Facing Estate Tax Challenges For Business Owners, Artists, And Gallery Owners

Art up for auction at a sale with Sotheyby's podium

As 2024 progresses, the sunsetting of key tax provisions presents unique challenges for business owners, artists, art dealers, and gallery owners alike. With the estate tax exemption set to decrease and potential changes looming in capital gains and valuation practices, it is crucial to review and adapt estate and tax plans to avoid pitfalls. Below, I outline the common challenges faced by these groups and what should be reviewed before year-end.

1. Sunsetting estate tax exemption
One of the most pressing concerns across all sectors is the scheduled reduction of the estate tax exemption at the end of 2025. The current exemption of $13.61 million per individual is set to be halved without new legislation, significantly increasing the tax liability for estates exceeding the new threshold and likely doubling the number of estates that will be taxable. This change will affect more business owners, artists, and gallery owners who have seen their net worth increase in recent years. Now is the time to explore options such as gifting strategies, establishing irrevocable trusts, or freezing the value of assets to lock in the current high exemption levels.

2. Valuation and liquidity issues
Valuing a business or a collection of artwork poses distinct challenges. For business owners, determining fair market value can be complex, particularly for family-owned enterprises with illiquid assets but, as in the recent Supreme Court ruling in the Connelly case, valuation of a business interest requires some time and expense to avoid much greater estate tax liability down the road. Artists and gallery owners face a different but equally daunting task: the subjective nature of art valuation often leads to disputes with the IRS, especially when preparing for estate tax. Without a clear valuation strategy, you risk either undervaluation penalties or liquidity issues when it comes to paying estate taxes.

3. Succession and business continuity planning
Succession planning is vital for business owners and gallery operators, especially those with family-run operations. Consider the interplay between family dynamics and tax obligations to ensure that business continuity is preserved while minimizing tax liabilities. For artists, this may involve establishing a clear plan for managing intellectual property and ensuring that your legacy, as well as your financial interests, are preserved after your death.

4. Potential capital gains changes and stepped-up basis
Another looming threat is the potential overhaul of capital gains taxes and the elimination of the stepped-up basis at death. If passed, these changes would dramatically affect how business owners and art collectors transfer assets to their heirs. For artists and gallery owners, the impact could be especially severe if high-value works of art are subject to immediate capital gains taxation upon inheritance.

5. Inventory and intellectual property management
For gallery owners, keeping accurate records of artwork provenance, purchase dates, and current market values is essential. Poor documentation can lead to significant tax problems during estate settlement. Similarly, artists must carefully document ownership and rights of intellectual property, ensuring that royalty streams or reproduction rights are properly managed in their estate planning. Business owners also need to protect their intellectual property, such as trademarks, copyrights, and design patent rights, especially in response to the FTC rule that bans non-compete agreements.

6. Digital assets and international planning
In our increasingly digital world, managing digital assets has become an essential element of estate planning, particularly for artists whose online presence or digital artworks may carry significant value. Furthermore, gallery owners operating internationally must navigate not only domestic tax rules but also international cultural property laws and customs regulations.

Preparing your plan for 2024
With so many challenges on the horizon, prioritizing what to address first is a challenge. Whether you are a business owner, an artist, or a gallery operator, it is important that you avoid wasting time and money on estate and tax planning on solutions which do not address your most pressing needs today.  

One of the key tools I utilize in estate and tax planning is the Theory of Constraints (TOC), a methodology that helps identify the most pressing challenges limiting your overall financial strategy. By applying TOC, we can focus on the most critical constraints in your estate and tax plan – whether it’s the impending estate tax exemption reduction, business valuation, or liquidity concerns – and address them first. 

This approach ensures that your most vulnerable areas are fortified, freeing up resources to tackle other areas more effectively. For example, if liquidity issues are the greatest constraint, we can prioritize strategies that create liquidity without selling critical business assets or devaluing your artistic legacy. By systematically eliminating each constraint, we create a more streamlined and tax-efficient estate plan that meets your goals. 

This method allows us to address your unique challenges in a logical and prioritized manner, ensuring that you gain the maximum benefit while minimizing risk. 

Bottom Line: Don’t wait until it’s too late. Be sure to review your estate and tax plan before the close of 2024, to know if you’re fully prepared to take advantage of today’s opportunities and safeguard your future.