Trust Estate
Facing Estate, Tax Challenges For Business Owners, Artists, And Gallery Owners
Regular FWR writer Matthew Erskine takes a tour around the tax and estate planning territory as the clock ticks down before the US Presidential and Congressional elections.
The political clash gets ever closer, and in November 5 elections, tax is likely to feature as an issue. (See articles here, here and here.) Regular contributor Matthew Erskine, who runs his own law firm, Erskine & Erskine, has thoughts about tax and estate planning in this environment. The editors are pleased to share these insights and invite responses. The customary editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com
As 2024 progresses, the sunsetting of key tax provisions presents unique challenges for business owners, artists, art dealers, and gallery owners alike. With the estate tax exemption set to decrease and potential changes looming in capital gains and valuation practices, it is crucial to review and adapt estate and tax plans to avoid pitfalls. Below, I outline the common challenges faced by these groups and what should be reviewed before year-end.
1. Sunsetting estate tax exemption
One of the most pressing concerns across all sectors is the
scheduled reduction of the estate tax exemption at the end of
2025. The current exemption of $13.61 million per individual is
set to be halved without new legislation, significantly
increasing the tax liability for estates exceeding the new
threshold and likely doubling the number of estates that will be
taxable. This change will affect more business owners, artists,
and gallery owners who have seen their net worth increase in
recent years. Now is the time to explore options such as gifting
strategies, establishing irrevocable trusts, or freezing the
value of assets to lock in the current high exemption levels.
2. Valuation and liquidity issues
Valuing a business or a collection of artwork poses distinct
challenges. For business owners, determining fair market value
can be complex, particularly for family-owned enterprises with
illiquid assets but, as in the recent Supreme Court ruling in the
Connelly case, valuation of a business interest requires some
time and expense to avoid much greater estate tax liability down
the road. Artists and gallery owners face a different but equally
daunting task: the subjective nature of art valuation often leads
to disputes with the IRS, especially when preparing for estate
tax. Without a clear valuation strategy, you risk either
undervaluation penalties or liquidity issues when it comes to
paying estate taxes.
3. Succession and business continuity
planning
Succession planning is vital for business owners and gallery
operators, especially those with family-run operations. Consider
the interplay between family dynamics and tax obligations to
ensure that business continuity is preserved while minimizing tax
liabilities. For artists, this may involve establishing a clear
plan for managing intellectual property and ensuring that your
legacy, as well as your financial interests, are preserved after
your death.
4. Potential capital gains changes and stepped-up
basis
Another looming threat is the potential overhaul of capital gains
taxes and the elimination of the stepped-up basis at death. If
passed, these changes would dramatically affect how business
owners and art collectors transfer assets to their heirs. For
artists and gallery owners, the impact could be especially severe
if high-value works of art are subject to immediate capital gains
taxation upon inheritance.
5. Inventory and intellectual property
management
For gallery owners, keeping accurate records of artwork
provenance, purchase dates, and current market values is
essential. Poor documentation can lead to significant tax
problems during estate settlement. Similarly, artists must
carefully document ownership and rights of intellectual property,
ensuring that royalty streams or reproduction rights are properly
managed in their estate planning. Business owners also need to
protect their intellectual property, such as trademarks,
copyrights, and design patent rights, especially in response to
the FTC rule that bans non-compete agreements.
6. Digital assets and international planning
In our increasingly digital world, managing digital assets has
become an essential element of estate planning, particularly for
artists whose online presence or digital artworks may carry
significant value. Furthermore, gallery owners operating
internationally must navigate not only domestic tax rules but
also international cultural property laws and customs
regulations.
Preparing your plan for 2024
With so many challenges on the horizon, prioritizing what to
address first is a challenge. Whether you are a business owner,
an artist, or a gallery operator, it is important that you avoid
wasting time and money on estate and tax planning on solutions
which do not address your most pressing needs today.
One of the key tools I utilize in estate and tax planning is the Theory of Constraints (TOC), a methodology that helps identify the most pressing challenges limiting your overall financial strategy. By applying TOC, we can focus on the most critical constraints in your estate and tax plan – whether it’s the impending estate tax exemption reduction, business valuation, or liquidity concerns – and address them first.
This approach ensures that your most vulnerable areas are fortified, freeing up resources to tackle other areas more effectively. For example, if liquidity issues are the greatest constraint, we can prioritize strategies that create liquidity without selling critical business assets or devaluing your artistic legacy. By systematically eliminating each constraint, we create a more streamlined and tax-efficient estate plan that meets your goals.
This method allows us to address your unique challenges in a logical and prioritized manner, ensuring that you gain the maximum benefit while minimizing risk.
Bottom Line: Don’t wait until it’s too late. Be sure to review your estate and tax plan before the close of 2024, to know if you’re fully prepared to take advantage of today’s opportunities and safeguard your future.