Collectibles: Unique assets in estate planning—Part two

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:

When you think of collectibles that carry value, you may think of the traditional items like coins and stamps. More recently, pop culture items like Pokémon cards, sneakers, Beanie Babies, and even vinyl records may carry significant value. Collectibles have many nuances when viewed as an asset, and similar to our previous episode dealing with art, they can be even more nuanced from an estate planning context.

Hello, I’m Leanne Kaufman, and welcome to RBC Wealth Management Canada’s Matters Beyond Wealth. With me today is Corina Weigl and Demetre Vasilounis, both from the law firm Fasken.

Corina is the co-leader of the private client services group. Her practice focuses on estate and family business succession planning. She develops customized strategies for Wills, trusts and tools designed to protect a client’s property. She’s been named “Lawyer of the Year” for trusts and estates in Toronto by Best Lawyers in Canada, and has also been recognized with Lexpert’s “Zenith award” for her pro bono work for SEDI.

Demetre is an associate in the private client services group. He has a broad trust and estate practice and has developed and implemented cohesive succession plans for clients. Demetre regularly speaks and writes about various legal issues in succession planning.

Corina, Demetre, thank you for being here with me today to talk about how we should consider passing down collectibles in our estate plans and why this matters beyond wealth.

Corina Weigl:

Thank you for having us, Leanne. It’s nice to be here.

Demetre Vasilounis:

Thank you so much, Leanne. Thank you.

Leanne Kaufman:

So Corina, I’ve mentioned collectibles that might have value, but really, you know and I know when dealing with estate planning, we need to turn our minds to all the stuff we own. All the things that fill our homes and our closets and the shoe boxes and everything. Some of it has value, some of it has sentimental value and some of it frankly has no value. How do you advise clients when it comes to personal effects in an estate in general terms?

Corina Weigl:

Well, thanks, Leanne. That’s a really good question to ask and one that we do often struggle with with our clients because it has both an emotional and a financial perspective to it, but we always start first by asking for an inventory of assets, even of things like personal effects with estimated values, together with where are those assets located. When it comes to things like personal effects, you’ve talked about the Pokémon cards and the Beanie Babies, we ask the clients to highlight those that might have significant financial or sentimental or emotional value. When we see a client that has some specific intentions around who they want to receive different types of personal effects, we always recommend to them that they should be including specific directions in their Will. Otherwise, it’s simply impractical to go about identifying and listening all the personal effects that the client might own.

Once we’ve dealt with those specific gifts that a client or specific intentions a client might have, when we’re thinking about everything else, we generally look to four different options in terms of making recommendations to a client.

First, we might say to a client, you can just leave all of the other items of your personal effects to be dealt within the discretion of your executors and trustees. In other words, you leave it to the people that you thought have the requisite judgment to execute on your estate to decide how those remaining items of personal effect should be gifted to your family members, to charities, which ones should maybe be sold and which ones frankly should just be disposed of to other charities like Goodwill, for example.

Or a second option we look to with clients is to suggest that you might want to think about doing what we would call a non-binding memorandum of wishes. In essence, this is a document where the client can sit down in their own time and in their own words, decide who they want to leave different items of their personal property to, who should get the Beanie Baby collection or the Pokémon collection. The benefit of that is the client doesn’t have to go through the hoops of having the formalities of preparing a Will, but the client also has to appreciate that it’s non-binding. So if the client does have some specific intentions about a particular piece of personal property or personal effect, they really still need to understand that they need to include a specific direction in their Will.

Another option that we leave to clients is just to leave it to their children to decide what to do with all those remaining personal effects, but then they should be thinking about a dispute resolution mechanism.

And then the last option we see or recommend to clients is some kind of a rotation process to engage in a selection process of those remaining personal effects. So, you can see how complicated it can get just to deal with the various options.

Leanne Kaufman:

Yeah, and everything from the things that have value right down to the Tupperware, right?

Corina Weigl:

Exactly.

Leanne Kaufman:

So Demetre, how would you advise differently, or how do you think the considerations maybe are different when there is significant value in some of those personal items such as a collection?

Demetre Vasilounis:

So, whether it’s an item of significant sentimental value or financial value—because there are clients who may have both or who may have just items of financial value or just items of sentimental value—I would suggest that if it is significant to ensure that it is in fact dealt with in the Will. One thing I want to highlight specifically for the items with significant financial value is that you might have a collection that’s in the form of a personal item, but really at the end of the day, it may be viewed by the client as an investment. So, let’s take the example of a wine collection. It’s not beyond the realm of possibility that someone who doesn’t drink alcohol may nonetheless collect wine in the hopes of it increasing in value over time as specific types of wine become more and more scarce, eventually with the goal of being sold.

So if that client or individual doesn’t drink, can that wine really be said to be a personal item of theirs? Especially when, again, the sole purpose for collecting it is to hopefully sell it one day and make a profit. So I think for those types of items, and we’ve seen it before too, the drafting can get really tricky because if we have a really valuable collection, but then we’re giving the trustees the discretion to deal with personal items, and sometimes that discretion can include making charitable donations of them or even just disposing of them, then we may not want the wine collection that’s an investment to be captured in that personal items’ clause. We might want to deal with that separately, make it as a separate gift or even just have it form part of this residue of the estate, but specify that it does in fact form part of the residue.

So that’s probably what I would say on the sort of financial items of with financial value, even if it is an asset in the form of a personal item, we need to look at the nature of how the item is used to determine how to most appropriately deal with it in the Will. This is where the suggestion of keeping an inventory is critical.

Leanne Kaufman:

Well, and you can only imagine if they don’t deal with it. Something like the wine one is a great one because what if the trustees just handed out as bottles of wine, as in for everyone to drink? Oh, yeah. I can see the difference between intention and execution getting muddled there.

Corina Weigl:

For sure.

Leanne Kaufman:

Demetre, you wrote a blog that I read about Pokémon cards and their unexpected appreciation and value, and I have to be honest, I gave away a lot of my son’s Pokémon cards. He kept a few, but I’m now really regretting that after reading your blog. So that was kind of an unexpected one for me. What other sorts of collections do you think that people should think about that might be subject to this unexpected appreciation when you’re considering going through—obviously in this case it’s the estate planning context, not just purging the content of their son’s house, but nevertheless—what do you think other sort of collections might fall in that Pokémon card category?

Demetre Vasilounis:

First of all, love that Pokémon cards are the focal points of this podcast—really appreciate that, have to say, I’m very excited by that. And to piggyback off of my previous answer, and before I sort of go into the other collections, I think Pokémon cards are a great example of the issue and the concept that I just discussed. So Pokémon cards, some people play with them, but there’s also simultaneously this whole PokéInvesting community out there that just collects cards to hold them and to sell them eventually. Then there’s someone like me who collects them for both purposes, and I can’t decide if something’s I want to keep to sell because they’re so valuable, or if I want to take a chance, especially with sealed product, so like Pokémon packs and open the packs and see what’s inside and keep the cards for myself just to have, right?

To be clear, Pokémon’s a good example because it’s a card game and people could collect cards just to play the game. I would consider cards that are used in that way to be personal items. But then again, we have the sealed products, which have the sort of randomly selected cards, and then we have the single sort of rare valuable cards. Some cards have more rarity than others. It’s the scarcity and the rarity that I really want to focus on. And even with the sealed product, the prospect of getting something scarce and rare, that’s where these cards and these sealed products derive their value. As you pointed out earlier, many parents used to say, back in the day, “keep those Pokémon cards as they’ll be worth something one day.” At least that’s what my parents said, and they were right.

Leanne Kaufman:

Not this parent, not this. She said, “Get rid of them all.”

Demetre Vasilounis:

So to answer your question, what other sorts of collections? I would say any collection where there is a form of scarcity or rarity. So we talked about Beanie Babies. I think sneakers are a really good example as well. You have people lining up outside of these stores to get these limited editions of sneakers because they’re not going to be made again, it’s not easy to sort of mass produce these items. Vinyl records are also a good example as well, because even with the newer artists that are pressing vinyl records, they do it in a limited release. They’re not, again, mass-producing those records. Even video games—like, I like video games—and they have collector’s editions, right?  So they come with unique items such that once they’re gone, they’re gone. And you have sealed versions of these collector’s editions going for hundreds or thousands of dollars sometimes online just because of that rarity and because of that scarcity.

So again, it’s these types of things that are not mass-produced all the time. These are the types of collections where we’ll see this value because the value is derived from the fact that you can’t easily get it again.

One other example, I’ll just give, I’m a big gaming fan, so I collect these Nintendo Amiibo, they’re these little figurines depicting Nintendo characters. It was so hard to get some of them, even when they launched. You know people would say to me, “Oh, Nintendo will just make more. They’re doing this to drive up demand.” And that’s really not the case. Just because a big company is manufacturing an item doesn’t mean that they’re going to be mass-producing it such that it’s going to be widely available. There are many, in my example, the Amiibo that have only limited reprints because the companies are also a little scared to oversaturate the market with these collector’s items as well.

One other point I just want to add too, just to sort of wrap things up on this, you can own a collection, but the value is also derived from how it’s maintained. So to bring it back to the Pokémon cards, if you’re collecting single individual cards, they’re really only worth something if they’re graded. So this means that you actually send it to a company that evaluates the condition of the card and puts it in like a not a plastic case, but a hard case with a rating in terms of the score of what good condition it’s in. If your card’s in a crappy condition, it has scratches, that’s going to drive the price down. It may still be worth something at the end of the day, but I did just want to make the point about not only owning the collector’s item, but also how is it maintained as well.

Leanne Kaufman:

Well, that makes me feel better about giving away all my sons because they weren’t in great shape. But I do have to do a sidebar on one other story, because a million years ago I was a commercial litigator, and one of my cases as a very young lawyer was a client’s wife had bought a Beanie Baby through eBay, and this is 20 plus years ago, so buying through eBay was a very risky proposition. And sent the money, and guess what? No Beanie Baby was forthcoming. It was a bolt inside a box. But anyway, a story for another day.

So Corina—we’ll get away from the Pokémon cards and the Beanie Babies for a minute—but when you’re talking to executors, how do they determine if household or personal items has value or they don’t? Because that’s part of the role of the executor to collect the assets and maximize the value of the estate. So when is it okay to just call 1-800-GOT-JUNK to clear everything out, and when does a really fulsome inventory and set of appraisals need to be done? And I know we could spend 15 minutes on this, but in general terms.

Corina Weigl:

Yeah, that’s a really, really good question and it’s one that may have a bit of a risk management answer to it, but I think there’s two sides to the question. There’s obviously the obligations to the beneficiaries that the executors have to ensure that they’ve satisfied the terms of the Will, and then there’s the regulatory tax compliance side, so just dealing with the obligations to the beneficiaries. Obviously, you don’t want to be calling 1-800-GOT-JUNK out of the gate. You want to be looking at the terms of the Will, seeing if there are any specific gifts, identifying if that property still exists, and then setting those specific gifts aside to be ultimately delivered to the named beneficiary.

So once you’ve sort of dealt with anything that’s specifically dealt with in the Will, then as to whether or not you do a fulsome inventory of all of the household contents—for example, that parents you might have who’ve been living in their home for 50 years. I’m sure our listeners can just imagine the home of a parent who’s been in it for 50 years and just the contents just dealing with it. So what I meant when I said risk management, you got to kind of know who the beneficiaries are, and from that perspective, if you’ve got beneficiaries who are going to expect to see a fulsome inventory of everything and anything that was in the home, you might have a scenario where the executors have to go out and do that fulsome inventory in order to be able to provide that listing to the beneficiaries.

You might have other situations where you don’t need to go through that process from the perspective of satisfying the obligations to the beneficiaries. Now, you take the other side of the question, the other side of the obligation, and that’s the regulatory side from an income tax compliance, a duty to pay, and then a probate application process and probate tax side. On the federal income tax side, Demetre was talking about Pokémon cards, and I’m relieved to say that my kids did not collect Pokémon cards. It might just mean that I’m older than Demetre and older than you Leanne, but there could, as Demetre has informed us, there could be items like Pokémon cards that have increased a lot, and so they might actually have got accrued capital gains in their value, and that could lead to a potential income tax liability.

Thankfully, there are some rules in our income tax act that essentially say you don’t have to deal with necessarily valuing everything because there’s a special rule that says if the cost base of personal use property is less than a thousand dollars, it’s deemed to be a thousand dollars, which means there isn’t going to be a tax obligation until you’ve got property that exceeds that $1,000 threshold amount. So generally, you want to look at what is in the bucket of personal property and get some sense of what the value is in order to be able to determine whether you’ve got income tax compliance obligations, the probate tax side, provincial probate tax is a little bit more complicated. It’s more complicated because when you actually look at the government forms that give you an example of completing the filing in support of the probate taxes that are payable, and I’m speaking about Ontario only because that’s of course where Demetre, Leanne and I are, they actually give the example of a pair of slippers with a dollar value. So when you see that as the example of how to complete the forms from the government’s perspective, what that tells us is you do really need to do a fulsome valuation from a provincial probate tax perspective, because ultimately it’s the executors who will file that probate tax application and will have to make sure that they’re paying the appropriate quantum of probate taxes. So I wouldn’t gravitate to 1-800-GOT-JUNK right out of the gate. I’d be doing some assessment of the risks with respect to the beneficiary pool, making sure that I’ve at least ensured I’ve satisfied all those specific gifts. Then I’d be working with our accountants to figure out is there personal property that has value from an income tax perspective? Then I’d be doing an assessment, do I need probate? If I do need probate over the Will, what’s the process I should be going through to make sure I’ve got an appropriate inventory with appropriate valuations to calculate the probate taxes?

Leanne Kaufman:

Those would be some long probate inventories. If you got down to the level of slippers and socks and assigning a dollar value. I wouldn’t pay a dollar for someone else’s slippers.

Corina Weigl:

Exactly, which is why we are frankly very surprised to see that as an example in the court documents. Those comments are balanced with what’s practical. I would also not be telling a client go out and value the clothes that the deceased died owning, because ultimately they’re going to be—unless they’re collector items, which of course they can be—but if they’re just run-of-the-mill clothes, we wouldn’t be attributing a value. We would be donating that to Goodwill.

Leanne Kaufman:

Right. So Demetre, you’ve already mentioned that you like video games, and I’m going to guess that you’re a little bit younger than I am as well along the lines as of what Corina already said. So I think you’re well positioned to tell us briefly about these newer forms of art and collections that are only digital in nature. So NFTs, I know avatars can have value, my son talks about skins, there’s other things I’m not aware of that I know you are. Without trying to give us too much of a lesson for the old folks listening about what these things are, anything different that needs to be considered there when they’re strictly digital?

Demetre Vasilounis:

Yeah, definitely. So, first of all, as you just suggested, digital assets that topic could be a whole podcast in itself. So just trying to give a brief answer, being mindful of the time, I want to focus on some key aspects of that question. For NFTs in theory, they derive their value from scarcity, in theory. They use the blockchain technology for serialization. So an NFT may in itself be like an image, like a work of art that somebody actually drew or used a computer program to draw or whatever it is. But the idea is that it utilizes the blockchain technology to have a unique identifying number that can’t be forged or replicated just because of the way that the blockchain technology works. So it derives value from this, again, this serialization or this unique number. But on the topic of NFTs, I think the NFT market has gone down something like 90 percent or something like that. I think the way we were sort of talking about NFTs two years ago versus today is very different. I think personally that a lot of people have decided that at the end of the day, there’s more value in a collectible that you can hold in your hand, that you can display in your home, etcetera, rather than something that’s sort of online and digital, and that you can just view a lot of these NFTs online anyway, even if you don’t have the unique serial number—so that’s the issue with NFTs. You can still reproduce them, just maybe not with the serial number. You can literally take a picture of your screen and you have the same thing as an NFT, except you don’t have the number. But as I mentioned with the physical collectibles, you can’t go back and sort of replicate these companies’ printing processes and production processes. So that’s the sort of difference between the digital collectible and the physical collectible.

With avatars and skins in a game, yeah, some of those may have cost money to acquire, but remember for those, there does in fact need to be a market for them. For an avatar or a skin in a game if it’s from a dead game that nobody plays anymore, and you’re probably not going to see it have a lot of value moving forward, even with the passage of time and even when it gets discontinued. Nonetheless, again, as I just kind of mentioned, it’s a lot, I think, easier to bring back an avatar or a skin, which is essentially just kind of code, we’ll say in a computer, than it is to again, reproduce these physical items, these physical collectibles. So if a product like that is easy to make it available, it might nonetheless be in a company’s interest to control the market and not have much of a secondary market anyway.

So again, using avatars and skins, as an example, a lot of companies they maintain those avatars and skins. You can still buy them today, right? Because they probably, again, want to not have that existence of a secondary market. Whereas with the physical items, just because of the nature of the manufacturing process, it’s kind of beyond the company’s control sometimes. Those are just some of the considerations. Even NFTs have a cost for serialization as well. So, we always have to look at what the cost is to a company for producing a certain item and the fear of not sort of recouping that cost. So not wanting to oversaturate the market. Those are the kinds of things that we’re looking at when we’re looking at does a digital collectible have value or does it not have value? That being said, whether it’s a digital collectible, whether it’s another digital asset like a social media account, or whether it’s cryptocurrency, which also could be its own separate podcast in itself, I think that just very briefly, if we’re dealing with those, they should have their own clause in the Will.

Any digital asset in its itself will have legal considerations. For example, if it’s a social media account, you need to look at through the terms of service, allow for a transfer of the actual account, and you also need to look at the technical considerations. So, for example, if it’s an NFT, how can we actually technologically affect the transfer of the NFT from one party to another? I’ll leave it at that for now, but if there’s any interest in taking a deep dive on that in the future, I’m happy to discuss that.

Leanne Kaufman:

Yeah, you’re right. There’s a lot of different rabbit holes we could go down there, but thank you for your answer on that because I think that’s a growing area and something that we probably will need to keep an eye on. Although I won’t worry too much about a collection of avatars or skins based on what I’m hearing from you. So, I think Corina, last question to you, if we’ve covered a lot of ground here, but if you hope listeners really just remember one thing from this conversation, what would that one thing be?

Corina Weigl:

I think it would be to make an inventory. It’s always a great starting point for planning, and it leads to your advisors asking other questions. For example, about financial value, emotional value, and then it gets the client thinking about, well, what do I actually own and who do I actually want it to go to, or how do I want it to be dealt with at the end of the day? So that would be my one takeaway.

Leanne Kaufman:

And then keep it updated, right?

Corina Weigl:

Keep it updated, for sure.

Leanne Kaufman:

Yeah.

Corina Weigl:

Yeah.

Leanne Kaufman:

Thank you, Corina and Demetre for joining me today to talk about considerations for your collectibles in your estate planning and why this matters beyond wealth.

Corina Weigl:

Thanks for having us, Leanne. We really enjoyed ourselves.

Demetre Vasilounis:

It was a great time. Thank you, Leanne.

Leanne Kaufman:

And thanks for the education on many things, Demetre. You can find out more about both Corina and Demetre on LinkedIn or at fasken.com. If you enjoyed 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.

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.