Wealth Transfer: The Art in Estate Settlements


An investment of thought and consideration now will help smooth the generational transfer of a family’s cherished artwork.

The remarkable collection, consisting of an extensive assortment of impressionist works by many well-known artists, reflected the avid collector’s lifelong passion. It also represented roughly a quarter of the value of his estate.

Deeply appreciative of the depth of the collection — both in its emotional connection and monetary value — the man’s two sons agreed to discuss what would come of it upon their father’s passing. Sharing personal ties and preferences, the two determined which pieces would pass to whom. They also agreed that each would be liable for the tax burden on their portion of the collection.

As it turned out, the estate-ordered appraisals concluded that one son’s group of paintings was worth much more than the other son’s. Yet each brother remained satisfied with the standing agreement and the tax implications.

“Because they had a conversation around the possibility that the values might be different, neither son felt like he didn’t get a fair deal or was treated unfairly,” says Stacy Singer, a Northern Trust advisory practice executive who helped settle the estate.

Singer estimates that about half of the estate settlements she’s been involved with followed a similar path. The balance have mostly been complicated and messy, and required a long road to resolution.

“Families tend to imbue art and personal property with family history and family values,” she says. “They say, ‘This was what mom or dad loved,’ ‘This was the painting over the kitchen table when I grew up,’ or ‘I loved arriving at the lake house and seeing this piece of art.’ So it takes on a value that far exceeds the financial and becomes what people will put their stake in the ground over. That’s when problems arise.”

Streamline the Process of Passing Art to Heirs

To streamline the passing of artwork to heirs — whether it’s one piece or 100 — Stacy Singer of Northern Trust suggests the following checklist for art owners:

  1. Keep appraisals up-to-date.
  2. Make sure the art is adequately insured.
  3. Carefully consider how the art is passed down — both in choosing the intended recipients and the implications for the other beneficiaries of the estate.
  4. Ensure that your attorney knows what you’ve decided and can navigate art-related intricacies to effectively implement your wishes.

Open Communication Is Invaluable

Given the potential emotional land mines tied to artwork, Singer says the most constructive step for a family is to discuss the future while all members can participate in the conversation.

These may not be easy discussions. They can tap a broad spectrum of feelings, but leaving the decisions for the heirs to hash out down the road can lead to frayed nerves, inflamed tempers and abundant ill will.

“If parents, for example, say, ‘I know you both want this painting, but I’m giving it to X,’ at least everyone heard the decision directly from mom and dad,” she says. “They can then get upset, ask questions about it and argue about it, but they know the giver’s intent and hopefully understand why the decision was made. That’s the importance of conversation.”

Moving Beyond Emotional Attachments

Ideally, the alignment of the grantor’s wishes with the recipients’ expectations will dovetail with practical matters such as insurance, appraisals and the security of the artwork. When one or more pieces of the puzzle are missing, the process may be delayed.

Singer recalls one situation where her client’s valuable piece of art hadn’t been re-appraised for many years. As a result, it was underinsured by 85 percent of its value. The client had to take the new valuation into consideration when determining who was going to receive the art.

Additionally, tax calculations are impacted when the value of the piece is uncertain. Another of Singer’s client families vowed never to sell a large collection of paintings, so they considered its valuation irrelevant. When the artwork passed to the next generation, the tax bill was considerable, and the heirs scrambled to find a way to pay it.

Tax issues should not be taken lightly as the IRS has ramped up scrutiny into art valuations over the past decade or so, Singer adds. Any tax return referring to a piece of artwork valued at more than $50,000 is subject to review by the agency’s Art Appraisal Services. Beyond that, select reviews are forwarded to the IRS Commissioner’s Art Advisory Panel, a group of up to 25 art experts.

“When the art panel is involved, a disagreement over valuation can take a long time to resolve,” Singer says.

Regular Appraisals Are Critical

In the eyes of the government, a piece of art is an asset worth a fair market value. The best measure of that value comes from an appraisal, which considers numerous factors ranging from the scarcity and condition of the artwork to marketplace conditions.

Given the importance of this assessment and the potential fluctuation in valuation, Singer suggests owners re-appraise artwork every five years or after they’ve added a significant piece to their collection. Just as importantly, estate documents should provide guidance on how posthumous appraisals should be handled.

Generally this entails engaging an independent appraiser or an auction house that does appraisals. Results can vary. Auction houses tend to base appraisals on auction results, whereas some artists’ works sell better in private sales or at galleries, so an unaffiliated appraiser may be better attuned. An appraiser also will know whether a collection is worth more in total than if it’s split up, which could affect heirs’ decisions.

“Beyond the planning, thinking through how the art is going to be appraised following someone’s death is one of the biggest issues to address in an estate plan,” Singer says.

Some may find such discussions unsettling, but ultimately, they’ll help maximize the family’s ability to fulfill the owner’s wishes and the heirs’ enjoyment of the artwork assets.