This is the first part of a feature on fiduciary structures for family art collections, written by Randall Willette of Fine Art Wealth Management and Matt Litten of Collas Crill Trust.
This is the first half of a feature, drawn from an abstract from a new White Paper on Fiduciary Structures for Family Art Collections. It is written by Randall Willette of Fine Art Wealth Management (also a member of WealthBriefing’s editorial advisory board) and Matt Litten of Collas Crill Trust. They consider the key issues facing sophisticated art collectors who seek to establish fiduciary structures - such as trusts and foundations - for the long-term protection and management of family art collections. As ever, the editors of this news service invite readers to respond with their own views.
A new generation of wealth is emerging, for which art is increasingly becoming an important component of their overall tax and estate planning to put under the care of trust and estate practitioners. A growing number of wealthy families are art lovers, own collections or actively buy and sell in the art market. They require someone who shares and understands their passion for art and appreciates the pleasure of investing in art of high value. A recent report by Deloitte Luxembourg and ArtTactic suggests 76 per cent of those surveyed acquired art and collectibles from an investment viewpoint, up from 53 per cent in 2012.
Globalisation and structural inefficiencies in the art market are driving demand for financial innovation around art assets. Today, a family art collection requires the same strategic planning as other investments and with the help of skilled advice can become an effective working asset, requiring the same standards of asset protection, succession planning and management as with other family wealth. Planning how to transfer a family collection to the next generation can be one of the most critical aspects of building and maintaining a successful art succession plan. Understanding the real value of your collection is important.
Collectors need to consider their art as part of their overall financial and estate plans, especially in relation to other assets, such as real estate or investments. Deciding where the collection may reside after it passes from a family’s control, be it with an institution such as a museum, a family member or a planned sale strategy, is also a key consideration. And, in the light of potential tax and other financial liabilities, deciding on the best strategy early is critical.
Often, the family’s overall financial needs may help to determine the specific vehicle chosen to transfer all or part of a collection from one generation to another. Questions concerning whether children will have the organisational and financial resources to care for a collection and whether there will be sufficient wealth to bequeath an inheritance outside of the collection itself may have to be worked out. It is also essential to put in place a structure to ensure sound future governance. This will avoid potential family disputes, including questions as which family members will enjoy certain pieces of art after the death of the collector.
Regardless of whether the children have an interest in a family collection, decisions about any disposal can be emotional. One key to making sure a collection does not damage family harmony is to work toward open communication and look for creative ways to include family members in the decision-making process. A suitable governance structure, including a shared family vision, can be constructed and embedded into the chosen fiduciary structure.
Art ownership through a fiduciary structure can offer significant advantages over direct ownership, in terms of preservation of wealth generally and in particular in relation to art collections. The wide range of fiduciary structures available and the huge flexibility which careful drafting can incorporate into the governing documentation for structures means they can be tailored to the needs of each particular family and their collections.
Once a collector’s long-term objectives have been understood, the most appropriate fiduciary structure can then be identified. The relevant specialists such as art wealth consultants, valuers and restorers will also be identified and appointed to formulate the most appropriate art investment and collection care strategies.
In the short-term, the simplicity of direct art ownership may have a number of advantages - notably the absence of trustee fees. However, there are a number of long-term issues that collectors should consider, where trust structures can be of considerable benefit. These include:
• Is the collection to be kept intact after the death of the owner? Can the owner ensure that only certain family members benefit from specific works?
• Are there any forced heirship concerns in the country where the collector resides? If so, art works might need to be sold upon death to satisfy fractional shares of heirs.
• Is the artwork protected from divorce or potential family disputes?
• Is the artwork protected against unwarranted claims e.g. hostile third parties?
• Possible estate / death taxes - which may require a “fire sale” of the artwork.
• Lifetime taxes e.g. capital gains on sale of artwork.
• Can any philanthropic / charitable endeavours with the artwork be continued after the owner’s death?
• Does direct art ownership cause concerns around client visibility and/or security – for example high-profile individuals and families?
The use of fiduciary structures can assist collectors with some or all of these issues. It is essential to ensure that objectives for the trust are fully discussed at the outset with collectors. Fiduciary structures may be difficult and costly to unwind at a later stage, particularly if there has been any tax planning involved.