Question: I have a valuable piece of artwork as part of a larger collection. I don’t want to lose control of this piece in my collection and may even want to consider a sale. How can I keep the piece in the control of my family, but mitigate the potential tax liability (income or estate tax)?
Answer: One option is to create a private foundation. A private foundation is organized to make grants to other organizations for scientific, educational, cultural, religious or other charitable purposes. The private foundation receives its funding generally from one source, which can be an individual, a family or a corporation.
As an art collector, you can gift all or part of your collection to a private foundation that you create and receive a charitable income tax deduction. However, the charitable deduction is limited to the cost basis.
The foundation could then sell the piece to create philanthropic capital to benefit the charities that the family supports. While outside the scope of this answer, keep in mind that foundations come with minimum distribution requirements, excise taxes and numerous other regulations that have to be navigated.
Another approach is to create a private operating foundation to manage the collection. Unlike the typical private foundation which generally writes checks to support other charities, a private operating foundation (“POF”) exists to actively manage a charitable program (i.e., collection). When the POF is created, the items in the collection that are most suited for exhibition are gifted to the foundation and the collector receives a tax deduction.
Moreover, the POF permits the collector and his family to maintain control of the collection by serving as president or a board member.
Comment: Any collector who is interested in this option would need to steer clear of any self-dealing between herself and the foundation which would jeopardize the foundation’s tax-exempt status.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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