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Melissa Passman is an attorney with the firm Day Pitney, and specializes in tax law and estate planning. Prior to earning her JD and LLM, Melissa worked at Gagosian Gallery in New York City and thus brings a wealth of art-specific expertise to her practice. She advises HNW individuals and couples, family offices, foundations, and trusts on how best to protect their legacies and plan for the future. |
Who needs an estate plan? Literally everyone.
Everybody needs an estate plan—no matter how large or small your estate is—because everybody has possessions and everybody has family relationships, for better or worse.
Not doing anything is also a choice and will result in “default inheritance” (which is determined based on your state of residence). So, if you do not want default inheritance to be applied to your estate, then you should make an estate plan.
There are simple and inexpensive ways to do that. In certain states, such as California, there's a statutory will that you can fill out which you can find on the California State Bar’s website. You just have to make sure that you follow the formalities that are required.
When someone dies without leaving a will, they are said to have “died intestate.” In this instance, there are laws that each state has established with a prescribed distribution, i.e. “default inheritance.” Generally, any assets will first be distributed to the deceased’s children. If there are no children, the next recipient might be the parents.
Without a will, you simply have no control over how your assets are distributed. With complex assets such as artwork, the beneficiary may be completely unprepared or uninterested in managing this inheritance.
Therefore, if you are adamant that somebody is not to have something, you should specify that in your will. Not having an estate plan could result in that person potentially inheriting those items simply due to the “default inheritance” bylaws in your state of residence.
Generally, people thinking about their estate plans tend to be couples who have children, and who are concerned about the next generation. If there is more substantial wealth in question, they’ll want to make sure that the wealth is distributed in such a way so their kids are able to handle it. Or, the money will be placed in a trust, where the trustee has discretion to make distributions—or refuse to make distributions—depending on the circumstances at play. All of these thresholds and standards should be outlined in the estate plan.
Choosing an executor is the first—and often the most difficult—step in the estate planning process.
When it comes to estate planning, I think the hardest part is actually choosing the executor, i.e. the person charged with carrying out the estate plan.
The ideal executor of an estate should be:
- Organized
- Responsible
- Diplomatic (and relatively neutral vis-à-vis the family unit)
Whoever is chosen as executor will need to potentially manage any family conflicts that may arise over the distribution of assets. Normally, disputes tend to develop around who might be receiving certain personal effects: jewelry, family photographs or similarly sentimental things—including art.
I know someone whose father was a very big collector before he passed away. She and her brother got into a huge fight about the art—the brother would simply not let go of his position and she had to basically buy him out of it, but she couldn’t afford to do that at the time of her father’s death.
They didn't want to put the artworks at auction and split the proceeds because the art was simply too sentimental. Ultimately, she realized that taking her brother to court and having some big public fight also didn’t make sense and wasn’t what she wanted.
In the end, going to court usually just results in paying a lot of money to lawyers. People get so attached to certain things that they end up spending more money on legal fees than what the actual object is even worth.
If there is any sort of strife in the family, the executor should be somebody that people consider to be neutral.
There's a huge market for probate litigation between family members arguing over such decisions. Thus, having the proper executor could potentially protect your heirs from costly probate litigation and the fall out from emotionally- (and financially-) draining legal disputes.
It’s also helpful for the executor of an estate to live nearby, since court appearances could potentially be required, or documents may need to be signed, especially if you're transferring the title to a major property. Additionally, there might be accountings that may need to be provided to the probate court, depending on how the estate plan is structured. Having an executor located nearby will simplify the process.
If you have children, estate planning also includes choosing who their guardian might be in the event of your death. And, for a trust, choosing who the trustee(s) might be.
Part of an estate plan also includes doing incapacity documents: for health care decisions you’ll need a living will, and a power of attorney should be determined for any kind of financial decisions, etc. The power of attorney can also include the power to manage or dispose of any artwork.
If you aren't able to make decisions for yourself, having these roles assigned and a designated person in place to fulfill those roles should be part of an estate planning package as provided by an attorney such as myself.
Consider naming an art executor.
In an estate plan, you can name an art executor—a specific person who deals only with the estate’s artwork and has legal authorization to do that.
For estates with considerable art collections, it’s important to determine if the person chosen as the executor of the estate really understands the art market. Even if they are qualified to handle general affairs, they might not be the best person to manage the estate’s art holdings.
You can also set up an advisory group of people who don't have the fiduciary duties, but have expertise in the art market. When choosing art executors, however, it’s imperative to establish that there are no conflicts of interest—such as a gallery owner who might have a vested commercial interest in the artists and works represented in the collection.
Similarly, with a trust, you can give trustees the power to seek advice from a person knowledgeable in the art world. You could also even potentially put the artwork into a different trust or have specific instructions in your trust as it pertains to the artwork.
A database is the best way to organize your estate.
I think the best thing that people can do is be as organized as possible in advance. Having a database like Artwork Archive is essential. Anybody that’s a practitioner in the world of estate planning will prefer that their clients have a database—these days, a spreadsheet is simply not good enough.
It’s critical to have as much information compiled as possible for every piece, including documentation such as: purchase receipts, catalogue raisonne records, COAs, bills of lading, proforma invoices, appraisals, etc. This is especially true if you own art that has questionable provenance, or perhaps was made with a material that is now banned, such as ivory.
If you want your executor to sell your artwork at auction, when they sign that consignment agreement with the auction house, they are agreeing to representations and warranties that your estate has “good title” to the art in question—ensuring there aren’t any issues with the work. So it’s recommended to have all that information ready and aggregated in a centralized place, in the event that you (or your executor) need to prove ownership, provenance, etc.
Working backwards is not ideal in any case, especially with art. Digging through emails or—in the event the work was purchased pre-email—even just locating invoices and other relevant substantiating documents and correspondence can be difficult. Many dealers can also be hard to pin down anyway, especially if the acquisition took place a long time ago—they may not be in business anymore, they may have died in the years since, or they may be hiding out in a country without an extradition treaty!
Estate planning requires proof of ownership and timely documentation of assets.
Do you really own what you think you own? Between forgeries, fractional ownership, NFTs, and other recent developments in the art market, it can be difficult to ensure that there are no title issues within your art collection, even if the collection consists of contemporary art. Having everything inventoried and compiling all the paperwork together in one place will solve a lot of problems that could arise when confirming ownership and title.
Let’s assume your heirs do not actually want to inherit your art collection. Actually, this is a very common problem that can be due to a lack of communication—maybe the parents have a big art collection, and they're incredibly passionate about it, but the kids just aren’t interested and would rather go buy some multi-million dollar mansion (but haven’t articulated that to the parents). Parents and heirs must talk about these things before it’s too late, even if it’s a difficult conversation.
If your heirs do not want your art, I think the best thing to do is talk to an advisor, or to a knowledgeable art attorney, and make a plan. If the artwork is significant enough, then perhaps donation is the best path forward. Even if you don't have MoMA-quality art, there are plenty of university museums, or other regional museums, that will very happily accept that donation.
In general, once you know that your heirs will not be the recipients of your art collection and you must decide upon another fate for your collection, it’s important to have these conversations as early as possible, just so everyone knows (and is in agreement with) the plan.
Should you and your family decide that the estate should liquidate your art collection, there are various avenues to deaccession the works. If there's a dispute in the family, I think auctions are the preferable means to deaccession because auctions are the most transparent way to sell art. There’s also the opportunity to negotiate your agreement with the auction house and get the most favorable deal— which is definitely something that an art executor would do on behalf of the estate.
If you have a taxable estate, the amount that's includable is the fair market value at the time of your death. Whatever the art was worth before—at the time of purchase, for example—is not necessarily relevant. Those details will help inform an appraiser in their work, but it's not a final word by any means.
An appraisal report will need to be submitted to the IRS as part of your estate tax return. Similar to the charitable deduction side, the appraisal has to be a “fresh appraisal,” meaning it must have been completed within around the time of death, or immediately after the death has occurred.
Estate planning documents include many formalities—depending on what kind of documents are being signed, there could be witnessing requirements. Setting up a trust in New York will need to be notarized, etc. There’s also something called a self-proving affidavit, which can cement your estate plan in such a way that it also functions as a pre-litigation preventative measure.
These formalities can also defend against disputes that might arise if the estate-owner develops dementia or some other illness that would affect their decision-making. Similarly, it is common to encounter claims of duress. In that case, if the paperwork was witnessed, notarized, and all the formalities are followed, there’s simply more protection in place.
In the estate planning world, there is still an emphasis on originals. A law firm will always keep one set of originals of all paperwork in a vault facility so they can be referenced should a dispute arise and at the time of death for administration of the estate.
Recent developments in technology have impacted estate planning.
Despite the importance of original, hard-copy paperwork, technological advances have also affected the estate planning field. Today, it’s a lot easier to find information about provenance, such as online auction records and other searchable databases. This additional market transparency is really helpful in determining any possible issues with the collection, such as items that may have been illegally traded, looted, or even stolen, etc.
Technology has made it easier than ever to get organized. There is no reason to be fussing with paper files and rolodexes anymore. A database like Artwork Archive can help you compile all the images, records and other documents that your estate executor will need to properly manage your affairs post-mortem.
If your estate includes complicated artwork, make sure that you have specific instructions on how to deal with conservation of those pieces, or other requirements around display recorded alongside the artwork in your database. It’s also worth noting that artists are becoming increasingly assertive about the presentation of their work, and failure to follow the artist’s intentions could result in disavowal.
Paper files can be easily misplaced or destroyed by accident, and transparencies can degrade over time. Digitizing all of your information and compiling them in a central database is encouraged as a best practice and it has literally never been easier to do.
Sometimes the hardest part of estate planning is simply having a conversation with your family and heirs, and stating your intentions. Don’t wait to have these conversations. Nobody wants to feel like they have lost control over their own legacy—so the best thing anyone can do is make an estate plan.
