value, especially if the children co-own the right to publicity of a famous collector (eg, a celebrity or other known entertainer).

It may be the case that the collector would like to remove themselves from the determination as to the final destination of their collection altogether, and leave the choice entirely to the discretion of a trustee. The collector could leave a letter to make known their wishes as to the display, maintenance or distributions of the works, and preserve flexibility as circumstances change beyond their lifetime.

However the collector chooses to allocate their treasured works among their family members, it must be remembered that an art collection is a highly illiquid asset, and the collector should take steps during their lifetime to ensure there are liquid assets with which to pay taxes and costs of administration after their death. Life insurance may prove helpful to an estate comprised largely of valuable illiquid assets like artwork. Or the collector might consider how charitable giving can be an important avenue forward, not only in the mitigation of death tax issues, but in the maintenance an art collection beyond the life of its collector.

Charitable giving

It may be that it is of the utmost importance to the collector not to bequeath the artwork directly to their children, but to preserve their family's legacy by keeping the art collection intact. In fact, the best way to ensure a collection stays together very well may be to donate it to a museum or other charitable organisation with the capacity to care for such a collection. But to make this dream a reality, the collector is well-advised to begin these conversations with the intended charitable institution(s) during their lifetime and not to simply surprise an institution with the bequest of an entire collection at their death. Indeed, a collector who is charitably inclined can work to build relationships during their lifetime with the institutions that will manage their legacy after they have died, and come to an agreement as to the care, maintenance, and display of the collection in the future.

The collector intending to make use of a charitable deduction (from income tax or estate tax) based on their donation of a work to a charitable organisation must take care to understand the asset and structure their ownership of the work of art accordingly. For example, because an artwork can be separated from its copyright, it is not necessarily the case that the owner of an artwork owns the copyright thereto. And a charitable deduction is available only if the entire asset has been donated to a charitable organisation. Therefore, a collector who donates the physical work of art to charity but retains the copyright to the work and its associated revenue stream, will not be eligible for a charitable deduction, as they have not donated the entire asset to the charitable organisation. What's more, a charitable deduction will be allowed only if it the intent to donate to charity was ascertainable at the time of the collector's death. That is, if it is not clear from the collector's testamentary instrument(s) that a work is destined for charity at the time of their death, the charitable deduction will be disallowed.

Despite the need to look ahead, the collector must also proceed with caution, for though they may have supported a specific museum for a lifetime, it is not always easy to predict the changes in an institution's governance or policy that time may bring, and a promised gift to a charitable institution can be difficult to unwind if the collector's feelings towards an institution have changed. A private foundation may strike a perfect balance for the collector seeking a charity to assume the maintenance of an art collection but who is yet unsure which institution may be best suited to the role.

Conclusion

It can be difficult for an art collector, whether seasoned in the art world or just entering its waters, to imagine their art collection without them at the helm. To ensure that a collector's vision for the collection is met both at present and in the future, the collector must stay organised and review frequently with their advisors;

• their financial picture;
• their asset structure;
• changes specific to the art collection (and its corresponding inventory); and
• their long and short-term goals for their collection, their family and their legacy.

Of course, is it essential that the collector keep their advisors informed of any major life developments or changes, such as the marriage of a child, birth of a grandchild, change in residence or retirement. None of these issues can be considered in a vacuum, but rather each must be evaluated in context with the others, analysed, and given weight accordingly to help a collector achieve their dreams for their collection in life and beyond.