Moving Artwork to an Irrevocable Trust

As a dentist, you are likely aware that the atmosphere of your dental practice is a key factor in making your clients feel comfortable. Because of this, many dentists feature a variety of artwork in their dental office, not to mention their home.  A recent trend in estate planning has been transferring the ownership of artwork to an irrevocable trust as a way to benefit from tax savings. We have provided an overview of this process below.

What is an Irrevocable Trust?

A trust is a relationship created at the direction of an individual, in which one or more persons hold the individual’s property subject to certain duties to use and protect the property for the benefit of others. One specific type of trust is an irrevocable trust. An irrevocable trust is a trust that cannot be changed or cancelled once it is set up without the consent of the trust’s beneficiaries. Irrevocable trusts offer tax advantages that revocable trusts do not. Further, the transfer of assets to an irrevocable trust is a taxable event resulting in gift tax liability, as discussed further below.

Benefits of Transferring Art to an Irrevocable Trust

 If you transfer the ownership of your artwork to your irrevocable trust, then the artwork will no longer be legally part of your estate. As a result, there will be a reduction in value of your estate for tax purposes. An irrevocable trust includes property that no longer belongs to you, and so the assets will not be subject to estate tax after your death. Further, you would be gifting the artwork to your irrevocable trust and the artwork would be appraised at the time of the gift for tax purposes. If the appraised amount is higher than the current $14,000 annual exemption from gift taxes, then any excess amount will be deducted from your lifetime combined federal gift-tax and estate-tax exemption, which is currently $5.45 million. If that exemption has already been used, you will pay tax on the gift. Ultimately, if you, as the owner, retain ownership of the artwork instead of gifting it to your irrevocable trust, then it is very likely that the artwork will be appraised at a much higher value when you pass away, which would result in a higher tax liability for your estate. Irrevocable trusts are taxed on income similar to the way individuals are taxed on income. Transferring assets to an irrevocable trust can also save on annual income tax. The grantor of the irrevocable trust is not personally liable for income taxes on trust income because the tax liability belongs to the trust itself. Ultimately, transferring the artwork to your irrevocable trust shifts the tax responsibility to your beneficiaries.

Renting the Artwork Back from Your Trust

Once the artwork is gifted to your irrevocable trust, the trust will be responsible for storing and caring for the art. If you want to continue to enjoy your artwork in your home or your dental practice, then you would simply rent the artwork back from the trust. It is important to remember that you must pay fair market rent for the artwork, which can be difficult to determine since it is a more limited market. If you do not pay fair market rent to the trust, then it would likely be a violation of the trustee’s duties and responsibilities. Further, if you are ever audited by the Internal Revenue Service (“IRS”), then you will want to be in a position to provide documentation to the IRS regarding the fair market rent. The IRS has not provided set standards for determining fair market value for art rentals. Thus, hiring an art leasing firm to set the rental price and keeping documentation of the firm’s findings is your best defense in the event that you are ever audited by a taxing authority or someone questions the trustee’s decisions or actions.

Beneficiaries

Do the beneficiaries of your trust have any input regarding your artwork once it is placed in a trust? Any property placed in your trust, including any artwork, belongs to the trust and would not belong to the beneficiaries. Thus, the beneficiaries may enjoy the artwork; however, they cannot sell the artwork. Only the trustee can sell the artwork. Ultimately, if the beneficiaries do gain ownership of the artwork, and it is sold, they would pay capital-gains taxes at the appreciated value of the artwork. If the trustee sells the artwork, then the trust would pay the same taxes that the beneficiaries would. The taxable amount would be the difference between the value at the time of the sale and the tax basis, which is generally the amount paid for the art by you. If you have artwork that has high value or you believe will appreciate over time, then you may want to consider establishing an irrevocable trust to place your artwork in simply for tax savings purposes. Even if you transfer ownership of the artwork to an irrevocable trust, as long as you or your dental practice pays fair market rent to the trust, the artwork can hang in your dental practice and everyone in your dental office can still enjoy the piece.

If you would like more information on estate planning or would like to discuss preparing your estate plan with one of our estate planning attorneys, please contact Nardone Limited at (614) 223-0123 or visit our website at www.vincentjnardone.com.