Trust Estate

Estate Plans, Fine Art And Tax – A Heady Brew

Tom Burroughes Group Editor March 27, 2024

Estate Plans, Fine Art And Tax – A Heady Brew

It's been tax-filing season – a time to grapple with estate plans, wealth transfer, and considerations about the assets that are valuable. Fine art might be a niche market in some ways, but it matters to many HNW individuals. We talk to Bank of America's wealth business about what's involved.

The US – and certain other nations such as the UK – are in tax-filing mode right now, with all the stresses that involves. And in an election year in the US, tax and the impact on estate planning hovers overhead.

There’s a twist: It may be surprising, but in the case of some clients, up to half of their net wealth is in fine art, rather than the more conventional areas such as stocks or property. This raises particular challenges.

The process of planning estate transfers, covering liquid, business and illiquid assets – including fine art – is the stock in trade of Michael Duffy, who is the head of art planning for Merrill and a member of the strategic wealth advisory group at Merrill Private Wealth (part of Bank of America). He has been at Merrill since 2016, before which he was at Goldman Sachs.

Fine art advice is a big item on Duffy’s desk.

“To be a true wealth manager, you cannot afford to ignore a large part of the client’s balance sheet,” Duffy told Family Wealth Report in an interview.

Higher interest rates, inflation and political instability may have dented the world’s art market last year – sales fell 4 per cent in 2023 on a year ago to $65 billion – but the scale of the market is still large (source: Art Basel, UBS).

Bank of America is the largest provider of art lending services in the US, said Duffy. It is a large “niche” to be in. (Other banks playing in the space include Citigroup, UBS and Deutsche Bank. There is also a cluster of specialist fine art advisors to wealthy people, such as Ron Varney in the US.)

Handling this business requires a fine balance: Clients are drawn to the sector both emotionally and because of its investment potential.

Bank of America has an arts consignment program made up of elements which include allowing an art services specialist to manage the end-to-end sales process, and advise clients about timing, pricing and sellers’ agreements with auction houses. The program also covers marketing and PR; preferential pricing options from houses such as Christie’s, Bonhams and Sotheby’s, and project management. 

“We help the client in three ways: 1) formulate a customized sale strategy aimed at maximizing the value of the work(s) offered; 2) structure and negotiate the financial terms and marketing benefits of the consignment transaction; and 3) project manage the consignment from end to end while enabling the client to remain in charge of key decision-making,” Duffy said. 

BoA’s Art Services Group exists to co-ordinate all these services. It consists of 11 professionals with expertise serving art collectors. Duffy said the firm adds, on average, $1 billion to its art lending book each year.

“UHNWIs are a passionate group of people. They’re eager to share their journey [about art] and what they’ve learned,” Duffy said. “Most art collectors have never sold a piece.” 

For many art holders, the process of selling is the most fun part, he said.

One problem is when a client doesn’t share the tastes of their parents/grandparents, which can create issues in terms of what they do with such art. It is not straightforward for art owners to donate or gift art to museums and galleries, because they have a limited capacity for such art, could not necessarily pay for it or wish to exhibit it.

About 80 per cent of Duffy’s clients are private business owners and serial entrepreneurs, so transition of business ownership, pre-sale, pre-IPO advice is important, as is advice on trusts, transfer and structures. 

There is considerable focus on expiry of the tax changes to estate and other taxes enacted in 2017 by the former Trump administration.

Exemptions for estate taxes fall significantly in 2026, he said. 

“You are going to see in the US a steady drumbeat to get your planning in line and soak up transactions before the sunset rule,” he said.

Under current tax laws there is an opportunity for persons with taxable estates to engage in advanced planning before the end of 2025.

Under the 2017 Tax Cut & Jobs Act the Applicable Exemption Amount – the amount that a US person gave away during their lifetime and/or at their death – doubled from $5.4 million in 2017 to approximately $11.45 million in 2018. It was given an annual adjustment for inflation – but only until 2026 when the exemption reverts to $5 million (adjusted for inflation). The 2024 exemption amount is $13,610,000 per taxpayer. There will be another inflation increase in 2025. 

Merrill currently projects that the exemption will re-set at $7 million in 2026. 

“That means if you anticipate having a gross estate of more than $14 million if single (double that amount if married) and you fail to use your available exemption before 2026 it could cost your heirs approximately $2.8 million in unnecessary estate tax,” Duffy said. 

Tools in the box
One solution married taxpayers have been using to soak up their remaining lifetime exemption before 2026 is to engage in spousal lifetime access trust (SLAT) planning in which each spouse establishes a completed gift dynasty trust for the other spouse and lineal descendants, Duffy said. Through SLATs, each spouse can have access to the trust funds if need be through either distributions or loans.

There are ways of easing the burden of federal estate tax. Generally, the federal estate tax is due nine months after death. If a person owns a closely-held business, and its value has generated an estate tax, that nine-month deadline could present difficulties with raising the cash needed to pay the estate tax. Section 6166 is intended to address that eventuality. 

If a taxable estate includes an interest in a closely-held business (defined below) that constitutes more than 35 per cent of the value of an adjusted gross estate, then the estate makes an election under IRC 6166 to pay the tax caused by that closely-held business over 14 years. 

Interest only, at favorable rates, is payable for the first four years, and thereafter the tax can be paid in 10 annual equal principal installments (plus interest).  

All of these steps sound complicated, and that brings a need for more coaching and preparation for the next generation, Duffy said.

“Children of wealthy parents tend not to inherit assets anymore…but rather they inherit trust structures. Many of these children are unprepared for what that means regarding their access to the trust, their rights as beneficiaries and their fiduciary obligations if they are serving as trustee.

“In the past, it was common practice for parents to not disclose their estate plans to their children and/or to teach them how to be good beneficiaries. That’s changing. It’s becoming more common for wealthy parents to train and coach the rising generation on financial matters, including how various trusts will work after mom and dad have passed on,” Duffy concluded.

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