Art collecting is a passion sport pursued by many, and at many different price points. A nagging concern for some collectors is what to do with a collection ardently assembled over time, if or when their circumstances change. It’s a complicated question without a one-size-fits-all answer. The right approach will depend on family dynamics, tax and financial planning considerations, and the value and composition of the collection.
One of my clients gave me permission to share (on a disguised basis) the integrated plan we created last year for their collection. It serves as an example of all that’s involved in creating a pragmatic financial plan for a valuable art collection.
Setting the stage
Let’s start with some context. “Sally” and “John” started collecting in the early 1980s, when John began to make serious money. They felt post-war and
, and so focused their collecting efforts there. They supported their local museum and traveled regularly to New York and other cities to visit galleries and museums. They developed relationships with a few trusted curators and turned to them for input and advice. After years of engagement, they stopped collecting about 10 years ago.
Now in their late seventies, Sally and John enjoy living with their collection, which is spread across three homes. They have three adult children, all of whom are financially independent. In addition to their real estate assets and art collection, they have a substantial investment portfolio.
While working with their trusts and estates lawyer and financial advisor to update their wills, they decided they needed to better incorporate their art collection into their legacy plan. That’s when I got involved to help them think through their options. The objective was to help them achieve peace of mind, knowing their collection was thoughtfully positioned for the future.
Understanding the collection
The first step in the process was to assess the value of the collection and any issues associated with the physical objects. John and Sally weren’t sure what their collection was worth after 10 years of not following the market actively. But it was relatively easy to “mark-to-market” the collection for financial planning purposes, because most of the artists in it were well known and regularly traded at auction.
The 90 objects in the collection were worth around $45 million. As is true for most collections, value was highly concentrated—just 15 artworks represented about 85 percent of the total value of the collection. The couple also had substantial long-term capital gains embedded in the collection: They spent about $4 million to acquire the works.
During this phase of the project, I noticed that two works had condition issues, which is not uncommon. One object was a $4-million painting that hung in their dining room. Like many collectors who get used to living with their art, they hadn’t noticed a food stain on the bottom of it. Luckily, we were able to find a conservator who specialized in work by that artist, who restored it back to its original condition.
Sally and John also owned a photograph by a living artist which had been damaged from excessive light exposure. It hung in a hallway with skylights. Without the light damage, the photograph would be worth around $400,000. But given its diminished state, it was now essentially worthless. I was able to negotiate a financial deal with the gallery that represented the artist to get the photograph reprinted. The artist supervised the process and signed the new work for a fee equal to approximately 10 percent of the fair-market-value of the work.
During this phase of the project, I also identified necessary changes to make in their art insurance policy, and put the updated policy out to bid via a broker specializing in fine art.
Once that work was done, we held several working sessions to discuss potential goals for their collection. Three factors helped set a direction.
First, none of their children lived lifestyles consistent with owning and displaying valuable art in their homes. All of them were also slated to receive substantial inheritances.
Second, if Sally and John gave the collection to their local museum, the museum would likely keep it in the basement, but for a small group of objects.
Lastly, the couple had enough liquid assets (i.e., stocks and bonds) so that the executor of their estate would not have to sell the art quickly to pay estate taxes.
Armed with this information, we divided the collection into three parts. The first was called the “core collection” because it consisted of 25 objects worth approximately $35 million. All these objects would be held long-term and sold after the death of the surviving spouse. Sale proceeds were designated to go to charities important to the collectors.
Next, two valuable paintings were set aside to create a gifting currency. More specifically, the paintings were transferred into a single purpose limited liability company (LLC). Sally and John would annually gift shares in this LLC to their three children and seven grandkids. Across the 10 recipients, they would be able to remove $300,000 of value out of their estate each year. The two paintings we picked were easy to value, so the annual process for revaluing LLC shares would be very straightforward.
The remaining 63 objects in the collection were assigned to the “for sale” collection. We added a few valuable objects into the mix to make the “for sale” portfolio more interesting to auction houses. This would enable us to negotiate a better financial deal when sold. This sale would also be timed to allow my client to realize some losses in their venture capital portfolio. By doing so, they would be able to net capital gains on the collection sale with capital losses in their venture capital portfolio, lowering the capital gains taxes they would otherwise pay on the sale of the art.
A few other noteworthy flourishes were embedded in the plan. When the core collection is ultimately sold after both Sally and John have passed, sale proceeds will be distributed in an interesting way. Thirty percent is slated to be donated to their local museum. It’s their way of giving back to an institution they love. The museum is thrilled with the prospect of getting cash rather than art. The remaining 70 percent of sale proceeds will be put into a donor-advised fund. Their three adult children will then be tasked with distributing this money over 10 years to a shortlist of non-arts-related charities.
Sally and John are also downsizing. They will keep their New York City pied-à-terre, but are selling their other homes and plan to make Florida their primary residence. When this happens, two valuable paintings in the New York apartment will move to Florida so their value will not be subject to New York state estate taxes. But rather than looking at blank walls in the future, replicas are being created so the wonderful ambiance of the New York apartment is maintained. Technology now makes it possible to create replicas that the naked eye can’t distinguish from the original.
The Florida home will also be outfitted with state-of-the-art sensors so that light levels, humidity, and temperature can be monitored remotely from their iPhones. I also worked with the couple to rent short-term storage space they can elect to utilize on a moment’s notice so that when dangerous storms approach the Florida coast, they can be assured of being able to move artworks into a space on a high floor of a secure art storage facility.
Sally and John now have a plan for their collection that is specifically tailored to their personal goals for legacy and philanthropy. As you might imagine, cookie-cutter solutions don’t exist. But I hope this case brings alive what collectors can do to ensure that a collection passionately assembled over time is thoughtfully positioned for the future.
Stepping back from the specific case of Sally and John, I believe collectors can assess whether they need a holistic financial plan for their collections based on three factors.
The first factor is the percentage of family wealth tied up in art. The higher that percentage, the more important it becomes to have an art-related financial plan.
Second, given the fundamental illiquidity of art, how liquid is the collector’s remaining balance sheet? If it’s similarly illiquid, perhaps because it’s invested in real estate and private equity, it becomes more important to have a plan for the art collection.
Lastly, how many objects are in the collection, and in how many different collecting categories? The larger and more diverse a collection, the more important it is to have a financial plan that reflects the idiosyncratic and nuanced marketplaces where objects in each collecting category are traded.
If you have any questions about the topics covered in this article or how they may apply to your personal situation, please contact me at email@example.com.
Doug Woodham is Managing Partner of Art Fiduciary Advisors, former President of Christie’s for the Americas, and author of Art Collecting Today: Market Insights for Everyone Passionate About Art.
This week, thinking about how efficiency isn't enough…
TIME OUT OF MIND
On Wednesday, the 2020 edition of “Art Basel” “opened”—meaning, of course, that the grim necessities of the ongoing public-health fiasco forced what is normally the world’s premier European (and arguably, global) art fair to launch its latest limited-run e-commerce website. And those in the art industry who are still fortunate enough to be either employed or running a business with a legitimate chance at making money in the midst of this absolute junkyard blaze of a year mostly tried to lean in and make the best of the infamous New Normal.
However, a brief exchange I had this week got me thinking about the bigger picture.
Just before the Art Basel viewing rooms went live, someone in the industry said to me, with a mix of wonder and exhaustion, “Do you believe that we’re already doing another one of these? So many virtual fairs!”
To which my response was: You do realize this is the same fair schedule we’ve been on for years, right? And that until the past three months, it was actually even more demanding, because we were all jumping on planes and swanning around cities and uprooting our lives for a week at a time to be a part of the tangible versions of these same events?
I don’t want to downplay the practical and psychological pressures that the lockdown and the national civil-rights uprising have put on anyone lacking the ability and inclination to retreat to a scenic country home. Simply surviving every day physically and mentally intact requires more effort than many of us have put forth in our lifetime.
It's also true that the ban on tangible exhibitions and other IRL events has compelled galleries, fairs, and institutions to overcompensate with digital stand-ins of all kinds, as my colleague Nate Freeman covered a few weeks ago.
That said, there is no earthly way in which clicking around online viewing rooms is a heavier lift than physically participating in art fairs.
Is it more frustrating? I’d say yes. By this point, every new glitch-ridden Zoom meeting pushes me closer to driving a letter opener through my laptop camera like I’m trying to stake a vampire. I’d rather spend a full day trying to make sense of 300 physical art-fair booths sustained by nothing but a Clif Bar than spend a day switching between browser tabs to look at photos and prices on a backlit screen inside the same two rooms that contains the rest of my life. I’m confident I’m not alone in that preference.
At the same time, what we really need to focus on is that this art-market A/B testing is a trap.
DRIVEN TO DISTRACTION
Riddle me this: Would you rather be required to swim a full lap around Manhattan every day in rose water, or in the signature blend of trash, biological rot, and toxic sludge mucking up the Hudson and East Rivers?
Obviously, the correct answer is rose water. But weighing those two choices blinds us to something more fundamental—namely, that it’s absurd to demand that someone swim a full lap around Manhattan every day! Changing the details doesn’t make the underlying premise any more reasonable.
All of the above loops back to the meat grinder of online art fairs. The common understanding in the Old Normal was that a big part of what made the art-market calendar so unforgiving was the nonstop travel. “Maybe if we could just transition some of these sales events online,” some people thought, “buyers and sellers could still do much of the same business—only more efficiently and more pleasantly.”
Well, guess what: the nonstop travel is gone… and most art-business professionals I know are basically just as exhausted and overextended as they were before.
In fact, there’s a sense in which the overwhelm feels worse. Just look at how many galleries are now supplementing their virtual fair booths with concurrent online sales platforms on their own websites. As of my writing, Gagosian (which was at the forefront of this trend) currently has a viewing room at Art Basel through June 24, plus a separate in-house viewing room in which the works being offered cycle every 48 hours for 10 days. Gladstone has its Art Basel viewing room, an expanded version on gladstonegallery.com that includes additional context and artworks, and a separate in-house viewing room dedicated entirely to watercolors by Ugo Rondinone, all open for business through June 26.
What does this mean? It means that the travel fatigue was just a detail, not the unreasonable premise itself.
RACING AGAINST REALITY
In business analysis, it’s become popular to say that the shutdown is an accelerant. What’s been happening to varying degrees around the globe is exactly what would have happened without a lethal medical scourge. Great products would still have sold out. Dangerously over-leveraged companies would still have gone under. An appalling amount of taxpayer funds would still have been legally hijacked from the Americans most in need by the ones least in need. These outcomes are just taking mere weeks or months to materialize instead of years.
What doesn’t get discussed nearly as much is that the same acceleration is happening in our personal lives, too. If you were somewhat politically aware before, you’ve probably taken more direct action in the past few weeks or months than you did in the past several years. If you thought a dog might be a nice companion to have back in January, then since May you’ve probably been willing to fight a bare-knuckle boxing match for the opportunity to adopt a puppy. If your marriage was starting to buckle in the Old Normal, then the New Normal has either cracked it clean apart or left it barely holding together.
The reason is the same: the shutdown has drastically reduced our options for escaping essential questions. Just like an increasingly restless couple used to be able to distract themselves from their base-level incompatibility by meeting up with mutual friends at their favorite bar for a night, art-fair participants used to be able to distract themselves from the calendar’s unsustainable pace by escaping the convention center for an evening to see a great museum show—or even by tacking on a short vacation to a nearby destination at the end of a grueling week.
Those opportunities have vanished in the New Normal. What's left is just the hamster wheel in its most stripped-down form.
As a smart dealer I talked to this week pointed out, the effect is amplified by the fact that the entire art fair is now being channeled through the same access point: the screen. For example, if an exhibitor didn’t care about the fair’s program of panel discussions before, the venue for the talks was so far removed from the trading floor that they could easily forget it even existed.
Now that the schedule and the events are being broadcast through the same digital interface as the parts of the event that actually concerns them, though, they found themselves asking… Wait, why does the fair need to do these again? And why are my booth fees subsidizing the cost?
The questions only get more urgent when the same device mediates not just the entire art fair, not just the entire art market, not just (nearly) your entire profession, but also most of your personal life. Line up so many components next to each other in one repository like this, and you start finding out what has value to you—and what doesn't—even if you didn't particularly want to. And the answers may scare you.
Look, I might be in the minority here, or at the very least being swayed by conversations happening in an echo chamber. I just think that if we believe that we can meaningfully ease the punishing demands of the 21st century art market simply by rebalancing the proportion of online versus offline events, we’re kidding ourselves.
More and more of the art world is inching out of lockdown every week. Galleries in New York were permitted to reopen by appointment last Monday, and a group of dealers in Berlin installed actual gallery shows of the works they were presenting on Art Basel’s sales platform. Although legitimate fears of a public-health relapse loom (setting aside that the US's curve has plateaued, not flattened), the Old Normal hasn’t felt so reachable in months.
Regardless of when the shutdown finally ends for good, let’s see how many of the industry’s decision-makers exit it agreeing that more dramatic changes are needed to make the annual calendar sustainable—and more importantly, what they decide to do about it.
That’s all for this week. ‘Til next time, remember: When you’re sheltering in place, there’s nowhere to hide from hard truths.