By Karl Chiao
So let's say that you or your client has spent a lifetime (or maybe just the past 5-10 years) building a collection of things in which they have a passionate interest. Though amassed with dedication and possibly at significant expense, the collection might or might not actually be valuable. Regardless, have they given a thought as to what will happen to that collection as they get up in age, or as interests shift and life changes happen? It is never too early to at least think about an "exit strategy" as it pertains to a collection. The following are some things to consider in determining how the story plays out towards the culmination of a life of collecting.
The first and most difficult thing for the collector to do is to take a detached and unbiased look at the collection and to ask themselves "what is it that I am collecting, and is this something that others will want?" The answer to this question is generally determined by a myriad or factors, including the focus of the collection and individual items' rarity, value, condition, desirability, and overall collectability. Are we talking about something that's inherently valuable, such as gold coins (which have a very wide market), or something as esoteric and personal as a beloved shot glass collection? Are the items in excellent condition and purchased from high-end auctions or dealers, or are they items usually acquired from thrift shops or on ebay? Is the collection of a category with a well defined market where there are price guidebooks due to a large collector base — like sport cards or comic books — or is it something more unusual and not generally collected such as old railroad ties or vintage eyeglasses? The answers to those type questions will go a long way to figuring out what do to with the collection down the road. Appraisers, dealers and auction houses can be an invaluable source for understanding the true market for all types of collections.
Once it is determined whether there is a true and viable market for the collection, then one can move on to the next step of figuring out what to do with that collection, and when is the most prudent time to do it. The options as to what a collector can do with their collection is pretty straight forward : a) sell or give the collection away during their lifetime, b) leave the collection in their estate and have their heirs/executor deal with it after they are gone, or c) donate the collection to charity upon their death. The analysis that follows should be "Which action should be taken, and why?"
If the collection is something that has been coveted by members of the family and they do not only share interest in the collection, but would also like to own some or all of the collection, then the best course of action would be for the collector to start giving away the collection (or parts of the collection) during their lifetime. This way, there will be no misunderstandings of who gets what, and there also could be some tax advantages as it pertains to annual tax-free gift allowances and reducing the assets of the estate.
If the collection is determined to be of some value but is not of any great interest to the heirs, then the best thing to do may be to sell the collection under the collector's guidance and leave the heirs the cash equivalent. Because the collector has the express knowledge of the collection (versus the disinterested family members), the collector is much more likely to not only have a better understanding of the market value, but also know of the best methods and venues for maximizing the value of the collection. We often hear stories about family members who inherit something and the first thing they do is take it to a pawn shop or local antique shop and sell it, leaving thousands of dollars on the table in the process. To keep that from happening, a collector may want to consider overseeing the sale of their collection during their lifetime.
If the collection is not sold prior to death, specific estate planning is so very important to address the asset of the collection, whether it be putting it into a trust prior to death, or having some provision in the will that will address the collection after your death — with directives and guidance for the disposition. Hopefully it will make the lives of the heirs a whole lot easier, as often they are dealing with the grief of losing a loved one and just do not have the capacity to deal with the vast quantity of possessions of a serious collector. Just make sure you have an idea of who wants what, as the last thing you want to do is create tension for your heirs if you leave "little Johnny's favorite taxidermy piece" to little Suzy.
Lastly, if the collector is planning on leaving their collection to a charity or non-profit, you must make sure that the organization is not only allowed to receive such items, but also WANTS to receive it. In order to receive the full tax benefits of a charitable donation, the charitable institution must have "related or like use" of the gift. The Smithsonian is often the beneficiary of collections left to them by generous collectors. However, rarely is it something that the Smithsonian wants, needs or can accept. What they (and most charities) really need is cash for unrestricted uses, most often for operations. With that in mind, it might be better to sell the actual items (once again, you are the best person to sell your collection) and leave the cash proceeds to whatever organization you had planned on making the original bequeath. Just make sure you talk to the organization first (and get acceptance of gifts in writing) so that everyone is on the same page — just in case you don't sell off that last piece of a collection that the organization has been hunting for the past 10 years!
A lifetime of collecting carries a responsibility to the collection and to the beneficiaries of that collection. We encourage our clients to fully explore the estate plan for their collection. We have time and time again seen the benefits and personal pride a collector achieves by overseeing the sale of their collection through a much lauded and publicized auction. Others prefer an anonymous sale under their supervision and control. Either way, the proper disposition of a collection to maximize the value through the best possible market place is the ultimate end game to many a collector.
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