ISSUE 32: 2017

Arts Special

Art in a New World

The art market is attracting new buyers and changing attitudes toward art as a part of an overall financial portfolio.

Plainpicture/Arthurimages/Roland Halbe

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From baroque and romantic to surrealist and modern, the world of fine art has a long history of innovation, with artists constantly exploring new ways to express their experiences and challenge our perceptions. Indeed, great art can be revolutionizing. The art market, by contrast, has gotten along just fine with very little change, as befits an institution steeped in tradition. There have been innovations — a notable one in the last century was the advent of the evening sale — though calling them revolutionary might be overstating the case. But all that has changed in recent years. Powerful forces not unlike those that are transforming the global economy — technological innovation and rising wealth in developing nations among them — have been reshaping the art market, bringing higher valuations, a global influx of collectors, and shifting attitudes toward the very “worth” of art. Amid these changes, more collectors — newer ones in particular, but seasoned ones as well — are viewing their collections not solely as an enduring and passionate pursuit but also as an economic investment. And, much as with an investment portfolio, they are paying more attention to the prospects and opportunities their collections can provide, with an eye to legacy planning, tax planning and wealth planning, and using the art on their walls as collateral for loans. Our goal in this special section is to highlight these changes and their consequences for collectors and their collections as art meets a new world.

Section One: An Art Market in Flux

Rising wealth, the globalization of markets and technological advances are just some of the forces that are reshaping the global economy — and, as it happens, transforming many facets of the art market. For collectors, understanding how and why the market is evolving may be more important now than ever before. 

On the rise: wealth and valuations

There’s been a surge of interest in art collecting in regions of the world where wealth has risen significantly. That includes the United States and other developed nations, as well as emerging regions such as China, India, Russia and South America (see the “China and the Next Great Growth Story” sidebar). The increase in interest is reflected in a significant rise in market valuations over the past decade. While sales differ by collecting category or period, overall sales climbed from about $36 billion in 2005 to $68 billion in 2014.1(A dip in 2015, to $64 billion, occurred, in part, when economies slowed in several art-hungry regions.) 

ART LENDING AT U.S. TRUSTRead more

Art Lending at U.S. Trust

We are one of the largest art lenders in the world. If you are considering leveraging your art collection, here are some points to keep in mind.

“First and foremost, the process of borrowing through us is straightforward,” says John Arena, a Senior Credit Executive at U.S. Trust. Beyond that:

  • Assessment. Your U.S. Trust advisor will assess your overall financial profile to help identify opportunities for you to borrow against your art.
  • Appraisal. A professional appraiser will determine the value of your collection. The loan amount is generally limited to 50% of the appraised value.
  • Closing. The loan, once approved, will be documented and closed with all the requisite information such as bill of sale and insurance certificates.
  • Distribution. The funds will then be disbursed so you may execute against your opportunity.
  • Line of credit. You may also be able to secure a line of credit for immediate purchases.
  • Caveats. Typically, a borrower must have a collection with an overall value of $10 million or more. Also, collections usually must have diversified holdings among artists and time periods. Our customary proposition is to lend against a diversified collection rather than one piece of art.

If you would like to learn more about art loans, speak with one of our credit specialists. They have broad experience with and knowledge of almost every business aspect of the art world and can draw upon relationships with several major auction houses and independent appraisers to help you value your personal collection and identify pieces that may be suitable as collateral for a loan or line of credit.*

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

*Credit Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All loans and collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based financing involves special risks and is not for everyone. When considering an asset-based loan, consideration should be given to individual requirements, asset portfolio composition, and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult with their own independent tax and legal advisors. Credit and collateral subject to approval. Terms and conditions apply. Programs, rates, terms and conditions subject to change without notice.

Seasoned collectors, who tend to buy mainly because of their passion for art, “are being joined by a new breed of collectors who apply the financial savvy and business sophistication of their professional lives to their collecting,” says Evan Beard, National Art Services executive at U.S. Trust. “While they too may have a deep passion for art, many are also keeping an eye on the financial potential of their collection and how it fits into an overall portfolio of assets they own.” While very few collectors buy art purely as an investment, he says, “Many now employ art lending strategies to unlock capital from their collection and art planning strategies to capture tax efficiencies.” Meanwhile, private banks and wealth management firms have expanded their offerings related to art and tangible assets to meet the sophistication of their clients. 

“Viewing art as a capital asset may prompt collectors to seek advice from specialists, especially as tax laws change, monetary policy shifts and the global art market evolves,” Beard says. “Just as they would speak with a financial advisor about their investment portfolio, collectors can now turn to private banks like U.S. Trust to unlock capital from their collection, develop an estate or philanthropic plan, and even consign works at auction at preferred rates.” 

For more on using art as collateral, see “The Financial Power of Your Collection,” below. For more on the disposition of a collection, see “Art Planning: What’s Next for Your Collection.”

Art fairs 

Two auction houses — Christie’s and Sotheby’s — have dominated the global art scene for decades, their revenues typically dwarfing those of other competitors. Against this imposing backdrop, the art fair has been making inroads. Major fairs, held in cities around the world such as Basel, Miami, New York and Hong Kong, expanded sixfold in about a decade, and sales at fairs grew substantially. In a sense, this expansion has helped democratize the art market by giving collectors an alternative to the auction giants and easier access to works of art. As Beard sees it: “For most of the 20th century, collectors tended to be passionate and academic, an exclusive group gathering at auction houses to buy important works. But in today’s so-called ‘experience economy,’ many newer collectors, who may be equally passionate about fine art, often find the atmosphere at art fairs to be less intimidating and more social.” 


Getty Images
 

Technology 

The nature of the digital age is also helping open up the art market to a broader audience. Video streaming allows bidders to engage in live auctions from almost anywhere, and collectors can now go online to check prices and provenance. They can also place bids through portals belonging to established auction houses as well as online-only houses such as Auctionata. Artsy and other sites are aggregating listings and information from art dealers, creating what is essentially a virtual art fair. What’s more, mobile apps are making it easier to bid on items, and social media platforms are growing more influential, alerting collectors when artworks come up for sale.2 

“A wider embrace of technology has helped lead to a broadening interest in art and greater transparency, while easing transaction complexity,” says Christopher Vroom, CEO of CollectorIQ, an art market data and analytics platform. “Although online is a small portion of overall art sales, the format nevertheless seems likely to expand given the global visibility afforded by internet access.”

Section Two: The Financial Power of Your Collection

Anyone moved to collect fine art typically does so with a deep passion and an abiding interest. But what about using beloved works of art as collateral for monetary loans or lines of credit? Some art lovers may be only vaguely aware of how to monetize their collections, while others may be wary of turning a passionate pursuit into a financial tool. John Arena, a senior credit executive at U.S. Trust, understands those concerns but thinks that they may be outweighed by the potential benefits of borrowing against art. “I believe that anyone who purchases a piece of art does so because they feel a connection to it,” he says. “Nevertheless, fine art can also be a powerful financial asset that may be considered as part of a collector’s overall wealth management strategy.” They might be able to use their collection as collateral to gain liquidity for other financial opportunities such as acquiring additional artwork or taking advantage of other business prospects. “This may be particularly attractive for the investor who is fully invested most, if not all, of the time,” Arena says. Not only that, for art lovers who are compelled by financial circumstances to consider selling works of art — especially those pieces with which they have a deep emotional connection — such loans can be a timely alternative. 

“By engaging in art lending, you put your paintings to work for you, so to speak, while you continue to enjoy them,” Arena says. 

Section Three: Art Planning: What’s Next For Your Collection?

Collectors often discover that planning for the future of their collections is no easy step to take. “A collection usually reflects an owner’s passions and interests at different stages of life, so planning for its ultimate disposition can prove extremely emotional,” says Ramsay H. Slugg, head of Art Planning Services at U.S. Trust. Even so, it is essential to plan ahead, he says, “and it may become more important as the value of a collection rises over time.”


Getty Images
 

What are your options?

Collectors have a number of options to choose from when planning for the disposition of a collection. Basically, says Slugg, “you can sell the collection, give it to family, or donate it to charity — all three of which can be done either during life or at the time of a collector’s death.” 

CHINA AND THE NEXT GREAT GROWTH STORYRead more

China and the Next Great Growth Story

Interest in collecting art has risen as wealth has risen in emerging markets such as Hong Kong, Russia and Latin America. That said, the single largest driver of the art market’s recent expansion has been the growth of art purchases in China. In just two decades, the nation’s share of the global art auction market climbed from zero to 19% today, behind only the UK, at 21%, and the United States, at 43%. Beijing’s state-sanctioned economic reforms of the early 1990s helped mint a new generation of young and wealthy collectors, with a pent-up demand to reclaim a cultural heritage nearly eradicated during the country’s Cultural Revolution of the 1960s. This has helped fuel interest not only in Western art, but especially in contemporary and classical Chinese works. In the first half of 2016, auction sales of paintings by renowned Chinese artists Zhang Daqian and Wu Guanzhong ranked second and third behind only those of Pablo Picasso.3 The China growth story is perhaps a uniquely key factor of recent art market growth. But collectors will need to search elsewhere to find the next regional growth story. Will it be Turkey? India? South Korea? Just don’t expect it to be on the level of China. —Evan Beard, National Art Services executive at U.S. Trust.

3 Top 50 Artists – H1 2016, Artprice.com

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

Sell. Selling a collection may be the right choice, but it’s important that collectors understand that it is more expensive to sell art than many other assets. For starters, “the capital gains rate is higher, and there can be other costs such as sales commissions that are not common with most other assets,” says Mitchell A. Drossman, national director of the Wealth Planning Strategies group at U.S. Trust. Selling after death may be a less expensive option from an income tax point of view, as the tax basis of the art collection is increased to fair market value at death, reducing or eliminating capital gains tax for a subsequent sale by the estate or its heirs.

You can sell the collection, give it to family, or donate it to charity — all three of which can be done either during life or at the time of a collector’s death.

Gift. For any collector who’d like to gift a collection to children or other heirs, Slugg has important advice: “Make sure they are interested, and don’t be surprised if they are not. Quite often, they won’t share a passion for art.” If there are several children, another factor to consider is that they may not agree on what to do with the art. “Exploring these options in advance might be painful, but it is necessary to begin the planning process,” says Slugg. And, as always, family members should be aware of any tax consequences they may face as recipients of artworks. 


Grant Faint/Getty Images
 

Donate. “Donating art to a museum can be a personally satisfying gesture,” says Slugg. “Of course, there may be tax advantages, too, especially if the work is donated while you are alive. Still, donating to a museum at death can be simpler. Your collection is delivered to the institution and your estate receives an estate tax deduction based on the current valuation at death.” Then again, some collectors looking to donate have discovered that their museums of choice have basements full of art, but little space for it on their walls. In these cases, when they still want to bequeath works of art, “collectors sometimes turn to hospitals, schools or rehabilitation centers as viable alternatives,” Slugg says. They might even consider establishing a private museum, which can have its own unique benefits. “A private facility is more likely to keep a collection intact, rather than bequeathing individual pieces to a public museum, which would mean less control over its final disposition,” Drossman says. For more, see “Art and the IRS,” below.   

THE ART CONSERVATION PROJECT IS A NOTABLE PROGRAMRead more

The Art Conservation Project is Notable Program

Bank of America’s Art Conservation Project is a noteworthy program that provides grants to museums throughout the world to conserve historically or culturally significant works of art that are in danger of deterioration. Since the program’s inception in 2010, it has provided grants for more than 100 projects in 29 countries. In 2016, conservation grants were provided to 21 museums across six countries. Items those grants will help conserve include The Blue Boy (1770) by Thomas Gainsborough at the Huntington Library; an important 6th-century haniwa (terra-cotta tomb figure) at the Tokyo National Museum; and more than 500 artifacts from the Late Roman and Byzantine periods (4th to 15th centuries) at the Istanbul Archaeological Museums.

For a complete list of the art conservation projects and more about our arts support, visit bankofamerica.com/arts.

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

What’s your plan?

Whichever option you choose for the disposition of your art collection, you are likely to feel more secure and satisfied — and may gain more tax efficiency — by outlining a precise strategy and guidelines now or in the near future. Of course, some collectors take what is perhaps the easiest route: no planning whatsoever. But, as Drossman notes, “This means that the collection is likely to end up in the hands of an executor without adequate direction or distributed to family members who may not share a passion for your art.” So, “no plan” may be the most expensive choice in terms of administration and the least desirable in terms of directing the disposition of the collection. 

Section Four: Art and the IRS

Selling an art collection may be more expensive than selling many other assets. This is because of higher capital gains tax rates — 28% compared to the current top rate of 20% — associated with artwork and other collectibles; on top of this, a 3.8% investment surtax is also imposed. And we can add to that other costs — sales commissions, insurance and shipping costs, and sales tax — which are not common with many other assets. Selling at death is perhaps less expensive from an income tax point of view, as the tax basis of the art collection is increased to fair market value at death, reducing (or perhaps eliminating) capital gains tax for a subsequent sale by the estate or heirs. The trade-off is that the entire value is included in the estate for estate tax purposes. 

Further, disposing of a collection at death often connotes a fire sale and could lower its perceived value. You can take advantage of certain tax breaks while building a collection — trading up to more expensive pieces as part of an exchange. The bottom line is that art collectibles are very expensive to sell — during life or at death — compared with other assets. Passing on art to family can be accomplished using the annual gift tax exclusion (currently $14,000) or the more generous lifetime exclusion (currently $5.49 million) to gift full or fractional ownership interests in works of art to your heirs. One significant difference, though, is that a popular technique of “discounting” the value of assets through the use of fractional interest gifts and/or using a family limited partnership, or limited liability company (LLC), is more difficult to accomplish with respect to artwork. More effective wealth transfers might be accomplished by using other assets. 

ART SALES BY SEGMENTRead more

Art Sales by Segment

The art market’s overall valuation has risen over the past decade but it’s important to note that sales trends tend to differ by period. Post-war and Contemporary segments, for example, have enjoyed strong growth at auction, with the latter due in part to availability: Contemporary artists are still producing important works. Sales of Old Masters, meanwhile, have been sluggish, as their supply is constrained: Most are already in museums or collections. —Christopher Vroom of CollectorIQ

Photo credit: Sophie Elgort

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

Art donated to a museum or other charitable organization entitles you to an income tax deduction of up to 30% of your adjusted gross income based on the value of the work at the time of the gift (provided that the charity uses the artwork in furtherance of its charitable activities). Of course, you will have to deliver the artwork to the charity to receive the deduction. Donating artwork to a museum at death is a simpler endeavor. Your collection is delivered to the institution and your estate receives an estate tax deduction based on current valuation at death. As for possible tax rate and rule changes ahead, Donald Trump pledged during his presidential run to lower certain tax rates. It may be too early to tell if changes will be in place for 2017 or 2018, but momentum to lower tax rates seems to be building.  This may help and hurt collectors, depending on what is done with the collection. Charitable gifts of art would be less valuable with a lower tax rate. On the other hand, the significant tax cost of selling art could be softened, just a bit, by lower rates.  —Mitchell A. Drossman and Ramsay H. Slugg of the Wealth Planning Strategies group at U.S. Trust  


Getty Images
 

Section Five: U.S. Trust’s Focus on Nonprofits, the Arts

Like the art market, the nonprofit arts sector is in the midst of its own transformation. As public funding declines and competition for donations increases, arts organizations are increasingly expected to play by for-profit rules. We are in a new era of alliances, partnerships and technologies — a race of sorts to find new revenue sources and cultivate relationships with the next generation of benefactors. U.S. Trust has a long history of working with nonprofit institutions, and as part of endowment management relationships, our team of nonprofit consultants are working closely with arts organizations on mission achievement in the 21st century. These services range from board governance to development strategies. Just as our clients are becoming more financially driven in their collecting, they are becoming more impact-driven in their philanthropy. Our dedicated advisors work closely with arts organizations to adapt and thrive in this new paradigm.  —Evan Beard, National Art Services executive at U.S. Trust. 

Bank of America backs the arts

Bank of America’s global program of arts support is a key element of the commitment to delivering both social and economic value to the community. The program’s art support is global and diverse, and includes both the visual and performing arts. It reflects the firm’s belief that the arts matter. They help economies thrive, help individuals across different cultures connect with each other, and educate and enrich societies. Art support includes the Museums on Us program providing free access to almost 200 museums on the first weekend of every month, loans of art from our corporate collection to museums at no cost, sponsorships, and grants to arts organizations for arts education, as well as the Art Conservation Project. —Rena M. DeSisto, Global Arts and Culture Executive, Bank of America. 

For a sampling of the bank’s upcoming programs, view our interactive Arts Calendar.

Next steps

We hope this special section has given you deeper insight into the ongoing revolution in the art market, in particular how it might affect your access to great works of art and the value of your collection. 

Speak with your U.S. Trust advisor or one of our credit specialists to discover more about art planning and lending, or visit ustrust.com/art.

1 TEFAF Art Market Report 2016, The European Fine Arts Foundation (TEFAF), 2016.

2 The Hiscox Online Art Trade Report 2016.

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

*Credit Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All loans and collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based financing involves special risks and is not for everyone. When considering an asset-based loan, consideration should be given to individual requirements, asset portfolio composition, and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult with their own independent tax and legal advisors. Credit and collateral subject to approval. Terms and conditions apply. Programs, rates, terms and conditions subject to change without notice.

From baroque and romantic to surrealist and modern, the world of fine art has a long history of innovation, with artists constantly exploring new ways to express their experiences and challenge our perceptions. Indeed, great art can be revolutionizing. The art market, by contrast, has gotten along just fine with very little change, as befits an institution steeped in tradition. There have been innovations — a notable one in the last century was the advent of the evening sale — though calling them revolutionary might be overstating the case. But all that has changed in recent years. Powerful forces not unlike those that are transforming the global economy — technological innovation and rising wealth in developing nations among them — have been reshaping the art market, bringing higher valuations, a global influx of collectors, and shifting attitudes toward the very “worth” of art. Amid these changes, more collectors — newer ones in particular, but seasoned ones as well — are viewing their collections not solely as an enduring and passionate pursuit but also as an economic investment. And, much as with an investment portfolio, they are paying more attention to the prospects and opportunities their collections can provide, with an eye to legacy planning, tax planning and wealth planning, and using the art on their walls as collateral for loans. Our goal in this special section is to highlight these changes and their consequences for collectors and their collections as art meets a new world.

Section One: An Art Market in Flux

Rising wealth, the globalization of markets and technological advances are just some of the forces that are reshaping the global economy — and, as it happens, transforming many facets of the art market. For collectors, understanding how and why the market is evolving may be more important now than ever before. 

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On the rise: wealth and valuations

There’s been a surge of interest in art collecting in regions of the world where wealth has risen significantly. That includes the United States and other developed nations, as well as emerging regions such as China, India, Russia and South America (see the “China and the Next Great Growth Story” sidebar). The increase in interest is reflected in a significant rise in market valuations over the past decade. While sales differ by collecting category or period, overall sales climbed from about $36 billion in 2005 to $68 billion in 2014.1(A dip in 2015, to $64 billion, occurred, in part, when economies slowed in several art-hungry regions.) 

ART LENDING AT U.S. TRUSTRead more 

Art Lending at U.S. Trust

We are one of the largest art lenders in the world. If you are considering leveraging your art collection, here are some points to keep in mind.

“First and foremost, the process of borrowing through us is straightforward,” says John Arena, a Senior Credit Executive at U.S. Trust. Beyond that:

  • Assessment. Your U.S. Trust advisor will assess your overall financial profile to help identify opportunities for you to borrow against your art.
  • Appraisal. A professional appraiser will determine the value of your collection. The loan amount is generally limited to 50% of the appraised value.
  • Closing. The loan, once approved, will be documented and closed with all the requisite information such as bill of sale and insurance certificates.
  • Distribution. The funds will then be disbursed so you may execute against your opportunity.
  • Line of credit. You may also be able to secure a line of credit for immediate purchases.
  • Caveats. Typically, a borrower must have a collection with an overall value of $10 million or more. Also, collections usually must have diversified holdings among artists and time periods. Our customary proposition is to lend against a diversified collection rather than one piece of art.

If you would like to learn more about art loans, speak with one of our credit specialists. They have broad experience with and knowledge of almost every business aspect of the art world and can draw upon relationships with several major auction houses and independent appraisers to help you value your personal collection and identify pieces that may be suitable as collateral for a loan or line of credit.*

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

*Credit Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All loans and collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based financing involves special risks and is not for everyone. When considering an asset-based loan, consideration should be given to individual requirements, asset portfolio composition, and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult with their own independent tax and legal advisors. Credit and collateral subject to approval. Terms and conditions apply. Programs, rates, terms and conditions subject to change without notice.

Seasoned collectors, who tend to buy mainly because of their passion for art, “are being joined by a new breed of collectors who apply the financial savvy and business sophistication of their professional lives to their collecting,” says Evan Beard, National Art Services executive at U.S. Trust. “While they too may have a deep passion for art, many are also keeping an eye on the financial potential of their collection and how it fits into an overall portfolio of assets they own.” While very few collectors buy art purely as an investment, he says, “Many now employ art lending strategies to unlock capital from their collection and art planning strategies to capture tax efficiencies.” Meanwhile, private banks and wealth management firms have expanded their offerings related to art and tangible assets to meet the sophistication of their clients. 

“Viewing art as a capital asset may prompt collectors to seek advice from specialists, especially as tax laws change, monetary policy shifts and the global art market evolves,” Beard says. “Just as they would speak with a financial advisor about their investment portfolio, collectors can now turn to private banks like U.S. Trust to unlock capital from their collection, develop an estate or philanthropic plan, and even consign works at auction at preferred rates.” 

For more on using art as collateral, see “The Financial Power of Your Collection,” below. For more on the disposition of a collection, see “Art Planning: What’s Next for Your Collection.”

Art fairs 

Two auction houses — Christie’s and Sotheby’s — have dominated the global art scene for decades, their revenues typically dwarfing those of other competitors. Against this imposing backdrop, the art fair has been making inroads. Major fairs, held in cities around the world such as Basel, Miami, New York and Hong Kong, expanded sixfold in about a decade, and sales at fairs grew substantially. In a sense, this expansion has helped democratize the art market by giving collectors an alternative to the auction giants and easier access to works of art. As Beard sees it: “For most of the 20th century, collectors tended to be passionate and academic, an exclusive group gathering at auction houses to buy important works. But in today’s so-called ‘experience economy,’ many newer collectors, who may be equally passionate about fine art, often find the atmosphere at art fairs to be less intimidating and more social.” 


Getty Images
 

Technology 

The nature of the digital age is also helping open up the art market to a broader audience. Video streaming allows bidders to engage in live auctions from almost anywhere, and collectors can now go online to check prices and provenance. They can also place bids through portals belonging to established auction houses as well as online-only houses such as Auctionata. Artsy and other sites are aggregating listings and information from art dealers, creating what is essentially a virtual art fair. What’s more, mobile apps are making it easier to bid on items, and social media platforms are growing more influential, alerting collectors when artworks come up for sale.2 

“A wider embrace of technology has helped lead to a broadening interest in art and greater transparency, while easing transaction complexity,” says Christopher Vroom, CEO of CollectorIQ, an art market data and analytics platform. “Although online is a small portion of overall art sales, the format nevertheless seems likely to expand given the global visibility afforded by internet access.”

Section Two: The Financial Power of Your Collection

Anyone moved to collect fine art typically does so with a deep passion and an abiding interest. But what about using beloved works of art as collateral for monetary loans or lines of credit? Some art lovers may be only vaguely aware of how to monetize their collections, while others may be wary of turning a passionate pursuit into a financial tool. John Arena, a senior credit executive at U.S. Trust, understands those concerns but thinks that they may be outweighed by the potential benefits of borrowing against art. “I believe that anyone who purchases a piece of art does so because they feel a connection to it,” he says. “Nevertheless, fine art can also be a powerful financial asset that may be considered as part of a collector’s overall wealth management strategy.” They might be able to use their collection as collateral to gain liquidity for other financial opportunities such as acquiring additional artwork or taking advantage of other business prospects. “This may be particularly attractive for the investor who is fully invested most, if not all, of the time,” Arena says. Not only that, for art lovers who are compelled by financial circumstances to consider selling works of art — especially those pieces with which they have a deep emotional connection — such loans can be a timely alternative. 

“By engaging in art lending, you put your paintings to work for you, so to speak, while you continue to enjoy them,” Arena says. 

Section Three: Art Planning: What’s Next For Your Collection?

Collectors often discover that planning for the future of their collections is no easy step to take. “A collection usually reflects an owner’s passions and interests at different stages of life, so planning for its ultimate disposition can prove extremely emotional,” says Ramsay H. Slugg, head of Art Planning Services at U.S. Trust. Even so, it is essential to plan ahead, he says, “and it may become more important as the value of a collection rises over time.”


Getty Images
 

What are your options?

Collectors have a number of options to choose from when planning for the disposition of a collection. Basically, says Slugg, “you can sell the collection, give it to family, or donate it to charity — all three of which can be done either during life or at the time of a collector’s death.” 

CHINA AND THE NEXT GREAT GROWTH STORYRead more 

China and the Next Great Growth Story

Interest in collecting art has risen as wealth has risen in emerging markets such as Hong Kong, Russia and Latin America. That said, the single largest driver of the art market’s recent expansion has been the growth of art purchases in China. In just two decades, the nation’s share of the global art auction market climbed from zero to 19% today, behind only the UK, at 21%, and the United States, at 43%. Beijing’s state-sanctioned economic reforms of the early 1990s helped mint a new generation of young and wealthy collectors, with a pent-up demand to reclaim a cultural heritage nearly eradicated during the country’s Cultural Revolution of the 1960s. This has helped fuel interest not only in Western art, but especially in contemporary and classical Chinese works. In the first half of 2016, auction sales of paintings by renowned Chinese artists Zhang Daqian and Wu Guanzhong ranked second and third behind only those of Pablo Picasso.3 The China growth story is perhaps a uniquely key factor of recent art market growth. But collectors will need to search elsewhere to find the next regional growth story. Will it be Turkey? India? South Korea? Just don’t expect it to be on the level of China. —Evan Beard, National Art Services executive at U.S. Trust.

Top 50 Artists – H1 2016, Artprice.com

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

Sell. Selling a collection may be the right choice, but it’s important that collectors understand that it is more expensive to sell art than many other assets. For starters, “the capital gains rate is higher, and there can be other costs such as sales commissions that are not common with most other assets,” says Mitchell A. Drossman, national director of the Wealth Planning Strategies group at U.S. Trust. Selling after death may be a less expensive option from an income tax point of view, as the tax basis of the art collection is increased to fair market value at death, reducing or eliminating capital gains tax for a subsequent sale by the estate or its heirs.

You can sell the collection, give it to family, or donate it to charity — all three of which can be done either during life or at the time of a collector’s death.

Gift. For any collector who’d like to gift a collection to children or other heirs, Slugg has important advice: “Make sure they are interested, and don’t be surprised if they are not. Quite often, they won’t share a passion for art.” If there are several children, another factor to consider is that they may not agree on what to do with the art. “Exploring these options in advance might be painful, but it is necessary to begin the planning process,” says Slugg. And, as always, family members should be aware of any tax consequences they may face as recipients of artworks. 


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Donate. “Donating art to a museum can be a personally satisfying gesture,” says Slugg. “Of course, there may be tax advantages, too, especially if the work is donated while you are alive. Still, donating to a museum at death can be simpler. Your collection is delivered to the institution and your estate receives an estate tax deduction based on the current valuation at death.” Then again, some collectors looking to donate have discovered that their museums of choice have basements full of art, but little space for it on their walls. In these cases, when they still want to bequeath works of art, “collectors sometimes turn to hospitals, schools or rehabilitation centers as viable alternatives,” Slugg says. They might even consider establishing a private museum, which can have its own unique benefits. “A private facility is more likely to keep a collection intact, rather than bequeathing individual pieces to a public museum, which would mean less control over its final disposition,” Drossman says. For more, see “Art and the IRS,” below.   

THE ART CONSERVATION PROJECT IS A NOTABLE PROGRAMRead more 

The Art Conservation Project is Notable Program

Bank of America’s Art Conservation Project is a noteworthy program that provides grants to museums throughout the world to conserve historically or culturally significant works of art that are in danger of deterioration. Since the program’s inception in 2010, it has provided grants for more than 100 projects in 29 countries. In 2016, conservation grants were provided to 21 museums across six countries. Items those grants will help conserve include The Blue Boy (1770) by Thomas Gainsborough at the Huntington Library; an important 6th-century haniwa (terra-cotta tomb figure) at the Tokyo National Museum; and more than 500 artifacts from the Late Roman and Byzantine periods (4th to 15th centuries) at the Istanbul Archaeological Museums.

For a complete list of the art conservation projects and more about our arts support, visit bankofamerica.com/arts.

IMPORTANT INFORMATION

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

What’s your plan?

Whichever option you choose for the disposition of your art collection, you are likely to feel more secure and satisfied — and may gain more tax efficiency — by outlining a precise strategy and guidelines now or in the near future. Of course, some collectors take what is perhaps the easiest route: no planning whatsoever. But, as Drossman notes, “This means that the collection is likely to end up in the hands of an executor without adequate direction or distributed to family members who may not share a passion for your art.” So, “no plan” may be the most expensive choice in terms of administration and the least desirable in terms of directing the disposition of the collection. 

Section Four: Art and the IRS

Selling an art collection may be more expensive than selling many other assets. This is because of higher capital gains tax rates — 28% compared to the current top rate of 20% — associated with artwork and other collectibles; on top of this, a 3.8% investment surtax is also imposed. And we can add to that other costs — sales commissions, insurance and shipping costs, and sales tax — which are not common with many other assets. Selling at death is perhaps less expensive from an income tax point of view, as the tax basis of the art collection is increased to fair market value at death, reducing (or perhaps eliminating) capital gains tax for a subsequent sale by the estate or heirs. The trade-off is that the entire value is included in the estate for estate tax purposes. 

Further, disposing of a collection at death often connotes a fire sale and could lower its perceived value. You can take advantage of certain tax breaks while building a collection — trading up to more expensive pieces as part of an exchange. The bottom line is that art collectibles are very expensive to sell — during life or at death — compared with other assets. Passing on art to family can be accomplished using the annual gift tax exclusion (currently $14,000) or the more generous lifetime exclusion (currently $5.49 million) to gift full or fractional ownership interests in works of art to your heirs. One significant difference, though, is that a popular technique of “discounting” the value of assets through the use of fractional interest gifts and/or using a family limited partnership, or limited liability company (LLC), is more difficult to accomplish with respect to artwork. More effective wealth transfers might be accomplished by using other assets. 

ART SALES BY SEGMENTRead more 

Art Sales by Segment

The art market’s overall valuation has risen over the past decade but it’s important to note that sales trends tend to differ by period. Post-war and Contemporary segments, for example, have enjoyed strong growth at auction, with the latter due in part to availability: Contemporary artists are still producing important works. Sales of Old Masters, meanwhile, have been sluggish, as their supply is constrained: Most are already in museums or collections. —Christopher Vroom of CollectorIQ

Photo credit: Sophie Elgort

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

Art donated to a museum or other charitable organization entitles you to an income tax deduction of up to 30% of your adjusted gross income based on the value of the work at the time of the gift (provided that the charity uses the artwork in furtherance of its charitable activities). Of course, you will have to deliver the artwork to the charity to receive the deduction. Donating artwork to a museum at death is a simpler endeavor. Your collection is delivered to the institution and your estate receives an estate tax deduction based on current valuation at death. As for possible tax rate and rule changes ahead, Donald Trump pledged during his presidential run to lower certain tax rates. It may be too early to tell if changes will be in place for 2017 or 2018, but momentum to lower tax rates seems to be building.  This may help and hurt collectors, depending on what is done with the collection. Charitable gifts of art would be less valuable with a lower tax rate. On the other hand, the significant tax cost of selling art could be softened, just a bit, by lower rates.  —Mitchell A. Drossman and Ramsay H. Slugg of the Wealth Planning Strategies group at U.S. Trust  


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Section Five: U.S. Trust’s Focus on Nonprofits, the Arts

Like the art market, the nonprofit arts sector is in the midst of its own transformation. As public funding declines and competition for donations increases, arts organizations are increasingly expected to play by for-profit rules. We are in a new era of alliances, partnerships and technologies — a race of sorts to find new revenue sources and cultivate relationships with the next generation of benefactors. U.S. Trust has a long history of working with nonprofit institutions, and as part of endowment management relationships, our team of nonprofit consultants are working closely with arts organizations on mission achievement in the 21st century. These services range from board governance to development strategies. Just as our clients are becoming more financially driven in their collecting, they are becoming more impact-driven in their philanthropy. Our dedicated advisors work closely with arts organizations to adapt and thrive in this new paradigm.  —Evan Beard, National Art Services executive at U.S. Trust. 

Bank of America backs the arts

Bank of America’s global program of arts support is a key element of the commitment to delivering both social and economic value to the community. The program’s art support is global and diverse, and includes both the visual and performing arts. It reflects the firm’s belief that the arts matter. They help economies thrive, help individuals across different cultures connect with each other, and educate and enrich societies. Art support includes the Museums on Us program providing free access to almost 200 museums on the first weekend of every month, loans of art from our corporate collection to museums at no cost, sponsorships, and grants to arts organizations for arts education, as well as the Art Conservation Project. —Rena M. DeSisto, Global Arts and Culture Executive, Bank of America. 

For a sampling of the bank’s upcoming programs, view our interactive Arts Calendar.

Next steps

We hope this special section has given you deeper insight into the ongoing revolution in the art market, in particular how it might affect your access to great works of art and the value of your collection. 

Speak with your U.S. Trust advisor or one of our credit specialists to discover more about art planning and lending, or visit ustrust.com/art.

TEFAF Art Market Report 2016, The European Fine Arts Foundation (TEFAF), 2016.

The Hiscox Online Art Trade Report 2016.

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

*Credit Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All loans and collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based financing involves special risks and is not for everyone. When considering an asset-based loan, consideration should be given to individual requirements, asset portfolio composition, and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult with their own independent tax and legal advisors. Credit and collateral subject to approval. Terms and conditions apply. Programs, rates, terms and conditions subject to change without notice.