February 19, 2014

‘Free Ports’ for Storing Clients’ Valuables: The Pros and Cons

More On Tax Planning

from The Advisor's Professional Library
  • Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
  • Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.

Where can you store a large collection of valuable art and other collectibles, assuming you don’t have a secure, climate-controlled attic on your house?

For many high-net-worth individuals, free ports are their attics of choice. Over the past decade, these century-old former warehouses have become the repositories of great works of art, rare automobiles and coins, fine wines, and even gold bars and other precious metals. Especially large contemporary art pieces like massive Christo sculptures and even mini-submarines (among the newest toys of adventurous, super-wealthy people) are stored at these facilities.

The key motivating factors for warehousing these expensive items are security, confidentiality and tax advantages. Because the goods in a free port are technically in transit—the bonded warehouses were initially built to store goods in between shipments—they are accorded special tax-exempt treatment. This remains the case today, even if the valuables are stored for very long periods of time. The Economist magazine estimates that hundreds of billions of dollars’ worth of valuable art and other extremely valuable items are stashed away in such uber-warehouses.

Although free ports are well known to the super wealthy, their confidential status has made them largely unfamiliar to the general public.

LeConte “Conte” Moore, managing director at insurance broker DeWitt Stern in New York, said that while there are some advantages to storing valuables in free ports, collectors should think twice before putting all their eggs—Fabergé or otherwise—in one of these warehouses.

“Free ports often contain an enormous amount of highly valuable art in one location, which creates a large concentration of risk,” Conte said. “Because of this, insurance companies won’t always offer the lowest rates to insure these valuables.”

Far From Free

The world’s best-known free port is in Geneva, Switzerland, a former grain facility from the 1800s that now houses some of the world’s finest art. Customers pay around $12,000 a year to rent a small room within the facility to store their treasures. Switzerland houses five other free ports, the most of any country.

Last year, Beijing announced the creation of an 83,000-square-foot free port near that city’s planned new airport. The free port is predicated on encouraging Chinese art collectors to store their valuables in Beijing, the Jing Daily newspaper reported. Other free ports dot the world, but there are none in New York City, arguably the world fine art capital.

While airports and seaports are logical places to locate a free port (otherwise it might be difficult to argue the transitory nature of the goods for tax-exempt purposes) these factors also add undue risk. Collectors and their financial advisors should be concerned about the numerous airplanes flying low over these warehouses and the close proximity of large bodies of water. They can be sure that their insurers are taking these factors into consideration.

Theft, on the other hand, is rarely a concern, as most free ports are highly secure. At a free port in Changi, Singapore, for instance, high concrete walls surround the warehouse, which is patrolled 24/7 by armed guards. Using state-of-the-art technology, stringent background checks are conducted on all personnel as they enter or exit the building, and both motion sensors and video cameras are strung throughout the premises.

Although security may not be an issue, collectors should consider the potential impact of a catastrophe at a free port, or any art warehouse, where they are storing tens of millions of dollars’ worth of valuables. One direct hit from a major storm and all their efforts to amass a rare and unique collection could be lost. Just as a well-balanced stock portfolio emphasizes a diversity of investments, a large collection of valuables should be stored in different warehouses, emphasizing geographic diversity and, therefore, reduced exposure.

Another thing that makes insurers question how much risk they’re taking on is that free port managers tend to be tight-lipped about the kinds of goods contained in these warehouses, which is understandable given their clientele’s demand for privacy.

Because of the heightened exposure, Conte estimates that the premiums to store goods at a free port can be two to three times other storage rates, “if coverage at a specific desired location can be obtained” at all.

“Insurance capacity is the big issue here,” Conte added. “Financial advisors need to exercise caution about insurance protection, including the coverage limits, terms and conditions, before simply storing their clients’ valuables in a free port. Don’t assume the insurance is high caliber just because that would be the expectation.”

Knowing in advance what insurance covers and what it doesn't cover is as important as which company you buy the insurance from. Just because it’s call a free port doesn’t mean it’s a great value.

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.