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By Richard Manney and Michael Mendelsohn, Managing Partners, CM Briddge

There is an expression, "Life is short, art is long." Your client, a collector, may not have focused on "life is short," and therefore may not have given thought to the disposition of his collection whether it be art, automobiles, baseball cards, or Faberge eggs.

A collection's life has several stages. Initially a collector will be actively involved in the acquisition and accumulation of his or her collection. Ultimately, the collector will run out of time, money, space, or interest to continue such activity. At that point, the collection may either remain static or be refined through selected sales and purchases. Finally, the collector may begin to plan the ultimate disposition of the collection. Sometimes this is undertaken by the collector voluntarily. At other times, it is forced upon him by financial reverses or a change of lifestyle; or as frequently occurs, no thought is given to the matter until after the collector's death. The degrees of thoughtfulness in planning for the ultimate disposition of the collection will determine whether the collector's objectives are realized.

Some strategies that may be useful in fulfilling goals to preserve and perpetuate the collection with benefits to the collector, the collector's family, and the museum or other charitable organization that will become responsible for the collection in order of increasing complexity are as follows:

Gifts to Museums at Collector's Death: The most common way for a collector to give a collection to a museum is by a gift: The museum gets the collection and the collector's estate gets an estate tax deduction. However, this form of gift has many missed opportunities, i.e., loss of a current income tax deduction, usually no certainty for the museum that it will receive the collection, and usually no collaboration between the museum and the collector and the collector's life. Many of these additional opportunities can be achieved with a gift during life or an acquisition at death.

Lifetime Gift to Museum: This gift can be accomplished by a) a gift of one or more works or art, b) a gift of a fractional portion of an entire collection, or c) a gift of a limited partnership interest in a partnership that owns an entire collection.

The fractional gift is not appropriate for a collector who wishes to retain sole control over additions to or sales from the collection. Since the museum is an unrestricted fractional owner, the museum will have some influence over those decisions. A partnership can resolve that issue. The collector can be the managing general partner and have sole control over the management of the partnership's assets. The museum owns only an interest in the partnership and does not own a direct interest in the collection.

There are several limitations on the partnership concept that will prevent it from being appropriate for every collector. First, the collector as managing general partner must actually manage the collection. Second, the collector must permit some use of the collection by each partner. We believe that one partner's rent-free use of more than his or her pro rata share of partnership assets creates income for that partner. The issue is avoided if each partner is allocated a pro rata use of the

Third, the value of a limited partner interest will be less than the limited partner's percentage of the value of the partnership's assets because of the restricted nature of the interest. This reduction in value will reduce the current income tax deduction available to the collector for gifts to the museum. Interestingly, this reduction in value also will reduce the current gift tax cost to the collector for gifts to the collector's children and grandchildren. The partnership form permits these discounted gifts and allows the collector to add the children as general partners to share in the management of the collection at an appropriate age.

In each case with an immediate gift to a museum, the collector receives an immediate income tax deduction, and the collector's personal wealth is reduced by the value of the gift. If the collector desires to maintain a particular level of wealth to be transferred to the collector's family at the collector's death, the collector may purchase life insurance to replace the value of the gift. A trust or person other than the collector would own the insurance, so that the proceeds would not be subject to estate taxes at the collector's death. To the extent that the income tax deductions improve the collector's cash flow, the collector would have additional cash to invest in life insurance

"Acquisition" at Collector's Death. The term acquisition is used here to mean the collector's family will receive, directly or indirectly, some benefit as a result of the museum becoming the owner of the collection at the collector's death.

The direct benefit method would be for the museum to enter into a contract with the collector to purchase the collector's collection at the collector's death. I anticipate that the collector and the museum would actively collaborate on the management of the collection during the collector's life. The museum could finance the acquisition using existing funds, raising funds quickly after the collector's death, or purchasing a life insurance policy on the collector's life.

The indirect benefit method would be to use a split dollar life insurance plan. This would switch the sale to a gift and the death value of the life insurance policy from the museum to the collector's family.

A tax-exempt organization can enter into a split dollar plan, but there is no clear authority for what relationship is required between the organization and the participant of the plan. The relationship should be as substantial as possible, so the collector should be a director or trustee of the museum.

This arrangement accomplishes many goals. The museum receives equivalent wealth, free of any income or estate taxes. The museum, the collector, and the collector's family have a relationship throughout the collector's life that should foster cooperation and collaboration.

An art succession plan can develop the most efficient method for collectors to acquire, preserve, and enhance the collection through a variety of means, such as arranging for interaction with museums. The strategy can also mitigate estate taxes and produce current income.

CM BRIDDGE is a resource for collectors to develop strategies to enhance and to plan for the future of any type of art collection. *


By Vernon Jacobs, CPA, Asset
Protection Strategies

Charities and other exempt organizations are required to pay taxes on any unrelated income from a trade or business (UBI). The IRS has ruled that an interest in a partnership generates UBI. The Tax Court agreed that it does. However, this assumes that the partnership does have some debt or some business income. If the partnership only has investment income, there should be no problem. But, the court held that when a charitable remainder trust (CRT) has any UBI, then all of its income for the year is subject to income tax. Thus, any flow through of trade or business income from any partnership (or S corporation or LLC) would cause this problem. Note: This rule doesn't apply to operating charities. For them, the UBI is taxable income but it doesn't subject all of their other income to taxation.

Milton Miller, CPA

William Bregman, CPA\PFS

Contributing Editors:
Alan Fogelman, CPA
Clarfield & Company P.C.

David Kahn, CPA\PFS
Goldstein, Golub Kessler & Company, CPAs P.C.

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