Why You Need a Collectibles Wealth Plan

By Thomas Beirne III, CFP®
Vice President, Senior Wealth Planning Officer and Business Development Manager

Collectibles, encompassing everything from art and wine to antiques, baseball cards, and even NFTs, hold a unique place in the investment landscape. Whether you're an avid collector or treasure a single cherished item, a specific strategy for your collectibles will help you preserve their value and avoid the pitfalls in including them in your financial and estate plan.

Preserving Value

In addition to emotional value, collectibles derive a significant portion of their worth from their physical condition and historical significance. Preserving these qualities requires safeguarding your investments.

• Physical protection. Climate-controlled environments and archival-quality storage materials can prevent deterioration and shield your treasures from dust, light exposure, and potential accidents.
• Insurance. Many standard homeowner policies exclude coverage for artworks, coin collections, and other collectibles. Review your existing policies for coverage and supplement with riders or separate coverage for collectibles, typically based on the monetary value demonstrated by appraisals or receipts.
• Security. Home security systems provide protection, as well as a reduction on premiums for insurance policies. Storage in a safe deposit box is a good option for certain collectibles but be sure to check whether your insurance policies cover theft or damage of items stored there.

Lifetime Planning

Planning with collectibles involves strategic market research, timing, and a grasp of tax implications. However, selling, and donating collectibles may not be as easy as it sounds, requiring a combination of market knowledge, patience, networking, and often a bit of luck.

• The market. Collectibles often appeal to a niche market, narrowing the pool of potential buyers. Demand and price fluctuate, depending on trends, nostalgia, and cultural shifts (think of the Beanie Baby boom and bust). Value is also heavily influenced by condition and documented authenticity, complicated by the increasing prevalence of fakes and reproductions flooding the market. In addition, collectors are often surprised to discover that museums, universities, and similar non-profit organizations may not always be eager to accept their donations. Museums, for example, typically already have more items than they can display, and accepting new collections means taking on the cost of storing, preserving, and protecting them.
• Tax implications. Given the complexity of tax regulations and the variations in laws from state to state, it’s important to consult with a wealth advisor and tax professional in advance.
  • Capital Gains Tax: Collectibles, even if held long term, incur a higher long-term capital gains tax rate of 28%, compared to a maximum rate of 20% for other assets. The Affordable Care Act layers an additional 3.8% Medicare surtax on top of unearned income, bringing the total tax consequence to 31.8%. IRAs. Did you know that with some rare exceptions of U.S. gold or silver coins, IRAs are barred from investing in collectibles? If it happens, the IRS treats the investment as having been distributed to the owner, resulting in immediate taxation, as well as a 10% early distribution penalty if the IRA owner is under the age of 59½. ⁱ
  • Deduction restrictions. It is possible – but not easy! - to avoid capital gains tax and obtain a deduction equal to the fair market value of the property. The donation must be to a certain type of organization (generally a public charity, and not a private foundation or DAF), it must be used by the charity for its exempt purpose, and you’ll need to obtain a fair market value (FMV) determination, likely from a qualified appraiser. For most collectibles, however, deductions may be limited to your cost basis. If the art or collectible is donated to a charitable organization that does not use the item as part of its charitable mission, your deduction, assuming you itemize deductions, is limited to the lesser of cost basis or fair market value. ⁱⁱ If you have a significant and valuable collection, planning is key, such as including in your gift instrument a specified charity, limitations on use, and timing of any sale.
  • Charitable contribution limit. Generally, you can deduct up to 30% of your adjusted gross income (AGI) in the year of your gift. If the deduction exceeds these limits, you may be able to carry forward the excess deduction for up to five subsequent tax years. ⁱⁱⁱ

Legacy and Estate Planning

Many collectors treasure the thought of passing down their cherished items to future generations, but it is important to know whether your heirs are interested in or able to take your collection. Incorporating your collectibles into your estate plan requires careful thought and professional guidance to help create a seamless transition, minimizing potential conflicts and tax burdens.

• Careful conversations. Communicating your intentions to your heirs and addressing potential conflicts early can help avoid misunderstandings. The distribution process can become complicated, especially if multiple heirs are interested in the same items, if conflicts arise around sentimental versus financial value, or if you choose to donate some items to charity.
• Appraisals. Determining the value of your collectibles through professional appraisals is vital for equitable distribution among heirs and estate tax calculations.
• Potential burden to heirs. Consider and discuss with your heirs the potential tax implications and other carrying costs, including security, insurance, and storage, that they may face if inheriting collectibles.
• Special provisions. If you have particularly valuable or unique collectibles, consider including specific provisions in your estate plan to address their handling, maintenance, and potential sale. For example, you might want to ensure that certain collectibles remain in the family for generations or that they're sold only under specific circumstances.
• Clear beneficiary designations. Clearly specify your beneficiaries for the collectibles in your estate plan. Make sure that your intentions are documented in your will, trust, and other estate planning documents.

Washington Trust Wealth Management Can Help

At Washington Trust Wealth Management, we understand the emotional and financial value of collectibles—and the importance of creating a strategic wealth plan to preserve and protect your investment. Our experienced wealth advisors can provide referrals and work in collaboration with reputable appraisers, insurers, and tax professionals experienced with collectibles. We can help facilitate family conversations so that your family clearly understands the value and responsibility of your collection. And when needed, our Washington Trust Wealth Management corporate trustee services give you and your family peace of mind, with our experienced managers providing knowledgeable, compassionate, and independent oversight of your trust assets.