Can Artwork Affect My Estate Planning Process?
When considering your estate, it is important to remember that artwork is an important aspect of determining your estate’s overall value, which can result in considerable inheritance taxes. Artwork is considered a non-revenue producing asset which can make financing taxes a greater challenge, especially when there is no prior planning. The value of an art piece can fluctuate based on market conditions. A recent Tax Court case highlights why including artwork in your estate planning process is imperative.
In the case, an art collector owned three valuable pieces, including a piece by Pablo Picasso. On a Federal Estate Tax Return, the Estate valued the Picasso at $5 million and the other two pieces at $800,000 and $500,000. However, the IRS contested the Estate’s valuation and commissioned a group of experts to price the pieces. The IRS determined the paintings were worth a substantial amount more than the Estate had reported. They found the Picasso to be worth $10 million and the other two pieces to be worth $1.5 million and $900,000. The discrepancies between the Estate’s valuation and the IRS’s valuation led to the IRS issuing the Estate a Notice of Deficiency, taking the dispute to the U.S. Tax Court.
One important piece of the case was that when the owner of the artwork passed away in 2009, art market prices were at a low point due to the country’s recession. However, by 2010 the market conditions were improving and art prices were beginning to rise. In 2010, the Estate auctioned the Picasso for $12.9 million, which is more than double the price expected by the auction house.
The Tax Court found that the Picasso’s sale price was the strongest piece of evidence to suggest the piece’s true value. The Tax Court agreed that the $2.9 million adjustment by the IRS took into account the state of the art market in 2009, and that the piece was correctly valued at $10 million. For the other two pieces, the Tax Court determined that the Estate had correctly valued their worth.
The above case highlights that valuable artwork can result in a significant taxable estate. Prior planning for artwork is crucial to your estate, especially if you plan to pass along the pieces to a family member or make a charitable donation.