THE IRS, TAXATION RATE AND THE TRUE VALUE OF AN ESTATE’S FINE ART

A beautiful painting is wonder to behold and often a good investment, as many residents of Miami, Florida, may agree. Some fine art increases in value over the years and can add great wealth to an estate. For example, thirteen pieces stolen from a museum 23 years ago have an estimated value of half a billion dollars. The FBI and the museum have offered $5,000,000 for information that helps recover the stolen paintings.

Many wealthy South Florida residents own significant artwork collections that they have gathered over the years. As provided by probate law, estate tax will be levied on these collections based on the current valuation of the art. Some collections can be valued at millions of dollars, depending on who makes the valuation, so the amount of estate tax owed may be a contentious issue.

Valuation and estate tax liability can become more complicated if the estate is dispersed to multiple heirs. An estate can face significant liquidity problems if a family owning a significant number of artworks wants to keep the art, instead of selling it. The art collection’s valuation discount may not lessen the estate tax levy, as a recent tax court decision in an estate valuation of artwork suggests.

A couple collected a significant number of artworks that were held under co-tenancy agreements that were placed an income trust. The wife’s death resulted in some trust assets being given to her surviving spouse. To avoid a hefty estate tax, her husband disclaimed a portion of those interests and claimed that his ownership of the nearly 100 paintings in the collection was less than 100 percent, so their value should not be taxed at 100 percent.

Valuation discounts became an issue. While the estate sought a discount of more than 40 percent, the IRS insisted no discount should be applied. In the end, the tax court allowed a 10 percent discount, which resulted in a hefty estate tax levy.

Estate value experts stated that the lack of control over and marketability of artworks can generate only a modest discount. They stated that splitting the ownership of an artwork collection or creating an interest trust, as well as other discounting methods that are specific to artwork, are often the best possible routes to avoiding full valuation when assessing value for estate purposes.

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Written by Luis E. Barreto

Luis E. Barreto

Luis is a probate and guardianship litigator with over 23 years of experience in the field. Determination of heirs, will contests, breaches of fiduciary duty, removal of personal representatives, guardians and trustees are just some of the types of litigation he addresses. In addition, he administers non-contested estates and guardianships.