This is the second part of a feature exploring the fine detail of creating family art foundations and how they can protect and preserve collections for future generations.

This is the second part of an article exploring the world of family art foundations, written by Randall Willette and Etienne Ceulemans. Willette is founder and managing director of Fine Art Wealth Management, and a member of the editorial advisory board for this publication, has already shared ideas on art, investment and collections with readers down the years. Etienne Ceulemans, is partner of Creattrust Sarl, of Luxembourg. The editors are delighted to share these insights with readers; as always, they invite readers to respond with their views. To see the first part of the article, click here.

Case study 1
A collector owned a collection consisting of thousands of antique objects of art. He was married twice and had three children from his first marriage and two others from his second marriage. His objective was to ensure that his collection would remain intact and not be dispersed among his heirs in order to achieve the best valuation while also maintaining the possibility of receiving a periodic income from the collection.

Creatrust helped the client to structure a foundation to whom he donated the entire collection and the objects of art are now the property of the foundation. While the donation is irrevocable, the client is able to remain very involved in the management of the foundation and is a member of the supervisory board. This entity allowed him to nominate beneficiaries as well as modify the beneficiaries list and statutes of the foundation during his lifetime. As managing director of the foundation, the client was able to oversee the foundation enabling the collection to continue to benefit from his extensive experience.

Any gains realised by the Foundation from the collection will be distributed to the beneficiaries in order to generate an income for them during their lifetime while also providing for an orderly succession and nomination of members to the supervisory board. Existing members included the client, two independent experts, a lawyer and an art advisor.

Case Study 2

A family with a child who was an emerging young artist, wished to provide sufficient capital to allow the child to:

Develop his art;
Create and build a collection; and
Organise an art exhibition to launch his career. While wishing to fund the child’s artistic development, the family wanted to ensure the funds were not misused and to protect the young artist from misappropriation by third parties.

Creatrust helped the family to structure the funding arrangement through a foundation in order to ensure the aim intended by the family was upheld.  The family structured the Foundation in such a way that a board of directors was named and a clear road map established in order to achieve the young artist’s without the capital being used for other purposes. The foundation designated a supervisory board made up of family members to ensure that the board of directors’ mandate was correctly realised and a rule of succession for the Board was predetermined.

Case Study 3

A client owned a major share (30 per cent) of the works of an artist who had reached the age of 75. The client wished to ensure that the collection would not be subject to a forced sale by the artist’s family at time of death, thereby significantly impacting the value of the artist’s work. The client required a tax efficient structure which would allow both the client and the artist to jointly manage the collection until his death, while ensuring the artist’s family would benefit from best execution in the ultimate disposal of the collection.

Creatrust helped the client to create a foundation which brought together the artist’s entire collection plus a securities portfolio pledged by the client. In return, the artist would receive a lifetime annuity from the securities paid quarterly by the foundation until death.  The foundation issued certificates backed in part by the assets in the foundation (e.g. the art collection) which could only be realised at time of sale. The foundation was established in such a way that the artist had the option to oversee the management of the collection in the foundation. However, upon the death of the artist, the client would remain the only member of the supervisory board. The client’s family was designated as the beneficiary of the gains realised from the foundation whereas the artist’s family received gains realised from the certificates.

Resources required to care for the collection

Caring for and managing a collection held in a family art foundation requires efficient access to dependable resources and trustworthy experts. Appropriate industry credentials combined with years of experience are critical for serving the complex needs of the family.  

Assistance in matters of shipping, insurance, storage, and restoration will be required to guide the family through the minefield of official documents and export licenses which may be required for the transfer of the art into a foundation. Experts should be internationally recognised leaders in their field and any services they perform should be carried out with due skill and care in accordance with international standards of best practice.

Since most family collections are unique and irreplaceable, proper documentation is crucial and can ultimately decide whether a painting has a lower or higher value. Over the past several years, provenance, or the history of ownership for a particular work, has become increasingly important. Provenance can help determine the authenticity of a work, establish the work's historical importance, and trace the work's legitimacy.  

Deciding whether an object is authentic is one of the most important factors in establishing its value. Authenticity is a concept which changes constantly, both from the point of view of how one defines what is an authentic piece and from the viewpoint of who is best qualified to determine whether a piece is authentic or not. Attributions of works to certain artists can and does change and adequate research and regular review ought to be conducted to identify any issues in this regard.

Framework for art governance

A family art foundation requires explicit governance practices in the same way as a family business. One key to making sure a collection doesn’t damage family harmony is to work toward open communication and look for creative ways to include family members in the decision-making process. A sound governance system for a family art foundation should comprise both structure and discipline.

In order to agree shared values for a family art foundation the process of creating governance-related documents such as a family collection policy and mission statement can be truly valuable.
A common complaint within families that fail to have a rule-guided, transparent system in place for their collection is that most decisions are made, or appear to be made, ad hoc. The problem with such a decision is that it is susceptible to challenge on one or several grounds including it was not consultative or it was too emotionally driven. By contrast, if a decision is made pursuant to a rule directed and transparent process, it will be, by definition, consultative. Moreover, it’s much more difficult to attack a decision that results from such a process as being motivated by personal emotion.

The role of an art foundation in art philanthropy
In recent years a growing number of wealthy collectors are choosing to build their own museums, through a foundation rather than donate works directly to existing institutions. While there are a number of factors driving the growth of private museums globally, a lack of public exhibition space has played a major part.  

For many collecting families, they simply want their art works to be seen. Though still relatively rare, private museums opened by wealthy collectors are increasing in both number and size globally.  

Apart from the psychological motivations, the decision to build a private museum is often prompted by the desire to keep artworks exposed and available to the public. Collectors must also consider the extent to which they can provide financially for the preservation of their collections. A private museum is not only expensive to build, but requires a large endowment to preserve it for the future.

Conclusion
The future looks bright for private collectors interested in creating their own Family Art Foundations.  An art collection requires the same strategic planning as other financial investments and with the help of skilled advice can become an effective working asset for the family.

However, the potential problems and pitfalls of creating a family art foundation are numerous and require careful consideration.  It is certainly well worth any family planning to put their collection into a foundation spending some time and money on ensuring that all issues are addressed at the outset.  

Solutions to most concerns are available, it is just a question of seeking them out.

Disclaimer

This publication is intended to provide general information only and is not intended to provide legal or tax advice. Readers should discuss any potential action with a professional advisor. It is Creatrust policy to enforce its intellectual property rights to the utmost extent as set forth in applicable laws, including criminal sanctions. The trademarks, logos and service marks (collectively the "Trademarks") in this publication are Trademarks reproductions, transcriptions, public electronic storage and dissemination in part or in total require the prior written consent of Creatrust.

About Fine Art Wealth Management

Fine Art Wealth Management (FAWM) is a professional membership-based advisory firm that provides independent consulting, education, networking, and proprietary research on integrating art into wealth management strategy.

About Creatrust

Creatrust is a Luxembourg-based trust and corporate services firms in Luxembourg providing family, fund and corporate services for wealth managers, high net worth individuals, family offices, corporates and fund promoters.