Not long ago, insurance agent Pamela Averick asked an art collector she knows whether he'd made any long-term provisions for his collection of 100 contemporary prints -- notable for its Jasper Johns and Robert Rauschenberg pieces.
Averick, a member of the just-formed Art Succession Advisory Council, sits on the print collectors committee of the Museum of Modern Art in New York City, as does the collector.
"When I asked him in passing what plans he had in place, his jaw dropped," says Averick. "He had never even thought about it."
The Art Succession Advisory Council is a small joint venture with a big plan: to help advisors bring world class planning to wealthy clients who have amassed art, antiques and other collectibles.
As Randy Fox, founding principal of Naperville, Ill.-based InKnowVision, puts it: "It's easy to get people to talk about their financial stuff, but these things they spend a lifetime collecting, no one talks about. They collect all this cool stuff but they never plan for it. It's an interesting and unique problem to have."
InKnowVision, which designs wealth transfer planning and income solutions for advisors serving affluent families, and joint venture partner The Briddge Group, launched the council in September, after almost a year in development.
"The goal is to have advisors in selected communities who are capable of interfacing with clients in a different way. We're talking about things other advisors aren't talking about," says Fox. "Every time we bring this up anywhere, they say no one's ever mentioned it before."
Already, the advisory council has a national footprint -- targeting a huge yet overlooked niche: art assets.
"Most advisors aren't accustomed to thinking about art as a financial asset that can be used to create income, fund a trust or otherwise be leveraged in ways that are commonly adopted for other classes of assets," notes Michael Mendelsohn, founder and managing director of The Briddge Group, which in art circles is widely regarded as the premier art succession planning firm in the country.
"Most advisors don't know a Rothko from a Degas. To be honest, they don't know the front of the canvas from the back of the canvas. And clients don't know what they have," adds Mendelsohn, who is based in Rye Brook, N.Y. "We're here to help redeploy their thinking."
Path to Planning
Advisors who have joined the advisory council already have deep practices with an A-list of clients but this new niche has created an opportunity to cement the relationship even further.
Michael Glowacki, who heads The Glowacki Group in Los Angeles, recently approached a client who has a robust collection of original New Yorker magazine covers about planning for their eventual disposition.
"He was jazzed. It's like having a conversation with kids that are five years old trading baseball cards. It's that kind of passion. And it's an easy conversation to have because you're connecting with him at the level of his passion. And he loved the idea of having a logical solution to an emotional passion." says Glowacki, whose average client has a net worth of over $10 million. "The thing is people don't think of their collections as an investment. They don't know what they have or they don't pay attention. Now you can provide some responsible structure for it."
The strategy Mendelsohn has developed is simple: to help collectors become aware of their ability to keep their collections intact and to assist advisors in developing more tax-efficient art distributions to heirs and art-related institutions.
The risks associated with failing to plan properly? Family art wars, tax problems and the loss, in some cases as much as 75 percent, of the collection's value due to a poorly structured estate auction sale. Mendelsohn, a philanthropist and art collector himself, has a term for it: the "moving van" strategy.
"A parent dies and the heirs drive the moving van up to the house, and load up the stuff without reporting the transfer as gifts or inheritances. Or they sell it to pay taxes," he adds. "I've never met anyone who collects anything who bought that stuff to pay Uncle Sam's taxes. What we're doing is designing a plan that's good for the collector and not dictated by Uncle Sam and advisors who don't know what they're doing."
By definition, the process involves everyone on the client's team -- not only the financial advisor but the estate and tax planning attorney, accountant and insurance provider. Start to finish, art succession planning typically takes six months.
The first thing Mendelsohn does is create a historical reference catalog for every piece in the collection: What was the purchase price and when and where was it bought? What's it worth now? Has the collection ever been loaned? Are there any title issues? Are the definitions of the pieces as described in the insurance policy correct? "This step alone increases the value totally," he says.
He also grades the collection. "We grade it according to 'oh,' 'oh my' and 'oh my God,'" he says. "No one wants your 'ohs' but they don't know how to create a plan for them either. It's wasted opportunity."
Next, Mendelsohn meets with the clients to determine what their wishes are for the future of their collections. Options he helps negotiate include gifts or fractional gifts and loans to museums; the development of a family art lending library along with an operating foundation funded with the lesser pieces; the creation of a fair and equal distribution to heirs based on valuation and sentiment; and utilizing the collection to create philanthropic capital for charities favored by the family. Notably, many plans involve liquidating the bottom parts of a collection and selling the better parts in charitable vehicles because, at 28 percent, the capital gains tax on art is higher than it is on stocks.
As a matter of practice, The Briddge Group prepares brochures and letters for advisors to send their clients as a way to ease into the conversation. "Basically, it's a way to tell clients and other professionals that it's been our pleasure to help you with your traditional financial planning all these years but now it's time to talk about your art, antiques and other collectibles: jewelry, wine, rare coins, historical books, guns, classic cars," he says. "We're talking about something no one else is talking about."
Filling a Void
When advisor Chris Jacob first met with a husband-and-wife client, he inventoried their assets and asked whether they had any personal property of value. As it turned out, they collect art and antiques.
"Is it worth much?" Jacob wanted to know. Their response: between $2 million and $4 million. "It was a throwaway, an aside," notes Jacob, who heads Cadeau, an advisory firm in St. Louis. "If I hadn't asked, they wouldn't have offered."
Jacob, whose average client has a net worth of $30 million to $40 million, is currently assembling an art succession plan for the couple.
"I know they want to see their stuff live on but their kids don't want the art, just the most money they can get for the art. Typically, you'd go to Sotheby's or Christie's to sell it but you're only going to get 35 to 40 cents on the dollar. So we're looking at a plan that would maximize the value for the kids while keeping those arts and antiques available for someone -- an art museum or a private collector," says Jacob. "This is definitely a game-changer and, as a firm, it's given us an entirely new capability."
In addition to canvassing his 45 client families about art succession planning, Jacob is broaching the subject with attorneys and accountants. He's already made inroads. One attorney has a client who owns over 100 Corvettes and another who has a pool cue collection worth $2 million. In the works: a presentation Jacob is putting together for advisors he's worked with over the years.
"It's just amazing. This has opened up a whole new world of opportunity for us. It opens up all the avenues you have with securities, but everyone and their brother is out there," notes Jacob. "Who else can bring this to the table? Nobody."
Art Industy Facts
- A third of individuals with assets greater than $10 million are serious collectors.
As much as $76 billion in art holdings may be transferred between generations each year.
More than 65 percent of assets, including art holdings, that are in private hands face liquidity problems.
An estate auction can lead to a 75 percent loss of a collection's value.
Fewer than 10 percent of financial plans for clients address art, antiques and other collectibles.
Fewer than 10 percent of advisors use art assets in intergenerational planning.
Source: The Briddge Group