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Can Artwork Affect My Estate?

A recent Tax Court case highlights some of the issues faced by estates that own valuable artwork and the need to account for artwork as part of estate planning and estate administration. Artwork is an important aspect of estate planning and administration because artwork can affect the estate’s overall value, and can result in substantial estate or inheritance taxes. Artwork is a non-revenue producing asset that can make financing taxes more challenging, particularly when there is no advanced planning. Valuable artwork is subject to substantial changes in value, depending on market conditions.

This case involved a dispute over the value of fine artwork owned by a sophisticated art collector. The Estate owned three exquisite and valuable paintings: (1) “Tĕte de Femme (Jacqueline)” by Pablo Picasso; (2) an untitled piece by Robert Motherwell; and (3) “Elément Bleu XV” by Jean Dubuffet. The Picasso was by far the most valuable, selling at auction in 2010 for $12.9 million. On the Federal Estate Tax Return, the Estate reported the following values for each painting: (1) $5.0 million for the Picasso; (2) $800,000 for the Motherwell; and (3) $500,000 for the Dubuffet.

The IRS contested the Estate’s reported valuations and commissioned its own experts to value the paintings. The IRS’ experts determined the paintings had substantially higher values than those reported by the Estate: (1) $10.0 million for the Picasso; (2) $1.5 million for the Motherwell; and (3) $900,000 for the Dubuffet. Using these higher values, the IRS issued the Estate a Notice of Deficiency, and the dispute found its way into the U.S. Tax Court.

One important aspect of the dispute was the general state of the art market in 2009 at the time of the owner’s death. The Court noted that the recession took a toll on the art market in 2009, with auction houses suffering a substantial decline in revenues. By 2010, however, the market had made a substantial recovery. The Estate sold the Picasso at auction in 2010, generating a final price more than double the expected price set by the auction house.

The Tax Court held that the Picasso’s 2010 sales price was one of the most probative factors on its value. The IRS’ $2.9 million downward adjustment to the sales price addressed the 2009 market conditions in the eyes of the Court, and the Court sided with the IRS on the value of the Picasso. Conversely, the Estate’s experts properly evaluated comparable sales for the Motherwell and the Dubuffet, and the Court held in favor of the Estate as to both paintings.

This case shows that valuable artwork can result in a sizeable taxable estate, even during times of unfavorable market conditions. Planning for artwork is crucial, particularly if the family intends on keeping the artwork or desires to make charitable donations.

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About this Author

Robert F. Morris, Stark and Stark, Trusts and Estates Lawyer
Shareholder

Robert F. Morris is a Shareholder in the Trusts & Estates Group of Stark & Stark. Mr. Morris’ practice focuses on the areas of estate planning, wills, trusts and probate. Mr. Morris has substantial experience in drafting sophisticated estate planning documents including complex wills, insurance trusts, personal residence trusts, and grantor trusts. He provides counsel to both fiduciaries and beneficiaries in all aspects of trust, probate and estate administration, including the litigation of contested estates and trusts. Mr. Morris’ estate planning practice...

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