Did you know that your personal effects, no matter what value, whether or not they are mentioned in your Will or Revocable Trust, must be reported to the IRS on Schedule F of your U.S. Estate Tax Return (Form 706). Moreover, there is a specific question on that form asking the Executor if the deceased owned any works of art, any items, or any collections whose artistic or collectible value is worth more than $3,000? If so, it is likely that the IRS will carefully review these more valuable items. For your information, Schedule F is likely where the Executor of Ileana Sonnabend’s Estate reported Canyon (the painting featuring the stuffed bald eagle that the IRS believes a Chinese billionaire would buy). Jewelry, furs, silverware, books, oriental rugs, and stamp collections are other examples of valuable items that must be reported on Schedule F.
Seem simple? Not so. You should know about the complications your Executor may face when handling these valuable personal effects and collectibles. First, your Executor will need to have each of these assets appraised. Your Estate will pay for the appraisal, and it can receive an estate tax deduction for the expense, but if your Executor has understated the value of any personal effect, there may be significant interest and penalties. The second complication is liquidity. In the absence of other funds, the artwork or other personal effect in question, or part of a collection, may need to be sold in order to pay any estate tax (or penalty) due. You should consider whether this is something you want to happen.
There are some solutions to the issues raised above. In life, you can sell your valuable piece of art or a collection, so that your heirs can benefit from its worth without the hassle of having it appraised. In the case of a collection, this option will also free your heirs from possibly having to determine how to split it equitably among them. In certain circumstances, you can also request that the IRS issue a Statement of Value that can be relied on for federal income tax, estate tax, or gift tax returns. This way, you can prepare for the amount of tax due and there should be no potential for understatement. Typically, however, such a request is only honored for artwork appraised at $50,000 or more.
Besides planning for payment of the estate tax, you must also plan for the distribution of such artwork, collections and the like. Your heirs may fight over who is going to receive your one of a kind painting (worth hundreds of thousands of dollars) or may actually also fight over who is going to receive the family’s old grandfather’s clock or tea set. No matter what the value of your personal effects, there are countless examples of families being torn apart over the distribution of furniture, artwork and other family heirlooms.
Planning for valuable personal effects, artwork and collectibles is not all about estate taxes and the appraisal, however. The first question is how are the personal effects going to be divided and distributed upon your death. There are many techniques that can be used for this purpose. And if estate taxes are an issue, that must be planned for as well. Sometimes, if there are valuable personal effects, artwork or collectibles involved, utilizing trusts or other devices can shield these items from creditors and potentially reduce the estate tax burden on your estate. To discuss these options and more, call us at (301) 468-3220 or email us at firstname.lastname@example.org.
- Gary Altman, Esq. and Coryn Rosenstock