It is common for wealthy people to purchase rare and valuable collectibles, such as art, stamps or other valuable collectibles. These are often things that we do not think will decrease in value over time, but they can also create tax problems for heirs.
If you have ever watched the TV show Pawn Stars or a similar show, then you know that it is often difficult to get the full appraisal value when attempting to sell rare items. The same process plays out on the show over and over again. Someone will bring in a rare item, the pawn store owner will call in an expert to appraise the item, the appraiser will give an approximate value, and then the store owner will offer to pay half the appraised value of the item.
Obviously, a pawn shop is not going to pay full price for anything. However, the spiel that the store owner often gives contains lessons. He explains to the customer that the appraisal value is how much the item might get at auction, but that it has to be the right auction with the right buyer and that in this economy nothing is going at auction for the full appraisal value.
This has implications for estate planning, too. Why? For tax purposes the IRS considers assets worth their appraisal value and not the amount they garner at auction. Thus, if you have a piece of art appraised at $5 million that your heirs can only sell for $3 million at auction, then your heirs might have to make up the difference from other assets when it comes time to pay the IRS.
A recent Wills, Trusts & Estates Prof. Blog article, titled “Rare Collectibles May Not be the Best Estate Plan,” illustrates the point with the case of a stamp collection appraised at $20 million that sold for less than half that amount.
Before you leave your collection to your heirs, it is important to consider how they will pay taxes on the collection. Even if the collection is sold to pay the taxes, the proceeds from the sale may not be enough to pay the tax bills.
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: Wills, Trusts & Estates Prof. Blog (June 24, 2014) “Rare Collectibles May Not be the Best Estate Plan”