Private collections open to the public, a philanthropic contribution and tax strategy
A CHARITABLE TRUST ALLOWS A GENEROUS DONATION TO A CHARITY OF YOUR CHOICE WHILE PROVIDING A TAX BREAK TO YOU AND TO YOUR HEIRS. THESE ARE IRREVOCABLE TRUSTS THUS DEMANDING PARTICULARLY CAREFUL CONSIDERATION. ONCE THE TRUST GOES INTO EFFECT, THE DECISION CAN NOT BE REVERSED AND YOU CAN NOT REGAIN LEGAL CONTROL OF THE PROPERTY IN THE TRUST.
WITH THAT IN MIND, IN LIGHT OF THE EVER EXPANDING PASSION FOR COLLECTING BOTH ART AND COLLECTIBLES, MANY CHARITABLY-MINDED HIGH NET WORTH INDIVIDUALS AND FAMILIES ARE TARGETING THIS TAX AND ESTATE PLANNING OPPORTUNITY.
IN SEPTEMBER 2016, LEGAL EXPERTS DIANA WIERBICKI AND PAUL ROY, OF WITHERS BERGMAN, AS GUEST EDITORS IN JANET NOVAK’S COLUMN AT FORBES ON TAX AND RETIREMENT PLANNING AND POLICY, CONTRIBUTED A CLEAR AND COMPREHENSIVE ARTICLE ON A NEW IRS REVENUE PROCEDURE THAT MAKES A CHARITABLE REMAINDER TRUST AN EXCELLENT VEHICLE FOR PHILANTHROPIC ART COLLECTORS.
NEW IRS RULE OPENS TAX SAVING STRATEGY TO ART COLLECTORS
Art and collectibles are subject to a 28% long-term federal capital gains rate, compared to a top rate of 20% for stocks and other investments assets. Add on the 3.8% Net Investment Income Tax and state and local income taxes, and a New York City collector can end up paying up to 44% on gains; a California collector could pay up to 45%.
So understandably, collectors are always looking for ways to mitigate this tax burden. A new IRS Revenue Procedure makes using certain charitable remainder trusts (CRTs) as vehicles for tax deferral more viable for art and collectibles. Moreover, this change comes at an opportune time, what with the Federal Reserve expected to increase interest rates later this year. (Charitable remainder trusts are most effective in higher interest environments.)
The dual benefit of CRTs
The name “charitable remainder trust” suggests a charitable component, and not surprisingly, CRTs are typically used by those who are both charitably inclined and want to sell a highly appreciated asset without paying a big capital gains tax bill. If appreciated art is sold outright by an art collector, the collector would owe income tax on the gain in the year of the sale. By contrast, if a CRT sells the appreciated art, the gain is taxed over time as distributions are made from the CRT. Meanwhile, the CRT, which is itself generally exempt from state and federal income taxes, can reinvest the full amount of sale proceeds unreduced by taxes. Additionally, in the year the CRT sells art, the collector can take a charitable deduction on his individual income tax return — a deduction based on the remainder value of the CRT that is projected (based on formulas dictated by the IRS) to be left for charity.
Typically, a collector transfers art to the CRT and the CRT’s trustee sells that art, reinvesting the proceeds in a portfolio of stocks and bonds. As noted above, the initial transfer of art to the CRT and the subsequent sale of the art will not result in a current capital gains tax bill for either the art collector or the CRT.
The CRT then makes a series of annual payments to a non-charitable beneficiary, usually the art collector who created the trust (or a family member) for his or her life or for a term of years. The annual payments to the art collector or family member will be made from the CRT’s portfolio of assets, and the amount will vary depending on the structure of the CRT.
GUEST POST, September 21, 2016, FORBES/Personal Finance#TakeATaxBreak with Janet Novack
Diana Wierbicki is the global head of art law at Withers Bergman. Paul Roy is of counsel at the firm.
SLEIGH BELLS ARE RINGING, OR AT LEAST THOSE OF THE SALVATION ARMY CAROLERS ON FIFTH AVENUE AND THE HOLIDAYS ARE RAPIDLY APPROACHING! ONE ANNUAL TRADITION AT THE LRFA BLOG IS BOOK EXPERT DOUG FLAMM’S CONTRIBUTION HIGHLIGHTING SPECIAL ART PUBLICATIONS TO GIVE (AND TO REQUEST) ON YOUR SANTA’S WISH LIST.
DOUG HAS JOINED GAGOSIAN GALLERY TO DEVELOP AND EXPAND ITS BOOK STORE AND ENRICH ITS INVENTORY OF ARTISTS’ BOOKS AND RARE BOOKS. LOCATED AT 976 MADISON, MAKE IT YOUR FIRST STOP FOR THE HOLIDAY SHOPPING SEASON!