This is Volume 3, Issue No. 1 of Spencer's Art Law Journal. This issue contains three essays, which will become available on ARTNET, starting July 2012.
As noted in the first two Volumes of this Journal, the legal structure we call art law (an amalgam of personal property law, contract, estate, tax and intellectual property law) supporting the acquisition, retention and disposition of fine art, often fits uneasily with art market custom and practice. The result is that 21st century art market participants are frequently unsure of their legal rights and obligations.
The three essays in this Spring Issue deal with core issues for ownership of visual art – possession and title. The first essay looks at the fraught issues involved with buying and selling antiquities in the United States. The second essay deals with the difficult issues of the statute of limitations and owners’ recovering possession of art once held by them, but which has been misappropriated, that is, stolen or converted. The last essay addresses a frequent issue for owners of art collections, to wit, how to pass (or not) the collection to heirs.
Three times a year issues of this Journal will address legal questions of practical significance to collectors, dealers, scholars and the general art-minded public.
Ronald D. Spencer
This modest essay describes an estate planning tool for collectors who thought they had to choose between their collection and their kids. But the collector can keep the former (pretty much) intact, and still benefit the latter.
RONALD D. SPENCER is counsel to the New York law firm of Carter Ledyard & Milburn LLP, where he specializes in art law as Chairman of the Art Law Practice. He is expert in the legal aspects of art authentication issues and has written and edited, The Expert Versus the Object: Judging Fakes and False Attributions in the Visual Arts, (New York, Oxford University Press, 2004).Art collections, formed by collectors, create a perplexing issue with respect to estate planning. The issue is easier if the likely heirs are interested in and knowledgeable about the art.
A frequent goal is keeping intact a collection—built with great energy, attention and money over many years—while providing financial security for heirs.
These twin goals are often best achieved by establishing a private family foundation and gifting the foundation a substantial portion of the art collection—but how much of the collection, since the childrens’ future financial needs are often not clear? One solution lies in providing in the collector’s Will that the collection goes to a Foundation established by the collector. The Will can provide that, if there is no foundation already in existence, the Executor is instructed to establish one. The Will would then go on to provide that the entire art collection would go to the children (or to a surviving spouse, with the surviving spouse gifting the collection by her Will to the children). Then within nine months of the collector’s (or spouse’s) death, the children could decline any part, or all, of the art collection (depending on their financial needs and estate tax considerations). Any part of the collection the children decline would pass automatically to the foundation, thereby reducing the federal estate tax payable by the collector’s estate. (Of course, any amount going to the children (and not declined by them) in excess of $5 million (the amount free of federal estate tax in 2012) would be subject to federal estate tax).
If a private foundation is established, there are several matters to consider about the foundation’s governance and operations. With respect to governance of the foundation, typically the founding collector is a member of the Board of Directors and President. Additional Directors typically are the spouse and children of the collector, and anyone else, such an art historian or art dealer (Yes, art dealers can be Board members who would simply recuse themselves from any Board vote involving a conflict between the foundation and their art dealing) who can bring art expertise to the Board concerning the core collection. The collector’s spouse and children are considered “disqualified persons” under the Internal Revenue Code, and, as such, may be paid for their personal services only if such services are “reasonable and necessary to carrying out the tax-exempt purpose of the foundation,” and are “not excessive”. The foundation’s purposes typically include (but need not be limited to) publicly exhibiting (or arranging for public museums and private art galleries to exhibit) the art collection to the public.
The foundation’s operations and activities in furtherance of these purposes would be to arrange for public exhibitions of the collection --- although not necessarily all the collection at any one time or in any one venue. Note that the public exhibition may consist of temporary loans by the foundation of significant parts of the collection to museums and art galleries.
A private foundation must make annual qualifying distributions of 5% of the fair market value of its “non-charitable use assets”, that is, foundation assets not used for its tax exempt purposes. (An exempt-purpose asset is an asset actually used, or held for use, by the foundation in carrying on the charitable, educational or similar functions which give rise to the foundation’s tax exempt status). Stocks, bonds and similar financial assets owned by the foundation are not charitable use assets (even though the income from such financial assets supports the foundation’s charitable or educational activities). However, art assets should be considered foundation charitable-use assets since the art is being publicly displayed or held for display to the public for much of the time. Thus, the 5% distribution requirement would not apply to the value of the foundation’s art. In the event the foundation needed to sell some of its art to fund its activities, such sales might cause the foundation’s art (possibly including exhibited not-for-sale-art) to be considered non-charitable-use assets and, hence, be included in the base upon which the 5% minimum distribution is calculated. In this circumstance, lacking sufficient financial assets, the foundation might be obliged to meet its annual grant distribution requirement by charitable gifting of foundation-owned art.
If the collector wished the foundation to do more than just be a (somewhat passive) grant-making foundation, that is, if the foundation itself were to conduct exempt activities to achieve its exempt purposes rather than through grants to other organizations, it might well qualify as an operating private foundation. As an operating foundation, it would not be required to meet the 5% minimum distribution requirement (hence not need to be concerned with its art assets being a base upon which the 5% is calculated). As an operating foundation, contributions to it from the collector (if the foundation had been established during the collector’s life) would be deductible for income tax purposes to the extent of 50% of the collector’s adjusted annual gross income, whereas contributions to grant-making private foundations are limited to 30% of the donor’s income.
Moreover, an operating foundation might be useful, where the collector had in mind active programs conducted by the foundation itself, such as commissioning scholarly publications, arranging for itself public exhibitions and scholarly lectures and seminars, etc. Operating foundation status would require at least one professional on staff to conduct these programs.
The collector should understand that, as a practical matter, the goal of keeping the collection intact after the collector’s death cannot usually be achieved by simply gifting the collection to a public museum on the condition that the museum exhibit the art as a single unified collection for many years. Public museums might be happy to receive all or part of the collection as a gift, but a museum will generally not obligate itself for years and years, to exhibit the collection as a single, unified collection. Only the collector-established foundation can assure the collector that the collection will be kept largely intact and exhibited, and thereby assure the collector’s long-term collecting and artistic legacy.
New York, New York