A Win in Estate Planning for Art Collectors

January 26th 2015

How do you put monetary value on a partitioned collection of art?

A recent decision by the Appeals Court 5th Circuit in the case of Elkins V. the IRS may shed some light on this question and give art collectors and their estate planners an answer to the question above.

Many people, especially those with a large amount of wealth, work with an estate planning attorney to ensure that their estates are properly structured and that upon their death, their wishes are followed.

It is more difficult to assign a value to an art collection than to quantifiable assets such as real property or bank accounts, especially when the art is divided among beneficiaries. This gives some creative license in how discounts and taxes may be applied as can be seen in the Elkins case.  

By the time James A. Elkins Jr. and his wife, Margaret Keith Wise died (Mr. Elkins in 2006 and his wife a few years earlier) they had left behind an impressive art collection estimated at $25 million. The Elkins had been diligent in implementing and maintaining a strong estate plan using many tools such as a Grantor Retained Interest Trust (GRIT), an irrevocable trust where the grantor transfers asset to the trust but still retains the right to receive income from the trust for a certain number of years.

The Elkins also split their art into two groups of which they gave their three children partial shares. By the time of their death, Mr. Elkin and his wife owned 50% interest in one group consisting of three works of art by Henry Moore, Picasso and Pollock, and 73% interest in the second group made up of the remaining 61 works. This allowed them to reduce their estate tax obligations or so they thought.

The issue in this case was how to assign a value to a partitioned art collection. The IRS claimed that because the collection had been partitioned there was no way to estimate market value therefore there should be no discount. Despite the evidence and experts brought in by the Elkins, and the lack of evidence by the IRS, the Tax Court sided with the IRS and assigned a meager 10% discount to the collection.

The Elkins contested the verdict and the case was taken to the Appeals Court 5th Circuit where, in a victory for all art collectors, the court increased the 10% discount to a 47.5% discount resulting in a refund of $14.4 million.

Klueger & Stein, LLP works with many clients faced with this dilemma. We continue to monitor this and similar cases to tailor the best estate planning strategies for art collectors.