Securing Treasures: What HNW Owners, Advisors Should Do

It may sound like an obvious point, but is often not sufficiently appreciated that guarding high-value assets must start with recording what clients own and keeping such an inventory in good order.

Great wealth brings with it the ability to own beautiful objects: fine art, classic cars, luxury homes, jewels and sculpture. However, there are threats to property – from thieves, vandals, governments - so defenses are required: via insurance and private security, among other means. What steps, including those that arise from estate planning and legal structuring, can be taken to protect such wonders? To discuss this aspect of wealth planning is Matthew Erskine, managing partner at Erskine & Erskine, a venerable law firm specializing in estate planning, tax, family law and other matters. The editors of this news service are pleased to share these insights and welcome responses. The usual editorial disclaimers apply. To enter the conversation, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Families that use family office services expect family office professionals to help them mitigate risks, both investment and concentrated illiquid holdings, such as real estate and closely held businesses. Sometimes overlooked is how to mitigate the risk of the ownership of artwork, numismatics, jewelry, cars and other collectibles. Risk mitigation for these treasures begins with knowing what your client has, aggregating the individual items into collections and beginning the management of the items as a collection.    

What do you own? 
Too many collectors keep their current inventory of items in their heads. Appraisals for insurance purposes often lack critical information or are badly out of date. Inventories should include not only a description of the work but also:  
-- List of works created by an artist and in your client’s possession; 
-- Collaborative creators, artists or authors;
-- Dates of both creation and acquisition;
-- Contracts associated with any works, such as licenses, assignments, etc.;
-- Where the items are located;
-- Galleries or dealer names along with their contact information; and, any paperwork that refers to the artwork, such as catalogs, bills of sale, consignment agreements, copyrights, loan agreements and reproduction rights.  

Aggregate: Simplify the collections for others to handle
Every collector has some items that are less significant than others, so the next step is to have the client aggregate items and their associated paperwork, with similar characteristics into groups. This aggregation can be based on the esthetic of the piece, but can also be based on taxes, recognition, and liquidity premium, if the piece were to be gifted or sold. 

Management: Continuing the collection when the client is no longer able to do so.  
A family office will be called upon to execute the client’s estate plan and play an active role in transferring, buying and selling of art and other collectibles in the settlement of an estate. It is essential that you know how your client wishes his/her collections to be managed after their death, specifically:

Understand the buy-sell discipline for artwork: 
Your clients need the same sort of discipline in managing the ownership of artwork and other investments in tangible property that you currently provide them with on their investments: namely, when to hold assets until the value recovers, when to sell assets to cut their losses, and when to sell some, or all, of the artwork before the market declines.   

An executor who knows how to maintain and ultimately dispose of artwork:
In some circumstances, where the artwork is very rare or unusual, a cultural executor such as a private curator or expert in the field may be better equipped than family members to manage the disposition of artwork. 

Access to funds to pay for administrative and tax costs:
Art is not easily liquidated so alternative sources of funds need to be considered. Life insurance held in a specified Irrevocable Life Insurance Trust is one way to provide liquidity. You should also consider obtaining title insurance to manage transaction risk and to eliminate liability for clients when selling works.

Keep purchase and sale records 
Having a list of the names of galleries, dealers, and auction houses, or other persons, who might be interested in buying or selling your client’s artwork should be readily accessible, so that your client’s personal representative could find them in the event of the client being incapacitated.  

Address the disposition of any copyrights 
Unless the deceased is also an artist, it is unlikely that your client will inherit copyrights; but, where there was collaboration between a client and an artist, such rights may exist.  

Specific instructions or restrictions on use or licensing  
Dealing with these restrictions will require significant cooperation with the future owners of the artwork or other items, so these restrictions should be clear and well drafted. The recent changes in the standards of the American Association of museum directors allowing the sale of art in a collection, and the use of the proceeds for operational costs, shows that even if there is a stated policy of an institution on the use of artwork, those policies can change. 

Arrange maintenance and storage
Sending a grand piano across the globe may cost much more than the piano is worth, and the beneficiary may not be able to carry those costs without assistance. Your client’s visual art, in particular, will need to be stored properly, as will photographs, film, and digital files.  

Use of split interest trusts and charitable foundations. 
A trust, LLC, or Limited Partnerships, are ways of managing an investment in tangible property and its associated copyrights, licensing, and management costs, when it is to be shared by a number of beneficiaries. In addition to a management trust, your client should be familiar with the use of split interest trusts (e.g., CRT, CLT, GRIT, GRAT) for transferring tangible assets between generations.

Conclusion: To help sustain clients as owners of artwork and other collectibles, take an  inventory of their tangible assets, simplify their collection process through aggregation, and prepare your clients on how to manage their treasures, if and when, they decide to sell, or to pass on to another generation.