"She's practically got money hanging on the wall," says William Connington of Connington Wealth Management in Pine Brook, N.J., when discussing a client with a passion for art. But when it comes to managing the value of her collection, Connington becomes almost as passionate as the client--and slightly frustrated: "You really can't put a price on these things because you cannot determine what they mean to the client."
Investing in collectibles--whether it be fine art, antiques, classic cars or even comic books or baseball cards--breaks all the rules because in the eyes of the collector-client, it can be nearly impossible to put a value on the objects of their affection, no matter how highly they may be appraised. Advisors who try to do so often find themselves venturing into the abstract.
"Value can be elusive in these situations," says Mark Snyder, an advisor in Medford, N.Y. with a client who has a penchant for classic cars. "A value-guide type book may quote one figure, but even if we find someone willing to pay that price, in his case the question is pointless because he swears he'll never sell his collection. He derives great enjoyment from driving them."
A client who regularly makes perfectly sane decisions when it comes to mutual fund or real estate investments is apt to throw off the curve when the subject turns to collecting. Here's why: "The vast majority of collectors do so for their own personal enjoyment and not primarily for possible investment potential," notes Kyle Husfloen, editor of Antique Trader Antiques & Collectibles Price Guide, an industry bible. For many collectors, investment appreciation is a side benefit, second to the joy of owning a piece of the past or a precious work of art.
In some ways, what a person collects is an extension of their personality or childhood. "I've been collecting comics for 32 years, since I was 9," says Garth Chouteau of Richmond, Calif. "It would take a U-Haul to move my entire collection." Chouteau pays about $300 in annual premiums to insure his personal pulp collection which is valued at about $75,000.
While your wife might think it quaint (or even strange) that you've got a shoebox full of "Spidermans" under your bed, remind her that a mint-condition edition of Action Comics' first publication of "Superman" recently rose in price by 13 percent, according to the Overstreet Comic Book Price Guide--jumping to $550,000 from $485,000. How's that for keeping pace with inflation? While issues such as the condition of an item, whether it's a first or limited edition and overall scarcity also come into play when determining monetary value, it's the emotional or sentimental value that tends to throw off the scale.
Another caveat of collectible investing is: Even if you're willing to part with your "Barbie" doll and an industry guide book puts it in the six-figure range, you've still got to find a buyer who'll meet your price. Stocks and bonds can be traded almost instantly with no disagreements over pricing--and little emotion.
In some cases collections can be used as collateral, usually pending a professional appraisal. "This is rare," says Connington. "Anyone who has these types of items usually does not need them for anything other than their own enjoyment." And while they can increase in value, collectibles usually do not generate income until they are sold. Online auction sites make connecting buyers with sellers easier than ever. If you find a collector as much in love with the item as the current owner, it may be possible to negotiate a sale, but this can also disrupt the idea of rational pricing.
To seriously invest in any collectible--whether it be toy trains or impressionist paintings--a great deal of education and experience is required, and a curator or art historian can be very useful when shopping. Unlike a relatively sane process such as asset allocation or measuring risk tolerance, when it comes to collectibles people tend to buy what they like. While investing in antiques and art sounds like a highly refined activity, it can approach the insane.
"When a person has the passion, pricing can get out of control," says Scott Veronese of the Matador Insurance Agency in Latham, N.Y., who regularly urges clients to insure their collectibles. "When two people fall in love with the same item, no one's paying attention to what a guide book recommends. The published price can be outstripped in no time. This never happens with a mutual fund."
Taking this into consideration, it's easy to see why the advisors here generally do not include collectibles when trying to determine a client's overall wealth: Essentially they're illiquid and "off limits," even if capital needs to be raised. "Clients want to have these objects but usually do not want to sell them," says Snyder with a nod to his car-collecting client. "You couldn't pry his fingers from the steering wheel with a crowbar."
But if you've got a client who is desperate for that Babe Ruth autograph or wants to have a piece from the next Picasso exhibit on his wall, an advisor can add value by putting her in touch with reputable dealers to help make sensible decisions. In the art world, rising artists generally have a dealer behind them and are affiliated with a gallery. Future treasures are rarely found at the flea market or garage sale. The dealer should help assure that the prices are sane even though credentials can be erratic. It's also usually wise to keep untrained clients out of auctions, where getting an object at the right price is nearly impossible. Organizations like the Fine Art Dealers Association (www.fada.com), the National Art & Antiques Dealers Association of America, Inc. (www.naadaa.org) and the Art Dealers Association of America (www.artdealers.org) are national, nonprofit groups whose members are dedicated to promoting professionalism and integrity, and they can help with buying, selling and appraising art. While those who collect classic cars, stamps or antique watches can find qualified appraisers fairly easily, those who pursue more arcane passions may have difficulty locating impartial third parties to help ascertain value.
George S. Cuhaj, editor of the Standard Catalog of World Coins and Coins & Currency of the Middle East, offers advice that can be applied to nearly any form of collecting. "[The collecting industry] is beset by numerous reproductions, thus knowledge is important. There are many books available. Buy some before spending. In the past two years, if you had bullion coins (those containing a pure ounce of silver, gold or platinum), you'd record a capital gain. If you had Franklin Mint medals since the 1970s and bought them at issue price, even with the bullion increases they would still likely be a long-term capital loss."
Another word of advice from Cuhaj: "Stay away from folks who sell coins on late-night TV."
Another sensible step is to keep careful records of one's collection. "Written documentation, including bills of sale and receipts, is good," says Veronese. "But we're seeing more photographic and video recordings." The more valuable the collection, the more important record keeping becomes. Anything valued over $100,000 should obviously be insured and its ownership well documented.
Because valuing collections becomes subjective, for estate purposes, a seasoned appraiser can help formulate and sign off on written records, which should include notes on the overall condition of each item, its age, as well as product ID or series numbers when available. This is important when an estate is liquidated, if the collection is stolen or damaged or when a value comes into question for tax or sale purposes. A collection's "estimated value" will also be required should an estate go into probate as they can be an asset.
[subhead] Insuring Your Love
While it's easy to see how much clients love their collections, only the most serious have them insured.
"Lots of items are commonly found in households that should be covered," says Veronese. "But they're not. Nearly anything that's collectible can be covered by an inland marine policy."
Inland marine covers "movable property," and policies can be written to protect nearly anything--from silverware, fine art, furniture, rugs and sports memorabilia to jewelry and other personal property. "A basic homeowner's policy generally allows $1,500 for a loss of jewelry," continues Veronese, who makes notes of collectibles during client interviews. "That won't replace your grandfather's Rolex."
"Collecting is a labor of love and very individual," observes Laura Bergan of American Collectors Insurance, Inc. (www.AmericanCollectors.com) in Cherry Hill, N.J. "Boomers are starting to collect pieces of the past in greater numbers." American Collectors has been issuing policies to cover Barbie doll and GI Joe collections, Flexible Flyer sleds, "Star Wars" memorabilia, as well as classic cars and motorcycles. The company does not insure "paper items" such as baseball cards and comic books, but does cover figurines made by such distinguished sources as Lladro and Hummel.
"Appraisals for these types of items are usually not needed unless it's for something very rare, like an old military item," notes Bergan, who adds that "proof of ownership" is requested when a loss occurs. That's why it's advisable to keep such records in a safe and separate place. A basic collectibles policy with $10,000 worth of coverage can cost as little as $75 per year and can protect against accidental breakage, mysterious disappearance/theft and acts of nature such as floods and fire--but each should be a "scheduled item" worth $2,000 or more. Bergan also notes that a "personal articles floater" can be attached to a homeowner's policy to cover many of these items, especially furs and jewelry.
Anthony Fluder, president of Condon & Skelly (www.condonskelly.com) of Maple Shade, N.J., which exclusively insures about 300,000 classic and collectible cars across the country, says people "can get carried away" when dealing with an item of historic significance. "This is especially true for those who own a former racing vehicle or a car that was once owned by a celebrity," Fluder says. But no matter what the client thinks, coverage is astonishingly affordable. Fluder says a 20-year-old Ferrari in good condition valued at about $50,000 can be covered for comprehensive, collision and liability for about $450 per year, depending on the state in which it's registered. In these cases, clients get "agreed-value coverage." Should their vehicle be totaled for any reason, they're reimbursed for the full amount of which they're insured "without regard for depreciation." The policy territory covers all 50 states plus Canada and Puerto Rico, but not Mexico.
The "hottest market" Fluder is seeing is the urge for a "modified" vehicle. "People are buying cars like a 1939 Ford and installing modern comforts in them like air conditioning, leather upholstery, cruise control and sound systems. They want the antique look with the modern conveniences," he says.
[subhead] Keeping It Sane
"While it's true that monetary value is usually of less importance to most collectors than the joy of owning a piece, managing antique and collectible assets can leave children with an incredible financial and legal burden and significantly decrease the amount of wealth that can be transferred at death," says Michael Mendelsohn, a collector and president of Briddge Art Strategies in Purchase, N.Y., an art-succession planning firm that helps collectors minimize tax liability on transferred art, antiques and collectibles. According to Mendelsohn, there are many steps that can be taken to minimize tax liability and keep peace in the family.
If a client would like to leave antiques and collectibles to heirs, they may need to create a source of funds within the estate to allow their heirs to pay for the estate taxes on the collection (especially if it's greatly appreciated). Otherwise, the heirs may have to sell some, if not all of the collection to pay the taxes.
Through an Irrevocable Life Insurance Trust (ILIT), heirs would take out a second-to-die life policy on the client and their spouse and transfer it to a special trust. When the second spouse dies, the insurance proceeds pass tax-free to the heirs, creating the money that will allow them to pay the estate taxes and keep the collection. "Should they sell the collection later, the ILIT gives them some measure of control," advises Mendelsohn. "They don't have to sell the collection at fire-sale prices to meet the nine-month settlement period. They can locate the best auctions and dealers and receive full value for the pieces."
Similarly, a Charitable Remainder Trust (CRT) can be used when heirs do not want a collection that, nevertheless, has significantly appreciated. This can also eliminate capital gains taxes which can be burdensome for items that have substantially appreciated. With a CRT a non-profit can sell the collection tax free and put the full proceeds in an investment fund. It then agrees to pay the donor a percentage of the interest earned until death. At that time the remaining funds go to the non-profit. This helps to avoid paying capital gains taxes, creates income and aids a charity.
If your client owns a large or significant collection, starting a family foundation may be the way to go. "Essentially, [by] creating one's own charity, an entire collection can be transferred tax-free upon death to the foundation," notes Mendelsohn. The foundation can keep the collection or sell pieces of it to create an endowment to fund itself or create scholarships.
Fractional Gifting is another roiute, particularly for those owning museum-quality items. A fractional gift can allow one to donate a share of a piece to a museum or related-use institution. The collector will receive a tax deduction equal to the fair market value of the share. If a collector gives a 25 percent share of a $1 million antique to a museum, she will reduce her adjusted gross income by $250,000. The collector has the benefit of both the tax deduction and retaining the item for most of the year. Each donated share also reduces estate taxes. "Proceeds of the deduction can be used to purchase the life insurance policy for the ILIT," says Mendelsohn.
The easiest way to transfer collectibles may be to give things away today. Under the Federal Gift Tax Annual Exclusion, annual gifts up to $12,000 ($24,000 per couple) are permitted to each child tax free.
[subhead] Collecting a Game Plan
If your client has collected some important items, one of the first lines of protection is to open a dialogue between advisor, client and heirs. "Make known their value and how much they mean to the client," advises Snyder. "Then learn what the heirs are thinking. They may want to sell the items to buy a vacation home or send their children to college. The parents may agree or may want to see the collection in the hands of someone who will maintain it, like a university. Give everyone time to think over their choices."
Be prepared to discuss tax liabilities and strategies. If disputes arise over value, call in an independent appraiser or auction house. "If a client disagrees with the appraiser's assessment," says Veronese, "either get a second appraiser's opinion or work out a compromise between the parties."
Joseph Finora Jr. is a freelance writer who covered key practice management topics in the March Wealth Manager.