Wednesday, March 26, 2014
Michael L. Duffy (Goldman Sachs Private Wealth Management) recently published an article entitled, Elkins’ Abstract Post Impressions – Can Works of Art be Transferred by Using Them to Fund Grantor Retained Income Trusts?, Trusts & Estates (March 2014). Provided below is the introduction to his article:
On March 11, 2013, the U.S. Tax Court issued its highly anticipated opinion in Estate of Elkins v. Commissioner, in which the court concluded, among other things, that there was no bar, as a matter of law, to claiming a pro rata discount on a decedent’s undivided fractional interest in 64 works of art.
The Elkins decision followed on the heels of Robert G. Stone v. United States, which was the first case to consider whether valuation discounts should be allowed for undivided fractional interests in artwork, given such interests’ lack of both control and marketability. The court in Stone allowed a meager 5 percent discount for the 50 percent undivided fractional interest in 19 paintings that were left to various family members. The court’s decision was primarily informed by the estimated costs that a hypothetical buyer would have to incur to monetize the acquired fractional interests by bringing a partition action in state court.
Practitioners were hopeful that the unique facts in Elkins would yield a substantially higher estate tax discount. Unfortunately for those planners, the Tax Court only allowed a 10 percent discount, and it didn’t provide clear guidance as to why it settled on 10 percent specifically. What’s evident, however, is that the court ignored the reasons proffered by the estate for greater discounts and, instead, focused on the decedent’s children’s documented desire to retain full ownership of the artwork and their willingness to purchase fractional interests for an amount equal to or close to undiscounted value.
While Elkins can be viewed as a modest victory for the estate because the Tax Court recognized that discounts were indeed possible and granted a greater discount than that in Stone, the court’s analysis leaves many unanswered questions. In particular, can works of art be transferred under today’s Chapter 14 regime of the Internal Revenue Code by using them to fund grantor retained income trusts (GRITs)?