Monday, June 20, 2016
How Art Can Blow Apart Your Estate
Barron's, How Art Can Blow Apart Your Estate:
Your Jeff Koons could destroy your estate plan and leave your heirs shell-shocked and scrambling to pay bills. That’s because the Internal Revenue Service is rigorously scrutinizing appraisals of artworks above $50,000 and often demanding value adjustments that trigger unexpected and large tax bills, with penalties and interest added on.
Consider what happened to the estate of art collector Bernice Newberger and her Tête de Femme by Pablo Picasso. She died in July 2009, when the art market was still reeling from the recession, and her estate deemed the date-of-death value of the painting to be $5 million, based on a Christie’s appraisal.
In December 2009, the work was put up for auction near the Christie’s estimate, and fetched a shocking $12.9 million. Four years later, in 2013, the IRS revised the date-of-death value to $10 million, noting that postmortem sales should be factored into appraisals. An unexpected $5 million was subject to the 40% estate tax and 20% in penalties.
What are the chances of this happening to your estate? The IRS has an Art Advisory Panel composed of experts such as curators, art professors, and gallery directors, which makes recommendations on works forwarded for review.
From 2011 to 2014, the IRS raised appraisals for estate- and gift-tax returns and lowered those for charitable deductions—both moves resulting in higher tax burdens—on 41% of the total 1,394 appraisals that it reviewed. In 2014, 58 out of the 159 estate appraisals the IRS panel scrutinized were increased from a total of $36.3 million to $66.8 million, an eye-watering 84%. ...
So what’s a collector to do? Estates should get two artwork appraisals. Heirs, in turn, should brace themselves for an IRS valuation audit and have a fallback plan for paying unexpected taxes, should the ruling go against them.