Take a closer look at clients’ art collections

Financial advisers need to pay more attention to their clients’ art collections, according to experts who are trying to bring the art and financial worlds closer together.

“Most advisers don’t have art assets on their radar,” said Michael Mendelsohn, founder and president of The Briddge Group LLC of Rye Brook, N.Y., a newly formed company that specializes in art succession planning.

Indeed, “art and collectibles that have significant value in an estate are the most overlooked asset class in the planning process,” said David Frohman, a financial adviser and director of business development for The Briddge Group who is based in Boca Raton and Palm Beach, Fla.

One recently widowed client told him that her financial planner and banker came to her home for a meeting and focused their attention exclusively on her two houses and her late husband’s substantial investment portfolio — but never once asked about the paintings hanging on the walls.

“The collective value of her artwork was worth more than her two homes and portfolio combined,” Mr. Frohman said.

“Lifetime planning for collectors is essential because art is often overlooked in the estate-planning pro-cess, yet usually comes into play with intrafamily matters and legacy planning,” said Barry Fine, a registered investment adviser who is principal and executive vice president of Kalon Planning Strategies, a consulting firm in New York that specializes in art and antiques assets. “Mostly, advisers must look at art as an asset class for diversification purposes.”

Advisers also need to “expand their intake questions” for clients with art, Mr. Mendelsohn said.

“They need to ask: ‘What are on the walls? What did you pay? What are they worth? What would you like to see happen to them?’ ” he said.

From a business standpoint, Mr. Mendelsohn said, getting up to speed on the client’s artwork opens up planning opportunities and serves as protection from potential fiduciary malpractice lawsuits.

But just as important, he said, is recognizing that art often means more to clients than other assets do.

“They have to remember that art is an emotional asset,” Mr. Mendelsohn said.

“Clients buy it and put together a collection with love,” he said. “It can also be part of building a legacy for them — it says something about who they are.”

Experts say that collectors themselves don’t realize that they have a planning issue and don’t include art in their estate plan before they die, or don’t realize that if the art is sold, sellers must pay a steep federal capital gains tax of 28%.

That is critical because the value of art has, in contrast to the stock market, kept rising.

According to the Mei Moses Annual All Art Index from New York-based Beautiful Asset Advisors, repeat-auction sales prices of the same works of art rose more than 20% last year.

“Clients are reluctant to discuss their collection and to plan for passing it along,” said Paige Stover Hague, a Boston-based attorney as well as a principal and executive vice president for Kalon. “Collectors do not seem to view the art collection as an asset class and adviser planning in post mortem is limited, and often results in significant loss of value.”

One strategy that advisers can use while the art-collecting client is still alive, Mr. Mendelsohn said, is a succession plan to give some lesser valued artwork to the client’s children as a charitable gift; it is a way to minimize estate taxes.

Working with an attorney, advisers can also help clients create an irrevocable life insurance trust that buys insurance on a collector’s life for the benefit of his or her children. When the collector dies, Mr. Mendelsohn said, the trust has enough money to buy the collector’s artwork from the estate.

Charitable-remainder trusts are also popular estate-planning vehicles for wealthy collectors.

Collectors can donate their artwork to a trust, which then sells it and invests the proceeds. The trust has tax-exempt status, which allows the donor to take a deduction and avoid paying capital-gains taxes.

In addition, Congress may soon offer art collectors another option.

According to published reports, Sens. Charles Schumer, D-N.Y., and Charles Grassley, R-Iowa, are working on a plan to allow art collectors who donate small stakes in their collections to museums to receive increasingly larger deductions as the value of their artwork appreciates.

Previously, collectors could take advantage of generous tax deductions on so-called fractional gifts of art to museums, but two years ago Congress limited the tax breaks, and the donations dwindled.

Under pressure from museums, those limits may be eased in new tax legislation later this year.

Easing the rules will “most certainly” help advisers and clients, Mr. Fine said.

According to Mr. Mendelsohn, fractional giving is a “win-win situation.”

“It helps the museums more, but it’s good for art collectors too,” he said.

E-mail Charles Paikert at [email protected].