It shouldn’t come as a surprise that many private art collectors are also among the world’s wealthiest individuals: Art, after all, is often a high-worth commodity traded among storied institutions, private investment funds, and historically wealthy families. As a $71 billion industry, the art market has often served as both a vehicle for investment and an instrument of charitable giving – one that, in many cases, can lead to a significant tax break.
It’s embedded in United States tax law that charitable donations are fully tax-deductible and therefore can be applied as savings on a yearly tax bill. Those benefits are extremely valuable when considering the estate tax, or inheritance tax, which places a 40 percent tax on any estate valued over $5 million at the time of the benefactor’s death. Often times, a charitable donation is structured before the benefactor passes, so as to reduce the estate tax’s impact to the beneficiary heirs. While the overall motivations may seem dubious, this mechanism has some substantial rewards for the public at large, who often benefit from charitable contributions made by wealthy benefactors. That’s especially true when considering the art world – think of how many wonderful institutions have been formed and preserved thanks to the legacy of some of the world’s wealthiest art benefactors, like the Whitneys and the Guggenheims.
However, this tradition of giving back to the arts is in jeopardy under the Trump administration’s proposed tax reform plan, which along with cutting taxes across the spectrum would also eliminate the estate tax. Since the estate tax effectively kicks in the need for wealthy contemporary art collectors to make charitable donations to art museums, the effect of a repeal of the estate tax could have a chilling effect on art museum donations. On the other hand, it could also bolster the already thriving art market, as private art collectors will likely increase their collecting pace and expenditure when any tax implications are removed from their wealth.
Here, we’ll discuss the overall effects that a repeal of the estate tax could have on public arts institutions and the private art market, along with some important takeaways for working artists.
The Estate Tax and Its Effect on Art
The estate tax, which has been in place in the United States for over ninety years, imposes a tax on the transfer of an estate of a deceased person at the time of their death when the estate is valued at over $5.4 million. That means that, a wealthy private art collector who wishes to leave an inheritance to a son or daughter will have to pay up to 40 percent tax on the estate once they’ve inherited it. For many private art collectors, this usually means having to sell a variety of assets and valuables in order to make good with the requisite tax, since much of a wealthy private art collector’s wealth is found in their art assets – unless, of course, they are able to plan ahead and structure their investments in a charitable vehicle before their death.
Malcolm Taub, a partner at Davidoff Hutcher & Citron LLP’s Art and Estates Law practice group, frequently counsels wealthy individuals and private art collectors with their estate planning needs. According to Taub, families that would have customarily donated their works in an effort to avoid significant estate taxes may be deterred under the proposed repeal.
“Under the proposed changes, families and owners of extensive art collections would avoid expensive tax bills, allowing them to keep private collections intact,” says Taub. “The estate tax encourages families to sell their art or donate items to museums and other nonprofit organizations to reduce their tax bill. Fewer donations would constrain the resources of museums and prevent the general public from gaining access to experience famous works of art, more of which would remain in private hands.”
Under the current estate tax framework, wealthy art collectors who don’t structure their assets for charitable giving prior to their death are required to pay their requisite estate tax within nine months, which usually results in being forced to sell their artworks at a depressed value, according to Taub.
“Imagine having your assets in art. This property is valued at the time of a person’s death, but there’s a tax on that value,” Taub says. “Basically if you die with those artworks in your possession and you want to hold on to the art, your estate can be depleted because you have to pay tax on the artwork. That’s why many people will make donations of artwork during life, or establish trusts or foundations.”
Taub, who was involved with structuring artist Robert Rauschenberg‘s estate, notes that many successful artists may wish to allow their galleries to take control of a trust, similar to the way Pace Gallery handles Mark Rothko‘s artwork.
Other Benefits to Donating Artwork
Notably, U.S. tax law treats certain donations differently than others – often times, this distinction will turn on the type of art institution that was gifted a work of art. Generally speaking, donated art will give the donor a tax deduction from their yearly filing. If a work is donated to a private charity, however, that work will be valued at the original price that the work was purchased for. If your artwork has appreciated significantly since you first purchased it, then you won’t receive any additional benefit – your tax-deductible amount will be whatever you paid for the work originally.
On the other hand, a collector who donates their artwork to a public museum will have the benefit of valuing their work at whatever the current fair market value might be for said work. Thus, there’s a significant incentive for art collectors to donate their works to public art museums.
The Repeal of the Estate Tax’s Effect on the Art Market
The availability of art in public institutions is an important opportunity for dialogue and a tool for engaging multiple and disparate audiences. But it’s worth noting and discussing whether there may not be a benefit to the estate tax’s repeal considering that private art collectors will still have several incentives to donate their art collections, including legacy opportunities and tax deductions.
Taub suggests that a repeal of the estate tax might create a healthy boost in the art market, as collectors may feel more encouraged to purchase artwork since they won’t have to worry about paying a tax on their estate.
“I would think that from a purchasing point of view, if you think an asset that you buy is not subject to estate tax it would be more beneficial and would create a bump in the market,” he notes. He also muses on the financial benefits of art as a commodity, noting that “there are people who say the value of art has risen higher than S&P index. Art is another form of asset which is collected – some buy for investment, some buy for trading; everyone collects art for different reasons.”
Interestingly, a bump in the art market could mean that artists are at a greater advantage since the repeal of the estate tax would encourage private art collectors to continue to purchase new works of art. However, would the effect be felt by all artists, or benefit only those at the highest echelon of the art market? Could this bump in the market trickle all the way down to emerging and mid-career artists, causing prices to inflate across the board? It’s possible, but at what cost?
Ultimately, the repeal of the estate tax would most certainly have a chilling effect on important art donations. While it’s true that private art collectors may still wish to donate to see their name on a building or reap tremendous tax benefits during their lifetime, it’s also very likely that they’ll want to keep their beloved works in the family.
And while there may be immediate benefits to an uptick in the market for artists, a repeal of the estate tax wouldn’t bode well for future generations of artists who will rely on public art museums and institutions to continue to educate and inspire.