How an Artist’s Death Affects the Art Market

Artwork Archive | March 4, 2020 (Updated April 12, 2021)

Image credit: Pierre Bamin, courtesy of Unsplash

When an artist passes, what happens to their unsold works?

Blockage discounts provide a system to evaluate the value of works left behind. 

Artists are prolific during their lifetime—creating dozens of works a year—culminating in hundreds of pieces in the world. If I think of my father’s painting studio, I see countless paintings stacked upon the barn’s walls—the cyclist series, his recent wharf works, my favorite oceanic landscape. As I help my dad inventory and archive all of these pieces, I think about the future of these works not yet sold from his gallery.

Once an artist passes, what happens to all of their artworks? 

Typically after an artist passes, there are many works left behind, which presents challenges. The sheer volume and availability of the works flood the markets and depresses the prices of the works. That’s not a great way to preserve the legacy of the artist. No one wants a flash sale of their life’s work. 

Why do prices drop when an entire collection is brought to market? 

Art is valued on a number of factors and one is availability—how many works by that artist are on the market at one time. If a “block” of similar works were to suddenly appear simultaneously on the market, this appearance would result in a reduction of the fair market value for each individual item.

So is the answer to reduce availability and to slowly release the pieces to market? How long would it take for the art market to absorb this category of works? It could be 1-150 years depending on the volume. That’s a long time. That’s an insane storage facility bill and amount of work. 

What is fair market value? According to the IRS, “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Fair market value is a concept and dependable on the ‘relevant facts;’ it is not as black and white as particular stock that is accessed on a formula. 

And when assessing value, appraisers look at the market. What is the "market"? For some artists, it can be an established auction market. What have similar works sold for at auction? Many artists's works don't sell at auction though, so values have to be derived from gallery retail pricing. 

This is where blockage discounts come in. 

To account for the adverse effect on the price, a discount, which considers a reasonable estimate of time for the market to absorb the entire quantity of work, is applied.

A blockage discount is applied to the number of works by the artist in the collection to account for the decrease in the fair market value subsequent to these works being placed on the market at the same time, rather than slowly introducing the works to market over an extended period of time. 

The IRS has acknowledged the relevance of blockage discounts in the context of art valuation. Blockage is described as follows:

The concept of blockage is essentially one of timing. A discount may be allowed where a large quantity of any one type of art is offered on the market at one time and would substantially depress its value. The amount of discount would be determined, in part, on a reasonable estimate of the time it would take to sell the entire quantity in smaller lots.  Some of the factors to be considered in determining whether a blockage discount is available are the opportunity cost of holding the inventory, the carrying costs of the inventory, and the expected period of time it will take to dispose of the inventory.1 

Like fair market value, blockage is a concept and not a set formula.

The notion of blockage has its origin in the valuation of stocks and securities in ‘blocks.’ In stock, the size of the block of stock is valued in relation to the number of shares changing hands in sales. Art too is an investment. But, art can be less liquid depending on how it is exchanged and sold. So, it takes some deciphering and projecting. 

The concepts of blockage discounts and present worth both require the appraiser to track past market experience and to project future market performance. The keyword here is “project” as no one has a crystal ball to tell the future. 

Image credit: Kadir Celep, courtesy of Unsplash

Factors taken into account when considering a blockage discount

The artist’s estate is reviewed when generating a blockage discount but there are other variables that are taken into account. Alanna Butera, President and Head of Appraisals and Advisory of Butera Art Advisory and Management, shares the list she uses when generating a blockage discount:

The artist

What is their reputation at death? And what is the long-term outlook of the market’s acceptance of their work?

Type of work

One particular thing to consider is size. Large-scale pieces are hard to sell in private homes and museums expect a large discount for purchases. 

Quantity of works remaining

How long will it take to sell all of these works?

Quantity of similar works 

Artists, you don’t want to be your own competition

Number of sales over a period of time

Under normal circumstances, how long would it take the market to absorb the artist’s work? 

Length of disposal time and associated expenses

The longer it will take to sell the remaining artwork, the more expenses will be incurred, i.e., storage, insurance, transportation, marketing, restoration, administration costs, etc. There are opportunity and carrying costs associated with holding art as an inventory. There are also financial risks with holding a large quantity of this non-liquid assets.

Desirability of works

What is desirable to collectors? Have all of the desirable works been sold off already?

Salability and significance of the remaining artworks

Are most of the remaining works difficult to sell because they are poor quality or presumably incomplete? What about works in progress?

Economic situation at the time of death 

What is the overall state of the financial and art markets at the date of valuation? This is constantly changing. Fluctuations in prices over time are results of changes in the artist’s reputation, art world trends, the influence of critics and of the museum and gallery shows, the state of the global economy, buyer’s tastes, among other factors.

A real-life example of blockage discounts

In 1992 the particular estate of Georgia O’Keefe contained approximately 400 artworks, ranging from early works on paper to canvases from the 1970s. The court ultimately ruled that a 25% blockage discount should be applied for works that could sell in less than seven years, and a 75% blockage discount should be applied for works that would require more than 10 years to sell.

There were two categories because there was a split in the quality of works. There was a group of great paintings that could be absorbed into the market quickly because there was a demand for those pieces. That was the block that had the 25% discount. The other category was of lesser quality works and those would have to be marketed over a longer period of time and require substantial effort to sell—hence the larger blockage discount. 

So, what can we take away from this?

Artists, it is paramount that you archive your artworks and sales in a way that is sharable after your passing. The best of your best sell, but not all pieces are created equal and you will leave behind pieces that have not sold. This way appraisers have access to all of the information they need to properly apply blockage discounts and retain fair market values that don’t tank your collection value and legacy. 

For those managing or inheriting an estate, work closely with your appraisers and attorneys to ensure that blockage discounts are properly being applied. Track all records in a secure and cloud-based art collection management system to enable collaboration with your art professionals.

1. Valuation Guide for Income, Estate and Gift Taxes, Fed. Est. & Gift Tax Rep. (CCH) No. 115 at 30 (Oct. 14, 1985). See also I.R.S. Valuation Guide for Income, Estate and Gift Taxes, Std. Fed. Tax Rep. (CCH) No. 4 (Jan. 28, 1994).

How will your art be taken care of after your lifetime? Take simple steps to preserve your legacy.

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