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How to Handle Collectibles as Client Assets

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Collectibles can provide enjoyment and potential profits during a collector’s life.

But they’re also potential headaches for heirs, because collectibles generally are less liquid, trickier to value and less divisible than financial assets.

They also can inspire emotional attachments and disputes among heirs, so advisors should help collectors focus on these assets’ unique characteristics when designing their estate plans.

AdvisorOne asked Jim Halperin (left), co-founder and co-chairman of Heritage Auctions in Dallas for his insights via e-mail on common estate- planning mistakes with collectibles and how collectors can avoid those errors.

Halperin outlines the right strategies to take below.

What are the key steps to take when working on an estate plan that includes a collection?

The number one mistake most collectors make is not working with their family to develop a will. We advise collectors to discuss all valuable objects with their families, and decide together what should be done with them–whether selling at auction or distributing among the family.

In one memorable case, a collector meticulously divided his coins equally (by value) between his son and daughter but failed to keep them updated on the market.

Rather than get the collection appraised before his passing, he left the two with instructions that they should seek expert advice before selling.

The daughter came to Heritage and was pleased to learn that her coins were worth more than $85,000 (and subsequently sold them at auction, netting well above that amount). Unfortunately, her brother had “sold” his share just eight months earlier to a pawnbroker for less than $7,500.

If no will exists, it may be best to leave the division to a third party. Perhaps an appraiser can value items individually so each heir can ‘buy’ their share at the appraised price. 

The lesson here is that families must be involved in the estate-planning process. If they don’t share your love of collectibles, you might decide it’s better to dispose of the collection in your lifetime.

Regardless, your family should have a basic understanding of the collection, its value and how you want the proceeds distributed.

When and how do collections have to be appraised?

Of the tens of thousands of collectors Heritage has assisted in disposing their collections, about 20% didn’t know even approximately what their art and collectibles were worth.

Appraisals are required for insurance, estate taxes, charitable contributions and even gift-tax purposes, but few people realize the IRS requires different types of appraisals depending on the value and use of the collection.

Selecting a qualified appraiser is an important step and takes time. Collectors should pick appraisers who specifically confirm to Uniform Standards of Professional Appraisal Practice.

We often advocate third-party grading as the best method to protect their collection. Just like an appraisal, reliable certification can greatly increase a collection’s liquidity and value, especially for:

  • Coins (Numismatic Guaranty Corporation (NGC) or Professional Coin Grading Service (PCGS);
  • Currency (Paper Money Guaranty, PMG, or PCGS);
  • Comic books (Certified Guaranty Company, CGC);
  • Stamps (Professional Stamp Experts, PSE) and
  • Sports cards (Professional Sports Authenticator, PSA, or Sportscard Guaranty, SGC.

Certification by these major grading services both assures authenticity and adds value. However, certification fees may range from $15 to hundreds of dollars per item.

Before considering a grading company it is best to meet with an expert to determine if the added value will justify the cost of the service.

What are the best ways to sell a collection?

A common practice among inheritors is to sell a collection outright, thus generating fast cash for minimal effort, but often producing the least amount of money for the owner.

Another method is to use an agent. Generally agents charge a fix fee of 5 or 10% plus expenses.

Matching the right agent with the right material is a challenge, as it is hard for any expert to know the market on every item in a collection. Even the greatest experts often lack the imagination to predict auction values when an item is truly special. Furthermore, you need to fully trust that the agent will give you an honest accounting. Most will, but private transactions are somewhat opaque, so some agents may succumb to the temptation of using your items to return favors to friends, buying the best deals themselves or even shortchanging you outright.

That’s why the auction method of selling has always been and will likely forever remain the best method to ensure your heirs receive as much value as possible from your collection. Auction is the fastest way a truly free market can set a value based on competitive demand in a transparent, level playing field.

Auction houses work on a percentage, so the more money you receive, the more money the auction house makes. Thus, their interests are aligned with yours.