Wednesday, April 30, 2008
Lance S. Hall (ASA, cofounder and President of FMV Opinions) has recently authored a article entitled The New Frontier: Non-Charitable Estate Planning Transfers with Fractional Interests in Art (and Other Personal Property).
Here is the conclusion of his article:
With the art market reaching new highs and investor interest in art exceeding previous norms, increased scrutiny to the estate planning needs of art collectors and investors is required. With the changes in the rules for charitable gifting under the 2006 Pension Protection Act, charitable gifts of art are no longer as attractive. Alternatively, fractional interest gifting to the junior generation may result in significant estate tax reduction. Even if a gift is not made, art investors/collectors in community property states may be able to avail themselves of undivided interest discounts at death.
Clearly, undivided interest discounts for art and other personal property are likely to incur close scrutiny and outright rejection by the IRS. However, under the principles of "fair market value" an undivided interest discount is applicable. The challenge will be convincing the court that an analysis with no empirical data involving actual undivided interest sales in art will meet the taxpayer's burden of proof. The courts have overcome identical difficulties associated with the lack of empirical data when discounting undivided interests in real estate. The issues are no different with art, collectibles and other personal property. An objective measure of the hierarchy of discounts applicable to different asset classes is to examine the relative volatility of the individual art or personal property with other classes of investments where empirical data is available (real estate is generally less volatile than stock and art, stock is generally less volatile than art, art is generally less volatile than gold and commodities). Then, the specific attributes of the art (or other personal property) could be used to more subjectively adjust the discount up or down, accordingly.
To focus the court's attention to the lack of control and lack of marketability of the interest, and away from the right to partition, a transfer made subject to an agreement to waive the right to partition is advisable.
With the charitable gifting no longer as advantageous, the estate planning professional can expect to see a significant rise in fractional interest discount planning for art (and other personal property).