Holding artworks as part of an estate raises a number of considerations when it comes to transfer, taxation and control. The author of this article goes through how these factors play out in the US.

This news service is looking at the world of art in August – examining areas such as art-based lending, investing in fine art, the philanthropy dimension and issues around collecting. The state of the art world can be a useful barometer for the wider wealth management field. And, as we know, many high net worth and ultra-HNW individuals use some of their assets to buy art; others have bequeathed collections to museums. 

This article examines the estate planning dimension of art, and comes from Matthew Erskine, managing partner, Erskine & Erskine. The editors of this publication are pleased to share these insights and invite responses. As always, the usual editorial disclaimers apply. To enter debate either in the next few weeks or beyond, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Lobus recently reported that across three art sales and 62 lots, Sotheby's totaled $364.9 million against a projected low estimate of $262.2 million; Sotheby's November Evening Sales saw a combined $479.6 million across 88 lots sold. Key highlights of the evening included record sales for Francis Bacon, Helen Frankenthaler and Matthew Wong. Upcoming sales include Phillips Evening Sale with a low estimate of $29.4 million across 25 lots, and Christie's with a low estimate of $379.1 million across 82 lots. Although, there are no facts to back up the assumption, the report suggests that the art market is not correlated to the stock market, and in some genres the prices will continue to climb. Whether art is or is not correlated to stock market returns, it is worthwhile to know how art is valued for estate and gift tax purposes. 
 
It’s all about the appraisal 
The core issue of most disputes on the valuation of art is the failure to prepare the appraisal correctly. The appraisal must comply with the requirements of the Uniform Standards of Professional Appraisal Practice (USPAP) and the Art Advisory Panel of the IRS (Panel). Doing so, lays the groundwork for a successful defense of a collection’s value in the determination of tax liability. Specifically, the appraisal should do three things: shift the burden of proof; use the correct discounting methods; and include the impact of clouded title to the artwork. 

Shift the burden of proof
The appraisal should have enough credible evidence to shift the burden of proof on the valuation and the discount to the service under section 7491(a). Credible evidence here means a quality of evidence which, after critical analysis, the court would find sufficient to base a decision on the issue if no contrary evidence were submitted. Taxpayers have shifted the burden of proof in cases of discounting artwork when they have had, in addition to the base appraisals: 

1. Expert opinion on the general nature of the specific art market at the time of valuation, 
2. Expert opinion on the quality of title documentation,
3. Expert opinion on the reputation of the deceased as a dealer and collector, 
4. Evidence of unsuccessful offers of sale of the entire collection, and
5. Evidence of the method and efforts of the estate in liquidating the collection.