Written By: Tom Gates

My Dad is facing a dilemma of how to plan for his collections when he can no longer appreciate them. It is an eclectic set of collections: porcelain military figures of the Napoleonic era, 19th century piggy banks, and early 20th century miniature trains. In addition to these collections he owns a substantial amount of family heirlooms and furniture from both his and my deceased Mother’s families.  Dad wants to downsize, he needs to downsize and simplify his life but the looming chore of planning for the disposition of these items has put him in near paralysis. Fortunately, he and I are working on a plan to deal with it.

What are his options? He can do nothing and let the executor of his estate deal with it. He can gift some, or all of his personal property during life and/or though his estate. He can sell them during his lifetime, or directed that his estate sell it, or he can donate some or all of his personal property to a charity or non-profit. These options are not mutually exclusive and all have some plusses and minuses.

One option that should be taken off of the table, in my opinion, is doing nothing. Not only can inaction be very costly to an estate, it can also wreak havoc among family members, sometimes irreconcilable. The administrative costs of disposing of personal property can be very high because the value at disposition is often well below market and it can take a lot of time to account for items. An auction house might typically charge between 15-30% of net proceeds from the sale of personal property. The worst outcome could be the emotional turmoil in the family. As an experienced trust officer I have witnessed horrible inter-family fights over “who was to get what,” (once siblings literally got into a fist fight over who got the dining room table).  Behavior during estate probate can be very unpredictable. Many real (or imagined) emotional issues between family members explode to the surface during that stressful time, and often parents are the last people to expect this. Additionally, a family member who is selected as executor or executrix of a will is often put in an awkward position of interpreting “equitable outcomes,” which may result in the deceased’s wishes not being fulfilled and  hard feelings all around.

This leaves gifting, selling or donating personal property, or some combination of the three. In Dad’s case, he is leaving the Napoleonic figurines to me as I treasure them, but no one in the extended family wants the piggy banks or the trains. Regarding the other personal property (including heirlooms and furniture), Dad has asked all of his children and grandchildren to make a list of items they would like. Family members are to work out any conflicts amongst themselves by horse trading or rock-paper-scissors. The lists, when finalized, will be incorporated into Dad’s will. Any personal property not on those lists will be sold or donated (no exceptions!) although family members are free to buy items when the time comes.

Under the current gift rules during his life Dad can use his per-person $13,000 annual gift exclusion as well as his Unified Gift and Estate Exclusion of $5.25 million. A word of caution here: Be sure to follow the rules of what constitutes a taxable gift in the eyes of the IRS or there may be trouble down the road. The gift must transfer total ownership at fair market value at the date of the transfer. No strings on ownership. (http://www.irs.gov/uac/Eight-Tips-to-Determine-if-Your-Gift-is-Taxable ) The IRS website provides information on the type of documentation required to prove fair market value if they choose to audit or challenge the gift. Personal property bequeathed by will follows the same requirements but becomes the responsibility of the executor for administration.

What can Dad do with the banks and trains or remaining personal property that no one wants? He has a couple of options. He can sell them during his lifetime or direct how they be sold in his will. I have tried to convince him that he will have as much fun selling the banks and trains to other collectors as he had when he was collecting them. eBay and other sites make selling collectibles much easier and more secure. For collectibles such as coins, stamps and art work, the help of a reputable dealer will be invaluable.

There is one pitfall to selling and it deals with the IRS and state taxation agencies. Most collectors are poor record-keepers so they cannot prove the cost of each collectible item. Therefore, during an audit, the cost of an item with no proof of purchase may be valued at $0 thereby generating large amounts of capital gains. The Federal long-term gains tax on collectibles is 28% flat, well above that rate normally assessed on other asset gains. Selling personal property though a will generate higher selling and administrative costs and the property sold will be valued at the fair market value as of the date of death and applied against the value of the entire estate for estate tax calculations.

Another option to selling or gifting his collections is for Dad to donate them to charity or a non-profit during life or through his will. The mechanics of this type of charitable donation, particularly if a great deal of value is at stake, can be complex and are beyond the scope of this piece. There are a number of factors involved: qualifying charities and non-profits, how much can be treated as a tax or estate deduction, how should ownership be handled and who should handle disposition.  A qualified tax professional and estate lawyer can assist you in working your way through the minefield.

A cautionary tale about collectibles and charitable donations: Years ago I knew of a gentleman who donated his map collection to the library of a public university that he helped sponsor. The executrix, spouse of the deceased gentleman, allowed the university to have the maps appraised by a team of professors from its history department. This was done to save the university the cost of appraisal services (which can be quite expensive). For estate purposes the map collection was valued at $100,000. Four years later, another appraisal was completed by the Library of Congress for insurance purposes and the value of the maps was set at $3.5 million. The deceased did his family no favors by not communicating the value of the map collection. The executrix made a mistake allowing the university appraisal that resulted in the deceased estate having to pay estate taxes. Had the appraisal been conducted by a map expert the family would have owed zero in estate taxes and been much better off. The only recourse was costly litigation against the university and the executrix who was the beneficiary’s mother/grandmother, and nobody wanted to deal with either option.

Avoid surprises and unnecessary tension: Plan for the future of your collectibles and tangible personal property during your lifetime.

Written By: Tom Gates