Art: Unique assets in estate planning—Part one

Transcript

Intro Speaker:

Hello, and welcome to Matters Beyond Wealth with your host, Leanne Kaufman, president and CEO of RBC Royal Trust. For most of us, talking about subjects like aging, late life, and estate planning isn’t easy. That’s why we’re going to help get the conversation started on this podcast while benefiting from the insights and expertise of some of the country’s top experts. We want to bring you information today that will help to protect you and your family in the future. Now, here’s your host, Leanne.

Leanne Kaufman:

Art in all of its forms is such an important part of life. It is also an asset class and a very unique one with many layers to it. Beyond the pure monetary sense of value, it often holds personal and emotional value to its owners and to other admirers of the work. It can also become emotional when one considers how or if art will be left to the next generation as part of an estate. The combination of monetary value and emotional value can create a particular kind of complexity when it comes to planning around art in all of its forms.

Hello, I’m Leanne Kaufman and welcome to RBC Wealth Management Canada’s Matters Beyond Wealth. With me today is Dr. Sara Johnson, a high-net-worth planner at RBC Wealth Management Family Office Services, and a colleague of mine. Sara is an internationally trained lawyer and an active member of STEP, the International Bar Association, the U.S. Board of Professional Advisors of International Art Market, the Art and Law Institute in London, United Kingdom, and the Art Law Center in Los Angeles—Sara, you’re accomplished.

She has completed several certifications in art taxation, planning and transactions management from Sotheby’s Institute of Art in New York and the European Institute for Innovation and Sustainability in Rome. Sara specializes in international estate planning, art collection and digital legacy planning in ultra-high-net-worth families in developing their wealth and legacy plans.

Sara, that was a mouthful. Thanks for being here with me today to talk about passing down art as part of an estate plan and why this matters beyond wealth.

Dr. Sara Johnson:

Well, thank you Leanne. I’m delighted to be a guest on your podcast.

Leanne Kaufman:

Well, I know our guests are going to learn a lot from you today. So let’s start at the beginning before you’re even really ready to talk about passing on the art and what tips can you give our listeners initially for protecting your collection properly right from the moment you acquire it?

Dr. Sara Johnson:

That’s a great question. So I would suggest that a clear and intentional decision over who should own what and keeping a complete and up-to-date inventory of the art items are essential steps. If the clients are starting a collection, there should be a clear path set forth.

Firstly, what’s the purpose? What’s the grand plan for the collection? Personal use, enjoyment, or is it an investment, treated more like a trade? Or, is it a family legacy? And then, what type of collection? Is it going to be fine art, so the paintings, the sculptures. And which type? Just the super contemporary or the old masters. Or are we looking at collectibles? Or both? From there we can structure an idea about ownership structure. So should the item be owned personally between the spouses, for example, with the right of survivorship? Should we settle a trust, maybe a family trust or a limited partnership or a holding company? And what about insurance, transport, import/export, maintenance, travel cost? How are you going to fund all of that? Also, will be any lending or borrowing to purchase the art items?

So the best way that I can describe it is you need to create your A team, your dream team. Is it going to be just the collectors? Is it going to be the collector and an art advisor, an art lawyer, a trusted conciliary, an art dealer? Who are you going to put in the mix to help guide you in making all these decisions?

Then there is the portion of the art collecting, cataloging, inventorying and constant updates. This is really the realm of our collection management, which focuses on the archiving of all the possible information about each item within the big collection. In this inventory, the important data is around provenance, so the chain of title, authenticity, the items’ full descriptions, which includes measurements, how the items are made, photos of the items, conditions reports, are they rare? Is it one of 100 or one of one? Their cost and the fair market value. And then other details, for example, is the item on loan at the museum or is it stored in Geneva? So this inventory can either be on paper or using a software, literally an app on your phone.

Catalogs should be updated with every new purchase or sale and any new information that bubbles up on existing pieces. And then current owners, executors and trustees, and the heirs will need these catalogs and all the data for the future dealing with the collections for taxes or sales reasons. For example, any artwork with an obscure provenance may not be able to be sold for fears that if it was stolen in the past, the original owners may come knocking at your door.

One tip that I have for people who are just starting to think of art collecting is to create your crush or beauty list. Every time you see something that you like, you just jot it down on your phone. It must be something very specific about the object and how it made you feel. For example, yesterday I was walking around Vancouver and in the window of a gallery I saw a 17th century portrait of a sparrow. I would note it down, I will put the name of the artist and the price, if I asked, and then how it made me feel. So I loved the way the red of the feathers around the neck blended in with the sunset in the background. After a while, you will notice that there are patterns of style, mediums—for example, you like more paintings than photographs—that you’re attracted to or that you are completely repulsed by. So that is the emergence of your own unique taste and unique style.

Leanne Kaufman:

That’s great advice. I love that idea of the crush or the beauty list, but then there’s all that administration that goes along with it to be a responsible art owner, isn’t there?

So you started us down the path a little bit in that last conversation about how the owners can start to prepare themselves to transition that art to their heirs, like all the information that the executors would need, etcetera. But what other tips do you have for how to really start preparing to pass the art along?

Dr. Sara Johnson:

Yes, so it really is about tackling the conversation of the art estate. And in that we can now segregate knowing the client, knowing the collector, and understanding both their personalities and the collection’s present situation. So planning really requires a diligent discovery and data gathering of the clients who must be open to very rigorous disclosures on both their personal and their family details as well as the collection details. For example, clients and collectors’ tax residency, domicile, nationalities will be determinative on which is the competent jurisdiction for planning purposes. The art items’ ownership—we said the example of the spouses owning it together or with joint with right of survivorship or tenants-in-common or owning it in the family business—that’s important because it will help us to understand who can make the gift. Is it the company dividing out an art item or is it mom and dad gifting something, and then when?

Also, the family composition and succession wishes are important because it will help us to understand if there is a need of equalization and what we will be using to equalize errors. Also, the art location. Where is it kept? Is it at home? Is it in the U.S. condo? Is it in Free Port in Geneva? This will shed light on potential cross border issues, ancillary probate proceedings that may be necessary, extra transport to delivery, import/export cost. I mean, this morning it was just announced, for example, that Italy is lowering their VAT import tax from 10 percent to 5.5 percent, which may be determinative of where are we keeping the collection.

Also, a collection may be made up, as I said, of fine art or collectibles. And when we really talk about collectibles we’re looking at luxury items such as fashion designer handbags, watches, jewelry, precious metals, baseball cards, wine, cars. All of these assets may have the unique values and also a mix of emotional and financial value. And collectors may have different goals to transfer their watches versus the paintings. One of the most overlooked aspects by a collector is integrating their art collection within their general governance of the family. This happens when the art collection destinies, for example, is left in the typical blanket clause for personal tangible capital property in their Will and dealt alongside, what? Their household items and their vehicles, instead of being very purposefully planned for.

So, if the family business has a shareholder agreement in place, for example, for how to deal with the shares of [the] privately owned corporation, why not have a letter of understanding regarding the present, and the future of the art collection? For example, will the purchasing of new pieces after the collector is gone be allowed? Will NFT or our AI generator art be a desirable addition? And when and if certain artworks could be deaccessioned, so sold, and how? Should you go private sales? Should it be at auction? Which auction? And donated it to a museum, for example. So, preparing a successful succession means avoiding to underestimating problems that the artist estate will pose and overestimating the ability of our loved ones to resolve them.

Lastly, art collecting is a habit and a lifestyle. Collectors cultivate special friendships with artists and intellectuals and tradespeople. So you do not want to miss the opportunity of sharing that type of relationship and knowledge with the next generation.

Leanne Kaufman:

Yeah. There’s the art and then there’s the story behind the art that also needs to be passed on, isn’t there?

Dr. Sara Johnson:

Absolutely.

Leanne Kaufman:

So what are some of the ways that you’ve seen in your work with clients around how they benefit when they, with intention, incorporate their art and their collection into their estate plan?

Dr. Sara Johnson:

Yes, so the benefit, really the number one I would say is to avoid future family squabbles and any type of resentment or disharmony and loss. For example, to go through a fire sale of certain assets just because we don’t know how to deal with them. Then there is the idea from a more planning perspective, really, of the optimization of the estate plan from a legal and tax perspective. So for example, you use a trust, you might be able to add privacy, avoid probate process and fees, have a two Will strategy, minimize expenses for example, of after the fact research and valuation. So when the executor literally has to start from a pile of randomly accumulated papers to identify, okay, what was the purchase price? Because the default, for example, in Canada for CRA is $1,000 that’s listed personal property.

Also transport costs and all other unintended outcomes. One of the worst ones I would say is to have an art item that has to be destroyed because it’s taken off the market because it was declared a fake. Those kind of things are more like the benefit of planning.

Leanne Kaufman:

Wow. Well, what about the flip side? You must have seen lots of situations where if the planning had been done or had been done properly, some negative consequences could have been avoided.

Dr. Sara Johnson:

Yes. I’m going to tell you a funny story about this because I think that the worst case scenario is confusion and confusion over which art items should actually be transferred to whom. So there was a case of a collector who had white paintings and left the one that looks like a banana to one of the family members and the rest to an institution. So, the problem arised when they were all abstract paintings and no one, not the executor, not the heirs, not the art advisor could see a banana anywhere. So how do you decide? And obviously they might have had different valuations. So there was really a problem and it had to be basically in agreement between the heirs. What that really taught us is that unfortunately we might have missed the intention of what the testator, the Will maker, really wanted, the collector’s original intention. Because now it became just a guess game and a negotiation of who gets which one. So that, I think, is one of the unintended consequences that’s problematic.

Also, very, very rarely, at least in Canada, I see the estate planning documents with prologues to art assets clauses and attestation by Will makers, or on their intention, the visions, the history of the collection. You talked very appropriately about storytelling and the importance of leaving something else that goes beyond just the description of the item and what it meant for the collectors and what the item says about the collector’s personalities and their collecting posture. All of this conversation and all the data sharing may also happen between different people. The family may have a conversation with the next generation, with the grandchildren, with the siblings, and the collectors may have this conversation with the planners, the trustees, which are the trusted persons in their life. Really the key is collecting, pun unintended, as much data either in quality or in quantity as possible.

Leanne Kaufman:

And I think that’s probably something that most collectors, whether they consider themselves collectors or not, most, maybe I’ll just say art owners, probably overlook and don’t think about the downstream stuff that’ll have to be dealt with. I mean, your point about just the purchase price and making sure that’s very clear because what an impact that would have on income tax. Capital gains if the CRA randomly assigned $1,000 valuation. That’s really fascinating.

So you mentioned earlier something about artificial intelligence generated art and NFTs, which I think is non-fungible tokens, but you’re going to correct me… Yeah. Okay. She’s nodding. You can’t see her. But maybe you could just give us a little bit of a glimmer—I know it’s not necessarily estate planning specific, but it’s so fascinating—where’s art going?

Dr. Sara Johnson:

That’s a great question—if we all could have a crystal ball. So you’re right, you’re absolutely correct, art forms are evolving and we would be amiss if we didn’t mention the latest craze for blockchain certificates. You’ve correctly mentioned, the NFTs, the non-fungible tokens, and also AI generated art, your Midjourney, DALL-E, Stable Diffusion type of generative art. I’m going to comment on this using a story.

In 1999, there had been an interview between David Bowie and journalist Jeremy Paxman. David Bowie was trying to convince him that the internet was not just an incremental innovation, but a sea change that created a complete disruption in the art world. He said, and I’m going to quote him, “I think we’re actually at the cusp of something exhilarating and terrifying. This is not just a tool, it’s an alien form.” And I would add it’s a resident alien, it’s not going away, and it’s getting more complex and more intelligent as we go.

Leanne Kaufman:

That’s amazing. Well, thank you for that. I think we’ll have to have you back in a little while to go a little deeper on some of these digital forms of art and other things and how you specifically estate plan around that, because as we’ve often said around all things digital, first everyone has to know that you own it, so that’s step one.

Well, Sara, I think we could talk all day about your experience and these issues. But for now, if you hope listeners just remember one thing from our conversation today, what would that one thing be?

Dr. Sara Johnson:

So, I love this part of your program, I’m always waiting for the one takeaway. So if there was one takeaway then, and I’m going to steal from last week’s report that was published by a very important law firm, Boodle Hatfield. They published Lessons in Legacy, and I would recommend collectors to, quote-unquote, “curate a mindset of custody and legacy for their art collection. With an eye to diligent cataloging and very thoughtful succession planning.” So if there is a setup of keeping the guesswork as limited as possible so that your executor and trustee and your heirs can actually honor your true intention and respect the true nature of the artworks.

Leanne Kaufman:

That’s great advice. Well, thanks so much, Sara, for joining me today to talk about these considerations for art collection and estate planning, and why this matters beyond wealth.

Dr. Sara Johnson:

Thank you so much, Leanne.

Leanne Kaufman:

You can find out more about Sara Johnson on LinkedIn. If you enjoy this episode and you’d like to help support the podcast, please share it with others, post about it on social media, or leave a rating and a review. Until next time, I’m Leanne Kaufman. Thank you for joining us.

Outro speaker:

Whether you are planning for your own estate, the needs of your family or business, or you are an executor for a loved one’s estate, we can help guide you, simplify the complex, and support your life’s vision. Partner with RBC Royal Trust and ensure your legacy will thrive for generations to come. Leave a legacy, not a burden™. Visit rbc.com/royaltrust.

Thank you for joining us on this episode of Matters Beyond Wealth. If you would like more information about RBC Royal Trust, please visit our website at rbc.com/royaltrust.