Joint Custody For Your Monet
By Rachel Emma Silverman From The Wall Street Journal Online
It’s like a time share for your art.
An increasing number of art collectors are giving museums a share of their most valuable works, rather than donating an entire painting or collection all at once. These so-called fractional gifts can provide donors with significant tax breaks — while still allowing them to keep the art on their walls for part of the year.
Fractional giving, which has been in use for at least a half-century, has been drawing more interest from art patrons as the value of their collections has soared. Wealth advisers and tax lawyers are also increasingly focused on the gift-giving technique, which helps donors maximize the value of their tax deductions.
A number of the nation’s most prominent museums, including the Museum of Modern Art in New York, Boston’s Museum of Fine Arts, the Los Angeles County Museum of Art and Washington’s Hirshhorn Museum and Sculpture Garden, Smithsonian Institution, are actively using the strategy to court potential donors — and in some cases, promoting it on their Web sites.
Fractional donations have grown so common at the San Francisco Museum of Modern Art that the museum has even considered organizing an exhibit of its fractionally owned works. "We contemplated, rather humorously, calling the show ’Joint Custody,’ " says Neal Benezra, the museum’s director, who says the museum is receiving a "large percentage" of its donations in this fashion.
As the approach becomes more popular — mirroring the boom in fractional ownership of luxury items such as yachts and airplanes — smaller museums also are starting to benefit.
The Albright-Knox Art Gallery in Buffalo, N.Y., for example, received a percentage of a painting late last year — the first in museum director Louis Grachos’s 2½-year tenure and a rarity for the museum, which was established in 1862.
The increased interest in fractional gifts — and art donations in general — is, in part, being fueled by highflying art values, especially for contemporary pieces. During June’s London fine-art auctions, Christie’s sales of contemporary works rose nearly 74% from last year, to $44.5 million, while Sotheby’s contemporary sales rose 37% to $35.3 million. By giving away art, donors avoid paying capital gains — a hefty 28% for art and collectibles — that they would owe if they sell the appreciated artwork.
Among the well-known givers who have donated percentages of their artworks or collections to museums are Donald G. Fisher, who founded Gap Inc., and his wife Doris, a Gap director; Levi Strauss & Co. heir Peter Haas and his wife, Mimi; and David Rockefeller and his wife.
Museums often stress the specific tax advantages of fractional gifts in their marketing appeals to donors. One point they typically make: Fractional gifts are handy when an outright donation of very valuable art would exceed the Internal Revenue Service’s deduction limits, which are currently 30% of one’s adjusted gross income — if the art is donated to a museum — though unused deductions can be carried forward for five years. If one donates fractionally, though, one can time the donations to take advantage of the maximum allowable deductions.
Wealth managers are helping clients manage their large art collections by devising sophisticated trusts, partnerships, private foundations and other giving and sale strategies designed to reduce income, capital gains, estate or gift taxes. Fractional giving has become one of the more widely discussed art-planning strategies because of its appeal to donors and museums. Peter May, a financial planner with Wachovia Wealth Management in Bryn Mawr, Pa., a unit of Wachovia Corp., last fall hosted a wine and cheese "salon" with about a dozen current and potential clients to discuss fractional gifts and other art-planning techniques. One art adviser has even applied for a patent on a charitable-planning technique for fractional donations.
To make a fractional gift, donors give a museum a fixed percentage of their artwork — say, 25% of a piece now worth $800,000. That gives the museum the right to hold and display the works for three months. The gift is irrevocable. In return, the donors get a current income-tax deduction of $200,000, or 25% of the current appraised value of the art.
Probably the biggest attraction, however, is that donors can continue to keep and enjoy the artwork in their home for most of the year. By law, the museum has the right to take the donated work for its share of the year. However, the institution might not always exercise that right because it can be expensive to ship and store the art or collection for a few months each year. In some years, that means donors might get a tax deduction without even parting with the art. In other cases, such as a long-running museum show, the artwork might be away from home for longer than the museum’s fractional share.
Advisers caution that there can’t be an explicit donation agreement keeping the art in the hands of the donor all the time, or else the IRS might not allow the tax break. "If you give 90% and it never leaves your house, you have a problem," says Michael Mendelsohn, founder of Briddge Strategies for Art, Heirs & Philanthropy, a New York firm that focuses on estate planning with art, and who recently applied for the patent involving fractional donations.
Museums often stipulate that donors ultimately give the rest of the artwork to the institution either while alive or as a bequest. Earlier this year, the Dallas Museum of Art received a gift of some 800 contemporary and modern artworks, currently estimated at more than $200 million, from three private collections. Some of the works included in the donation had been fractionally given, says Diana Duncan, director of development at the museum.
There’s an added benefit to gradually donating a piece of art or collection. At each subsequent donation, the works are reappraised — and if the art has gone up in value, that means a higher tax deduction. Having a prestigious museum own and display the work, even for part of the year, can actually boost the value of the artwork, as well as the tax deduction. What’s more, each portion that is donated reduces the estate-tax hit. When the entire artwork is donated, donors also avoid capital-gains taxes they would have otherwise owed.
Before the donation is made, donors and the museum should carefully spell out who pays what and when for security, shipping, insurance and storage. Museums say that arrangements vary on a case-by-case basis, and can depend on the artwork’s condition. "If a piece needs to be in [the donors’] living room for a 50th wedding anniversary, those issues can be worked out," says Ms. Duncan.
Donors must make sure their art gets independently appraised, in writing, at the time it is given. Appraisal costs vary widely depending on the object, but usually run at least several hundred dollars.
The type of institution that accepts the artwork is also key. Thanks to a provision of the tax code called the "related use" rule, donors of appreciated collectibles or art can get a bigger deduction if the institution can actually use and display the object, rather than quickly selling it off for cash. As long as the charity has a related use, donors can deduct the current fair-market value of the artwork, as much as 30% of the donor’s adjusted gross income. If the deduction is too big for one year, additional deductions can be taken over the next five years.
The related-use rule doesn’t mean you have to donate your artwork to an A-list art museum, or even a museum at all. Advisers also suggest approaching universities, libraries, nursing homes and hospitals, which might be able to display the collectibles or artwork for part of the year. Mr. Mendelsohn and his wife are considering donating their lunch-box collection to a children’s hospital, for example.
Still, donations of noncash assets, such as collectibles, have faced heightened IRS and congressional scrutiny in recent years, because some taxpayers have abused these donations by taking inflated tax deductions. The IRS has a special Art Advisory Panel, made up of top curators, art historians, dealers and other art-world professionals, which examines works, valued over $20,000, that have been audited by the IRS. Last year, the panel examined 1,186 items that taxpayers valued at more than $314 million. Only 37% of the submitted appraisals passed muster with the panel.
