Collections and Estate Planning, Part 3: Potential Tax Concerns for Collectors
As a collection’s value may increase over time, so might the tax consequences. We believe your tax and estate plan should consider and manage the impact of your collection’s worth.
Collections can grow organically, or you may have a specific plan for making acquisitions. Between seeking out items, researching them and connecting with others about the objects, you’ve likely spent a great deal of time—and probably money—on your collection over the years.
Whether you do it for investment purposes or just for fun, your good eye may have picked out some items that have appreciated in value over time. If you collect for investing, it’s exciting when that happens because it can be a sign of a good investment, but it can also leave you with a large, unexpected tax bill. As a result, we believe it’s important to know how to plan for taxes regarding your collection so you can help minimize the tax consequences.
In a previous blog post, we discussed the various options that collectors have when deciding how to incorporate their collection within their estate plan. In our opinion, a key factor in making those decisions is understanding the value of the collection and any tax implications its bequest or sale might have. From our experience, collectors should understand the two types of tax explained below.
Capital gains tax
As an example, let’s say that you picked up an antique roadster more than a decade ago. You love that roadster, and it’s been fun to drive. It’s also worth a lot more today than when you purchased it. So, if you sell it, you will owe capital gains tax on the profits. In 2023, the long-term capital gains tax rate on collectibles is 28%.1 This is higher than the long-term capital gains rate on other assets, such as stocks, which is typically 15% or 20% (depending on your tax bracket).2
If, on the other hand, you’re in a position where some pieces of your collection have decreased in value and will be sold at a capital loss, you can use the losses from the sale of your collection to offset an equal amount of capital gains tax. The key here is that the collectible must be an investment (as opposed to personal use property). Additionally, you may deduct up to $3,000 of excess capital losses against your ordinary income.3 In this regard, capital losses in your collection are no different from capital losses in your investment portfolio.
Estate tax
The majority of assets held directly in your name, including your collection, will form part of your taxable estate upon your death. This means that your heirs will inherit your collection with a stepped-up cost basis. If you decide to gift your collection during your lifetime, the cost basis will carry over to the recipient.
Your estate will be required to pay estate taxes if the net value is greater than the exemption set by Congress. In 2023, the estate tax exemption is $12.92 million per individual as a result of the 2017 Tax Cuts and Jobs Act.4 However, these tax cuts are due to expire at the end of 2025, and the estate tax exemption will revert to pre-2018 levels ($5 million, adjusted for inflation)5 unless Congress acts and declares otherwise.
Whether or not you have an estate tax issue today, you might in the future as a result of asset accumulation and/or changes in the law. This is where annual gifting and other estate planning strategies might be effective in managing tax liabilities.
If you do end up having a taxable estate at your death, then your heirs may need liquidity to pay for any taxes owed on the value of your collection. Estate taxes must be paid within nine months of death (without any extensions).6 Proper planning now may ensure that your heirs are prepared for this and can avoid any fire sales. Every collector and their family will have their own income and estate tax planning scenario based on the size and value of their collection, as well as their overall estate. We recommend discussing your collection with your Corient Wealth Advisor and tax professionals to help find the best possible strategy for you and your family.
Other articles in this series:
- Part 1: How Collections and Collectibles Affect Your Estate Plan
- Part 2: The Division of Assets
- Part 4: What You Need to Know about Charitable Gifts
1 https://www.irs.gov/taxtopics/tc409
2 https://www.bankrate.com/investing/long-term-capital-gains-tax/#whats-considered-capital-gain
3 https://www.irs.gov/taxtopics/tc409
4 https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
5 https://www.irs.gov/newsroom/estate-and-gift-tax-faqs
6 https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes
ABOUT THE AUTHOR
Matt Mignon
Matt is an Associate Partner, Wealth Advisor in our Morristown, NJ, office. He is responsible for managing client relationships and advising families and individuals on financial planning, tax planning and investment management. Matt is a CERTIFIED FINANCIAL PLANNER® professional and Certified Investment Management Analyst® (CIMA). He served on legacy firm RegentAtlantic’s Financial Planning Committee and Neighborhood Nonprofits Group. He also serves on the Morris Museum Board of Trustees. Matt has developed a specialty service to support all aspects of our clients’ collections—from building and cataloging to estate planning and inheriting. Matt graduated from Colby College with a BA in Economics and a concentration in financial markets. Matt also holds a certificate in Financial Planning from Northwestern University.
