As a wealth advisor or registered investment advisor (RIA), helping clients manage and plan for the distribution of their collections can be a nuanced and sensitive topic. Whether it's a collection of rare watches, fine art, or vintage automobiles, these items often carry emotional significance and financial value. Proper estate planning is essential to ensure that collections are handled according to the client’s wishes while minimizing tax liabilities and maximizing the potential benefits for heirs or charitable causes.
Understand the Importance of Appraisals The first step in managing any collection is to get a professional appraisal. Valuations of collectibles can fluctuate significantly over time, so if a collection hasn’t been appraised in the last five years, now is the time. An up-to-date appraisal helps the client understand the fair-market value of each item and the entire collection, allowing for informed decisions about its future. Abbey Flaum, principal and family wealth strategist at Homrich Berg Wealth Management, emphasizes the importance of creating a detailed photo inventory alongside the appraisals. This will help not only in the estate-planning process but also for future estate-tax reporting.
Wealth advisors should guide clients to seek qualified professionals for appraisals, ensuring they adhere to IRS standards, especially when the collection is expected to be a part of charitable donations or is subject to estate taxes. Having precise valuations provides clarity for future decisions, whether the client intends to sell, donate, or pass the collection on to heirs.
Engage in Conversations with Heirs Early One of the most common mistakes collectors make is assuming their children or grandchildren will want to inherit their prized items. What may be a beloved collection to one generation may hold little value to the next. It’s important for wealth advisors to facilitate conversations between clients and their heirs. This allows the client to gauge whether their children have any interest in specific items and ensures equitable distribution, where possible.
Steve Lockshin, co-founder of estate-planning software firm Vanilla, points out the complexities that can arise when distributing collections with highly variable valuations, such as watches. Without proper planning, heirs may attempt to claim the most valuable items, leading to disputes or inequitable outcomes. Wealth advisors should work with clients to create a structured process for distributing collections, ensuring that no single heir can dominate the estate’s most valuable pieces.
One approach could be to allow heirs to select items based on a rotating schedule, or advisors can help create a plan that provides for equal financial distribution if heirs are interested in different items of varying values. Documenting these plans in estate-planning documents can help prevent disputes and ensure that the distribution process aligns with the client’s wishes.
Consider Giving While Living
For clients interested in seeing their collections enjoyed during their lifetime, gifting items while they are still alive can be a strategic move. This allows clients to take advantage of the annual gift-tax exclusions, which are set at $18,000 per recipient for 2024. Gifting items now not only removes them from the estate, reducing potential estate taxes, but it also ensures that the intended heir receives the item they desire.
Wealth advisors should help clients weigh the benefits of gifting versus holding onto items for future sale or donation. Gifting collections during life can also provide the added benefit of seeing the joy or appreciation their heirs experience, which can be deeply meaningful for many clients.
Exploring Charitable Donations
For clients who are philanthropically inclined, donating collections to museums or charitable organizations can offer significant estate-tax benefits. However, as Nikki Savage of Sequoia Financial Group advises, it’s crucial to be aware of the “use-related” rule when making donations. In order to claim a fair-market value deduction, the donated items must be related to the charity’s mission—such as donating artwork to a museum or educational materials to a university.
Wealth advisors should guide clients in discussions with potential recipient organizations early in the process to gauge their interest. Not all museums or charities will want the entire collection, and some may only be interested in specific pieces. Advisors can help clients understand the potential outcomes and, if needed, assist in finding other buyers or organizations that may be interested.
For clients looking for more flexibility, donor-advised funds (DAFs) can be an attractive option. Collections that do not meet the use-related rule can still be donated to a DAF, where the client can receive a tax deduction and eliminate capital-gains taxes on appreciated items. DAFs allow the client to take the tax deduction in a single year while distributing the funds over time, offering greater control over charitable giving.
Prearranged Auction Sales: A Practical Option
If none of the client’s heirs are interested in the collection and charitable donations are not viable, prearranging a sale through an auction house can be a sensible alternative. This takes the burden off the executor or trustee after the client’s passing and ensures that the collection is handled by professionals who can maximize its value.
Lockshin notes that collectors can negotiate important terms in advance, such as starting bid prices, commissions, and how the items are handled, stored, and transferred. Prearranged sales provide peace of mind for clients, knowing their collection will be handled according to their wishes.
Advisors should also remind clients that auction houses are focused on fetching the highest price, which may not always align with the collector’s emotional attachment to the items. Flaum, who has worked with auction houses, acknowledges that some collectors value knowing their prized possessions will go to someone who appreciates them, which can sometimes conflict with the goal of achieving the highest sale price. Advisors should help clients reconcile these differing objectives and guide them through the decision-making process.
Conclusion: Thoughtful Planning is Key
For wealth advisors and RIAs, helping clients with collections involves more than just appraisals and estate plans—it requires understanding the emotional attachment clients have to their items and the potential complexities that arise in distributing or selling them. Proper planning ensures that clients' collections are managed in a way that reflects their values, supports their financial goals, and minimizes tax burdens.
By guiding clients through appraisals, discussions with heirs, charitable giving strategies, and potential auction sales, wealth advisors can help ensure that collections are not only preserved but also provide value to future generations or philanthropic causes. For high-net-worth individuals, collections are often more than just financial assets—they represent a lifetime of passion, pursuit, and personal history, and thoughtful planning allows that legacy to continue.
