Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week we open with a couple of locum tenens physicians who ground through years of demanding schedules to reach financial independence at age 45. Their plan called for $200,000 a year in spending. They’re spending closer to half of that now, and one spouse is trying to figure out how to actually trust the number they built. Then we hear from a listener who’s been asked to join the board of a company he used to consult for, one that’s about to go public with a seven-figure equity grant on the table. He’s already thinking about D&O insurance and indemnification, but wants to know what other questions he should be asking before he says yes. And in From the Field, we’re joined by Asher Rubinstein, a trust and estates, tax, and asset protection attorney, for a conversation about how art and collectibles get treated inside an estate and the structures that keep collections from becoming a tax problem. So let’s go ahead and get started with question one this week.
Question 1 – Retiring at 45 With $200,000 Budgeted but Only Spending Half of It: How Do You Trust the Plan?
Stephan Shipe: My wife and I were both locum tenens physicians. We had a FIRE plan from the beginning, worked crazy schedules, took the assignments nobody else wanted, saved everything we could. We hit our number three years ago at 45 and pulled the plug. Portfolios held up fine. Here’s the problem. Our plan said we could spend $200,000 a year, and we’re spending closer to 100. My wife thinks I’m being ridiculous and wants to increase spend. Am I? How do I let go and trust the plan?
Well, congratulations on retirement. That’s exciting. And for those unfamiliar with the whole FIRE goal — financial independence, retire early — so doing exactly what our listeners did here of retiring at age 45. The difficult part of a goal like this, as you all know, is that you’re stuck with a ridiculous savings goal before 45. You’re doing everything you can, you’re scraping together all the extra income, as you’re saying, you’re doing the stuff that no one wants to do, you’re working the holidays, you’re pulling all this income, it’s all being stocked away. You build it all up, hit your goal, retire, and then now you’re not spending.
This is more common than not. Actually, I’d say this is not only common in the FIRE community, but also just in general for retirees. It gets hard, especially if you’ve been a really aggressive saver, to turn that switch off when the income turns off. You’re so used to not only saving, but you’re used to seeing your accounts continue to grow and hitting a target. And whenever that target disappears, any type of goal-setting mindset, which you all would be accustomed to, starts to become a problem, because you have nothing you’re shooting for. In fact, it makes it worse, because the goal that you have been shooting for has been to increase the accounts. And now the goal that you’re shooting for is to decrease those accounts, or to at least pull from them. So there can be a lot of distance there in trying to figure out how to handle that.
Fortunately, because it is relatively common, there are some ways that can help with spending. One is — I am a huge fan of the double brokerage account idea. You likely have one joint brokerage account, or you should, that most of your savings is in. And if you split off another brokerage account that allows that to be the home for all of your spending money, that can help you ignore all the other account ramifications or movement that may cause you to be a little bit more nervous about taking that money out. So once a year, pull the money you’re going to need for the year, throw it into brokerage account number two, the spending account, and know that your account — brokerage account one — is doing what it needs to do. It’s there, it’s following the plan, and you don’t have to look at it until next year. That second brokerage account is where you’re actually going to be doing your spending from. So that’s where you’re going to transfer into your checking. And having that separation can really help avoid having to pull out money every month and say, well, the account’s down this month, so I don’t want to pull the full amount that we should be pulling, so we’re going to pull less, and we’re going to pull less than $10,000, even though our plan says you could spend probably closer to $15,000, $16,000 pretty easily. So that would be step number one.
The other one — you really have to look at how your plan was generated. If you were looking at that $200,000 goal, a good plan should have that $200,000 built in with some buffer. And if it’s established the correct way, I imagine you had buffer even with that $200,000. If you did not have buffer in there, then the other aspect of this is how much of this is discretionary. Because you’re spending only $100,000 and your plan was set for $200,000. In my mind, that means you have $100,000 of discretionary expense in there that you have to play with. So spending $200,000 a year shouldn’t be treated as, I’m spending $200,000 a year forever. It should be treated as, I’m spending $100,000 a year forever, and I have the option to spend an additional $100,000 a year whenever the market is doing well. That way, in your mind, you can set aside this issue of, if the market pulls back, maybe you can spend $50,000 or $150,000 as opposed to $200,000. So having that extra $100,000 be discretionary will likely make it easier to feel comfortable spending that amount, because you know you could always pull that back.
Now, the caveat I’d throw on there is make sure that that additional $100,000 you’re spending is not going into things that are going to lock you into higher expenses. So if you go spend that $100,000 picking up some extra debt or buying real estate that causes your expenses to go up in a significant way, then you want to be careful, because then it doesn’t become purely discretionary. You’re locking yourself into that number. And that’s typically approached as more of a guardrails approach, or some would call it a variable safe withdrawal rate. Instead of saying you’re fixed at two hundred thousand, you’re variable between, let’s say, one twenty and two hundred. And my guess is you probably even go above two hundred if you were willing to come down in some years, which doesn’t seem to be the problem here.
So the other — and this would be the last thing I’ll leave you with when it comes to this idea, because you’ve already done so well saving — is that you have to rebuild the spending muscle a little bit. You’re really good at saving. You’ve done well. You’ve accomplished those goals. Set the goal to spend, and that’ll help as well. So if you have $100,000 now and you could spend up to two, set next year’s goal that you should spend $150,000. And I know you may look at that and say, well, that’s ridiculous, I’m not just going to go spend money for the sake of spending money. What it’ll do is it’s going to force you to spend intentionally. So it’s going to force you to look at — if you have this fifty thousand dollars that you have to spend, what are you going to spend it on? And my guess is you’ll find that you’re going to want to spend it on time with family, experiences, travel, and all those. So switch gears a little bit and make it so that your goal now is to spend the money as opposed to save the money, and trust the process that you’ve built that got you to this point at forty-five, or now, I guess, forty-eight.
Question 2 – Going on a Pre-IPO Board: D&O and Indemnification Are a Start, But What Else Should You Be Asking?
Stephan Shipe: A company I used to consult for is going public, and they’ve asked me to join the board. I’d be an independent director. The equity grant is probably seven figures over four years. I’m thinking about D&O insurance, my own indemnification, some kind of liability shield around this personally. What other questions should I be asking?
There’s so much here that you should be asking, well beyond just the coverage. A lot of people go immediately into the coverage of, well, am I protected? But they don’t ask what they’re being protected from. You’re talking about D&O, which — of course, there’s going to be some D&O insurance, and you’re going to have to find out legally what’s going to be included there, what the coverage is, what the actual policy says. Same with the indemnification. You’re going to want to make sure that that’s taken care of so that your legal fees are advanced and you’re not just being reimbursed after the fact, especially if you get into some major lawsuit and you’re having to pay all the legal fees and then go for reimbursement. It’s going to be a mess. So you want legal fees up front. You want to make sure that that covers you even after you leave the board, so you don’t leave the board and then somebody comes after you a year or two later. Same with different types of committees. That’s all stuff that can be taken care of. That’s contractual, right? You’re going to have an attorney, you’re going to go through these. Those are all great questions, not knocking any of those.
What I think you’re missing, though, is — do you actually want to be on this board? And are you opening yourself up to more problems than a positive experience? And that’s not to say that it’s not going to be a positive experience, but it’s easy to jump to the insurance protection and not know what you’re insuring against. For instance, the first thing I would look at is what is the financial condition of this business? Yes, they’re going to go public, but that doesn’t mean they’re an amazing business. What’s keeping the current board up at night? What’s keeping the CEO up at night? Are there any impending lawsuits right now? Do you have any SEC action letters that have been out? Are there any whistleblower complaints? What is the overall true financial condition? Look at the financial statements, dig into it. Go pull the minutes, or ask for the minutes, for the recent board meetings so you can look at them and determine whether or not the issues that are going on are things that are going to linger once you’re on the board. Because once you’re there, you’re going to have this fiduciary duty. You’re going to be running this company, or at least advising on it as a board member. And you don’t want to be in a situation where you’re stepping into a bunch of fires that now you’re expected to put out and be legally responsible for.
So that’s number one. Do you want to be involved? I’m a little worried about you saying you’d be an independent director. And I hope that’s the case. I’d do a little bit more digging into that, just depending on what you’re doing now. Since you had that consulting relationship before, making sure everything truly is clean. There are different definitions of independent directors depending on who’s claiming the independence and who’s doing the rating. So making sure that’s going to be set. And then I would start looking at the culture of the board. Why are you being asked to be on the board? Are you being expected to be a rubber stamp on this? Is there actual governance going on? That’s where those minutes will also help. Does anyone push back at all? Are you going to be the only one that pushes back? How’s that going to impact your time on the board? How do you get out? Can you be forced out? Do you have an option to get out? What’s the time requirement?
Where a lot of people get caught up on boards is they get told, well, it’s going to be a few hours a week, maybe some meetings, and we’ll travel to a great place for the board meetings. And then they go in and say, well, now we’re going public, as is this case, and it’s not going to be just a few hours a week. Now it’s going to be a hundred hours a month, because you’re on the board of a company that’s going public right now. So you have to be there, and we need you in all these meetings — emergency meetings, last-minute meetings, being pulled in. It’s no longer just a one- or two-day board meeting. It’s a week. That’s the kind of stuff I’d really want to know, in addition to, do I need D&O insurance, or what kind of coverage? Of course you need it. You’re going to have all that coverage. But I would spend a lot of the time focused on what you’re getting into first, knowing that the rest of it you’ll likely be able to cover when it comes to upfront legal fees or the indemnification, D&O insurance, all of that works.
The other aspect I would unpack in a little bit more detail — you say the equity grant is probably seven figures over four years. Before I accept anything, I want to know more than “probably.” I want to know what the grant is, what the blackout windows are, what the issues of trading as an insider are, what the vesting period is, strike prices. All of that needs to be solidified. But I’d say that’s almost step three. Some of this has to happen at one time. Step one is, what are they expecting you to do, and what kind of company are you getting into? You may know that you used to consult for them. I don’t know if that was last month you used to consult for them, or that was 20 years ago you used to consult for them. So I’d want to know what the current financial condition is, what they’re expecting of the board, and what the expectations of the next year or two look like. How you get off the board, if you don’t want to be there or they don’t want you there, how that starts to affect compensation, what that compensation looks like in a pretty good level of detail, and then look at all the insurance needs that you’re going to require and making sure that all of that is covered.
Because you’re not covering something where somebody makes an honest mistake. You’re covering issues related to things like somebody actively hiding something and you didn’t catch it. Or the company’s in a tough spot, whether it’s legally or financially, and now you’re responsible for that as a board member. So lots of things to take into account. But those are the questions I’d be asking. And it’s probably more than an email. I think it’s time to have some conversations with other board members and see what’s actually going to be expected and what’s going on within the company.
From the Field – Art and Collectibles in Estate Planning: Tax Structures, Liquidity Problems, and What Families Get Wrong
In our From the Field segment, we’re joined by Asher Rubinstein, a partner at Gallet Dryer & Berkey in New York, where he practices in trusts and estates, tax, and asset protection. With 30 years of experience advising families on illiquid assets, Asher joins us to talk about the special challenges art, wine, and other collectible asset classes present inside an estate, and the structures that keep valuable collections from becoming a tax problem.
Stephan Shipe: Asher, welcome to the Scholar Wealth Podcast. Before we jump into everything today, I want to hear a little bit about how you got into this world, especially the subspecialty here on the art and collectibles in the estate practice.
Asher Rubinstein: Sure. So I’ve been an attorney now — this is my 30th year of practicing law. And in that time I’ve acquired a specialization not just for estate planning, but also asset protection. And when you’re dealing with people’s assets, whether it’s trying to reduce their estate tax exposure or getting it to their children or other beneficiaries in the best, most efficient way possible — in those 30 years, I’ve learned to deal with various types of asset classes. It could be the more mundane, like someone’s home, someone’s bank accounts. And then we get into other asset classes like collections, and art, of course, becomes important there. And in navigating my career, as things that interested me, like art, touched my professional world, people came to me and said, hey, I need a will, or I need a trust. And I said, well, what are your assets that you want to impart to your next generation? They said, well, I have this great art collection. To me, that was fantastic, because I got to essentially fuse my love of art, which I’ve studied throughout high school, college, et cetera — I got to fuse my love of art with my professional career as an attorney. And that really makes it much more interesting and much more gratifying. And I’ll also mention that I got to do this also not just with art as an asset class, but wine as an asset class. I’ve been a wine collector for 30 years, and when I get to do wine and food and restaurant-related things within my law career, it makes it all the more fun.
So bringing it back to art — families come to me and they say, well, I want to impart my assets to my kids, I want to make some charitable contributions, et cetera. What are your assets? We go asset by asset — real estate, business interests, bank accounts, securities. And they have this fabulous art collection. Well, let’s give that special attention. What’s in the art collection? How many pieces? Who made the art? Where is it located? Who should get the art? To me, that’s super fun. It’s more than just dealing with, okay, well, who gets this bank account and who gets that piece of property?
What Happens When Nobody in the Family Wants the Collection
Stephan Shipe: When you deal with that, my concern would be — let’s say I had this huge art collection, I come to you and say, Asher, I want to split it up, and here are all the names of people that I want to receive these works of art. What if they don’t want them? How do you navigate that? Do you help with the conversations early to say, hey, you know, Aunt Ethel’s going to give you this piece of art that you can’t stand but she loves? And especially when you’re talking about storage and holding costs and insurance, how do you navigate that? And is that something you navigate before the actual passing of the benefactor there?
Asher Rubinstein: My advice to my clients is, try to leave as few unknowns and as few variables — let’s deal with them today. Let’s not impart art to somebody who may not want it. Let’s address the issue now. So for example, if a family has a piece of art that — there are so many issues. What if you have two kids, and one wants the art, one doesn’t want the art? I think that’s your example. Well, you can equalize. You can say, okay, you’ve got a family, you’ve got a bunch of art, the son may not want the art, but the daughter may have an interest in the art. So what do you do? Do you give it all to the daughter? Where do you leave the son? Well, now we have the concept of equalization. If you’re going to leave ten million dollars worth of art to the daughter because she has an interest in the art and the son does not — well, have you shorted your son $10 million? Or are you going to find an equal amount of assets to leave to the son to equalize the art that you’ve left to the daughter?
I had to deal with this recently. I think one of your initial questions is what if somebody doesn’t want the art? I had to deal with that in my career not that long ago, when the significant asset in that estate was a chess set collection. This person had acquired literally hundreds of chess sets throughout his life. Some more valuable than others. Some, I should say, were even contraband, because I’m talking about specifically ivory. The chess set was made of ivory, and ivory, to a great extent, is grandfathered, but you can’t really buy and sell new ivory. But this chess set collection had been in the family for many, many years, and none of the kids were interested in acquiring a chess set collection.
So as disappointing as that may have been to the patriarch of the family, who wanted to leave hundreds of chess sets to the kids, none of the kids wanted them. So what do you do? Well, you sit down with the patriarch and you have an honest conversation. This collection may be important to him. He spent forty years cultivating that collection, buying it in his travels around the world, displaying it in special bookcases, and now the gentleman is getting older and his kids don’t share the love of chess or the love of art that the patriarch had all of his life. So you have to deal with issues like, well, who would be a good recipient for the chess set collection or the art collection when the kids in the family don’t really have that interest? So now we’re looking at things like, can you set up a family foundation and donate the art to the foundation and get a tax write-off, and now if the art or the chess sets are in the foundation, they will appreciate outside the estate. So you’ve accomplished some estate planning here. You’ve also gotten the collection to somebody or some institution — whether it’s a foundation or a museum or a school — that recipient of the collection, in the hypothetical that I’ve given you, that institution or that school or that foundation or that museum is better equipped to take the art, to display it, to make sure that it’s there for others to see and to enjoy.
Valuation Challenges for Illiquid, One-of-a-Kind Assets
Stephan Shipe: And unpack the valuation aspect of this. It’s not easy, but it’s easier to value something like real estate. Somebody has a home, they want to split it up, but one child doesn’t want it or something like that. It’s easier to say, I want to equalize, and I know the value of that property. So if you don’t want the three million dollar vacation home, that’s fine, because you can buy out your sister or brother for half. And it’s easy to say $1.5 million, and we’re even. When you’re dealing with these assets, a lot of these are illiquid assets. Not only illiquid, but they’re stale in trading, right? Or they’re one of a kind, where no one has the ability to have a price on that piece of art or the chess collection. When and how often are you doing valuations of those? And how much controversy does that bring, of someone saying, well, if you don’t want the chess collection, you’re going to miss out on X amount of dollars? And there might not be X amount of dollars there to actually equalize that.
Asher Rubinstein: There may not be, that’s true. I have seen situations where the prized family asset is this one work of art, and everything else kind of pales in comparison value-wise. And you really have to do the best you can. Maybe the thing to do, if it’s so disproportionate — let’s go back to the brother and the sister. The sister wants the art, the brother does not. The work of art is worth ten million dollars, and that’s the bulk of the estate. The sister really wants it. So you can’t just create another $10 million worth of value, or $5 million worth of value, to give to the brother to equalize the art to the sister. You have to work with the family dynamics and the asset situation that’s handed to you.
Certainly if it’s a wider collection, there are more works of art to distribute, then you have an easier time equalizing. But if it’s skewed, if there’s that painting that’s been hanging over the fireplace in the family home for half a century, that’s the main family asset. You can’t divide it in half, and you can’t give that to A at the expense of B. So what do you do? You have to be creative here. Do you put it in some type of a trust and name a trustee so that the family can enjoy the art, and maybe you display it someplace appropriate to display the art? And you don’t necessarily give the art in its entirety to the daughter when there isn’t anything else there to equalize with the son. You kind of have to work with what you’re given.
Stephan Shipe: Yeah. And I imagine that becomes even more complex if there’s a tax associated with it. When you’re dealing with the illiquid assets of saying, well, now you have a forty percent estate tax on top of that. So you may have a ten million dollar piece of art, but it costs four million dollars if you want to keep it, or you have to sell it. And remind me, and I don’t know if you have this off the top of your head — how long do you have to pay that tax? Is it the nine months?
Asher Rubinstein: You’ve nine months to file the return, nine months from the date of death, and then you can get an additional extension.
Stephan Shipe: So how does that work, going into your example, if we expand on that? I owe now four million dollars on this piece of art that I don’t want to sell. I have to come up with four million dollars somehow to be able to keep this art, or I have to sell it. But even if I go to sell it, how long does it normally take for some of this artwork — assuming we’re not talking about the more unique collections of the chess sets and finding a buyer for that — but if you had a painting that was well known and it’s worth millions of dollars, are you waiting years, two years, or can it be something that’s reasonably sold within nine months to create the liquidity there to even pay the tax on the estate?
Asher Rubinstein: Well, the liquidity issue that you’ve highlighted doesn’t apply only to art. It applies to any type of illiquid asset, like a family business or real estate, or you hear it a lot in terms of farms, right? Like, the parents have passed away, you can’t monetize the farm and make it liquid in order to pay the estate tax. So you have to deal with this ahead of time. One way to deal with it ahead of time is to buy life insurance. So that upon the death of — somebody dies, the insurance company pays out the death benefit, and that death benefit is used to pay the taxes, which gives some degree of cushion to the family. In your case, do they have longer than nine months to sell the art? What if we’re in an economic cycle that isn’t very advantageous to art? You don’t want to force the family to do like a fire sale simply because they have to raise the money within nine months to pay the IRS, right? You want to give the family as much cushion as they can, and not have them sell it under less ideal market conditions. They want to maybe wait it out until the art market has rebounded. And insurance could come in in that case. They get the liquidity from the insurance carrier, they pay the government, and then they can coast for a little while until the market rebounds and they can sell that work of art for as best a price as they can.
Stephan Shipe: So do you see the same issues — just like you’re saying, for those who may not understand, the farm scenario is probably the most extreme, because it’s easy to have that in multiple generations. Land prices go up, now you get over the estate limit and you’re running into tax issues there, but it’s also likely not income-producing nearly enough to actually pay any of the taxes associated with it, where no one would really buy it necessarily for farmland, because it wouldn’t make sense from an economics perspective. Art falls into that as well. How do you compare wine collections to these art collections or farmland? Because, without throwing a horrible pun in here, it seems to be more liquid than art would be. How do you handle that sales process? Are you selling the whole collection? Are you selling to restaurants? Is it easier to go more of a commercial route?
Asher Rubinstein: Right. So before I answer your question, I want to tell you one thing that I’ve built into the wills and the trusts that I’ve created for people with collections like this. And I’ve done it for my own estate planning, because I have the wine collection, I have the art, et cetera. You want somebody with expertise in the asset to manage the asset until it’s sold, and then to get the best price possible. So in the wine world or the art world, you want somebody who’s familiar with wine, who’s familiar with art, who’s familiar with market conditions, who understands the process of dealing with auction houses and galleries and has some familiarity. Let’s say if I make my brother my trustee because of convenience, or my brother is in the family, he knows the family dynamics and he has a good relationship with my kids. He’s my kids’ uncle, he’s familiar to them, he understands the family dynamics. Distributions are easier if the trustee is in the family. But what if the trustee has no knowledge of art? What if the trustee has no knowledge of wine?
I want to write into my documents that the trustee is empowered to speak with — and I might name that person — my wine-collecting friend, or my art mentor, my friend who owns a gallery. You build that into the documents so that the trustee or the executor that isn’t familiar with that asset can turn to somebody who is familiar with that asset, and rely upon that person to guide the trustee or guide the executor to get the best price possible. So going back to your question — if I put my brother, who has no knowledge of wine or art, in a position of having to sell that asset, let’s say because he’s got to pay the estate tax bill, and he doesn’t have knowledge — it’s much better to appoint somebody to advise the trustee or the executor who has the knowledge about that asset class, and could guide, you know, should he sell all the wine to one restaurant? Should he instead sell it to an auction house in one lump sum? Should he send it to Hong Kong because the Chinese market for art or wine is more robust than the American market? You want somebody who can deal with these issues. And I like to write the authorization for the executor or the trustee to deal with that expert into those documents, so that the trustee has somebody there on his team to maximize the value for the estate.
Stephan Shipe: That’s great. And you mentioned Hong Kong, which is actually one of the topics I wanted to bring up with you today, because you specialize not only in the US but international assets as well. Do you see that as an effective outlet now? And is Hong Kong the place you would be sending art and wine to for these types of sales?
Asher Rubinstein: It’s cyclical. Markets go up and they go down. There was a long time — forgive me for talking about wine more than art, but if it’s allowable, if it’s okay, then I’ll tell you that, just like art, there are fads and there are fashions, and an artist that’s hot ten years ago may not be hot today. The Chinese market for wine, for example, chased Bordeaux for many, many years and brought the price up, and then Bordeaux fell out of favor and Burgundy fell more in favor. So now the prices for Burgundy are much higher than with Bordeaux. And that applies to art as well. So whether it’s art or whether it’s wine, you want to look towards the more favorable market. It could be Hong Kong, it could be Singapore, it could be London, it could be Paris, it could be New York. It really depends. It’s site-specific. You want to empower the person who’s got the global understanding about what is the best market to sell the art or the wine or the Ferrari from nineteen fifty-two or whatever the asset might be.
Stephan Shipe: And then from the logistics of this, who’s paying? The trustee is going through and using the estate to pay for the advisors for this — to ship things to Hong Kong or to Paris and to deal with the sale and the commissions. That would all fall under the trustee role at that point? So even more to your point before, of making sure somebody is empowered to grab somebody else’s expertise, because it’s likely, you know, Uncle Joe may not know about art or wine, but he’s definitely going to be trusted to give the distributions to the kids and everything else.
Asher Rubinstein: Yeah, absolutely. Well, Uncle Joe’s going to have so much to deal with, whether it’s art or wine. I mean, you have temperature, humidity, the right custody, the right warehousing, the right transportation to get it from — where’s the art located now? Where are we going to store it until it goes to auction? Things like that. And Uncle Joe may not have that knowledge. And yes, there are going to be a lot of expenses, because if you’re talking about art, right, some art could be worth tens of millions of dollars, and you want to care for it properly. Sunlight, temperature, humidity, et cetera. The provenance of the art is going to be crucial in terms of reselling the art. So these are all expenses that are part of the upkeep of the art from the time that the person has died, and now the art belongs to the estate. Somebody’s got to deal with the upkeep and the storage and the transportation and the insurance and everything else, and then getting it to the auction house and making sure that it’s sold properly. And of course, the auction house is going to take their commission to deal with the logistics, but there’s a lot involved, as you’ve said. And if Uncle Joe’s not really knowledgeable about it, then what I would do — I’ve appointed in my will or the trust document, I’ve said, Uncle Joe, when you step up as a successor trustee, you should talk to this person at, you know, fill in the blank, this person at Sotheby’s or whomever. It’s an expensive, very important asset that needs the care and the attention and the expertise that it deserves.
Where to Start: The First 100 Days of Estate Planning With a Collection
Stephan Shipe: And is that the low-hanging fruit that you would see for someone who comes to you and says, Asher, I need help with this type of collection? Or maybe they don’t even know that they need help with it and they’re looking for estate planning, and you notice there’s this large collection or one particular asset. What is the low-hanging fruit there? Is it communication? Is it just writing these into it? What is the first step that you go to and say, this needs to be done now? Is it an appraisal? Is it insurance? How do you navigate that as kind of the first hundred days, so to speak, of that estate?
Asher Rubinstein: It’s a fabulous question, because in your scenario, it’s like you’re dealing with the family, and the family comes to you and they said, we’re getting older and we want to talk about our estate planning, and we’ve got kids and we’ve got assets, and they might not even realize what they’re sitting on. You see these stories of art that was found in someone’s attic or basement, and lo and behold, it’s a fifty million dollar work that wasn’t even known until now.
Look, the starting point when the family comes to see you for their wills or their trusts — you treat art like any other asset. You treat it like the family real estate or the bank accounts or the business interests, and you go asset by asset. Where do you live? What’s your primary residence? Who should get it when you die? Is there a vacation home? Is there an apartment? Then let’s go account by account. Who should get the brokerage accounts? Who should get the checking account, the savings account? The IRA’s taken care of, et cetera. And you go from a basket of assets like real estate or financial accounts to other assets. Now let’s talk about the art. Well, we have some stuff that’s hanging over there and we have some stuff that’s in the attic. Well, let’s hone in on that, like we honed in on the bank accounts. Let’s talk about the art. Did you get an appraisal? Where did you get this art? Who’s the artist? In what conditions was it kept? Do you have a certificate of authenticity? What’s the chain of title? Who’s going to get this art? Should it be the kids? Or do you want to donate it to a museum with a nice plaque with your name on it, et cetera?
What I’m coming to is you have to target the art like you target any other asset class, whether it’s real estate or business or intellectual property or boats, whatever it is. And then you hone in on the art. But the initial conversation is always the same. Who gets it, and under what conditions? You don’t want a fourteen-year-old child coming into possession of an important work of art. You may want to put it in trust for that child until that child is, let’s say, twenty-five, thirty, mature enough to own that art outright as opposed to in trust.
Stephan Shipe: One of the questions I have always comes back to that valuation piece. When you’re about to go pay a significant amount in tax on any asset and you go get it valued, especially with something pretty subjective as art — is it common for you to recommend just one valuation or multiple valuations? Do you have to blend those together? Do you just take the lowest one? How does that work in practice? Because I just can’t imagine going, and somebody saying, what do you think this work of art is? And they say, well, it’s worth 50 million. Like, well, that’s a lot of zeros here when we’re trying to pay forty percent tax, or potentially pay forty percent tax, on that, where I might go to somebody else and they say it’s worth thirty million.
Asher Rubinstein: Yeah, this comes up a lot when assets are contested, and you have to build in a mechanism where — well, what happens if the brother and the sister both agree to sell this art, convert it to cash, pay the estate taxes, and split the difference and walk away, right? What if the appraisal comes in low? What if the appraisal comes in high? You have to build in a mechanism whereby each party gets their own appraiser, and then maybe you split the difference. So you’re not relying on one appraisal only, because as I said, that appraisal could be low, could be high. Have a number of appraisals, and what’s the average? And there’s all kinds of mechanisms we build in. The mechanisms could be two appraisers, could be three appraisers. You have to deal with this. It goes to the theme of what we were talking about earlier, which is do this ahead of time. Don’t leave for your family this great big basket of unknowns. Unknowns like what is the value of the art, and who should get the art. Do this ahead of time. Sit down with your estate planning attorney, and it’s so much easier to dot the i’s and cross the t’s while the patriarch or the matriarch of the family is still alive.
Stephan Shipe: So that opens up two questions for me. One is, how much does an appraisal like this cost? And then, do you automatically have a mechanism to revalue these assets post-death? So that way, from a tax perspective, you’re paying an accurate amount for a tax. I would hate to have the art collection that’s in vogue two years ago that’s valued really high, and then now I pass away, my estate’s looking at it, and I’d want that revalued to make sure that it represents the lower price at that time, so that way the estate’s not paying the tax.
Asher Rubinstein: That’s right. And there is a way to — the IRS allows you to do that. You can get a date-of-death appraisal, just like you would the appraisal two years prior.
Stephan Shipe: Okay. And then what’s the cost of that?
Asher Rubinstein: A few thousand dollars, like any other appraisal.
Stephan Shipe: Okay, so that’s not too crazy. So you don’t see it go up — it’s not moving linearly necessarily with the value of the art. Interesting. It works out well.
Asher Rubinstein: Same thing also with real estate. The cost of the appraisal isn’t really a percentage of the underlying real estate, I think.
Stephan Shipe: Yeah, just a matter of the expertise of the people doing the appraising would be the key.
Asher Rubinstein: Absolutely. Yep. We’ve talked a lot about estate planning, estate taxes, but I think one thing that you may be curious about for your listeners is that there may be ways to lower one’s estate tax liability on an art collection.
Stephan Shipe: Absolutely interesting to our listeners. Go on.
Structures That Lower Estate Tax on an Art Collection
Asher Rubinstein: So right now everybody has a $15 million exemption from the estate tax on the federal level. On the state level, it varies state by state. I’m in New York, the exemption is about half that. It’s about $7.3 million. And it’s double that for a married couple. That’s a good threshold. The first thirty million is tax-free. But when you’re dealing with a high net worth clientele that has been accumulating art for decades, many times they’re in excess of that thirty million. And the estate tax rate is pretty high. It’s forty percent federally, and then plus whatever your state estate tax rate is. In New York State it’s about sixteen percent. So the forty plus the sixteen — more than half the value of the art could go to the government, state and federal. As we’ve said a little while ago, there could be a liquidity problem, where you’re forcing the heirs to sell the art to pay the government.
One of the themes that we’ve been talking about this morning is dealing with your estate ahead of time for as few surprises down the road. I advise clients that, as much as they’re dealing with estate issues like who’s going to inherit and upon what conditions — if the value of their estate is greater than 15 million per person, then as much as we have to deal with inheritance issues, we also have to deal with estate tax issues. Otherwise, as much as 56% could go to the government. So there are various structures and strategies that we could use. Two that come to mind are, number one, we could use a family limited partnership.
I’ve done it for a lot of clients, but in the art world, one comes to mind — a family that lived downtown and displayed their art in their home in the Hamptons, and they had tens of millions of dollars worth of art. Calders, they had one of the Marilyns by Warhol hanging in their living room in the Hamptons. The first strategy that I like to use is a family limited partnership, where you put the art in the family limited partnership. Mom and dad could be the general partners, and they control the assets in the partnership. The kids could be the limited partners. Why does it work for estate tax minimization for art? Because the IRS recognizes two discounts. One is the discount for lack of marketability, and one is a discount for lack of control. Lack of marketability means — hey, here are 10 shares of Apple Computer, would you like to buy them? Yeah, there’s a market for shares of Apple Computer. There isn’t a market for shares of my privately held family limited partnership where I’m the general partner. And if you buy in as a limited partner, you have no voting, no control, et cetera.
So the IRS recognizes a discount for lack of marketability and for lack of control. So if you put $10 million worth of art into a family limited partnership, you can actually pull a lot more than $10 million out of your taxable estate. You can get a discount as much as 30, 40% — you’re pulling out closer to 15 million now on 10 million worth of art. And that’s an excellent way to contribute art to a vehicle or a structure to accomplish the estate planning and the estate tax planning, to get more value out of your taxable estate for the art. In that case that I mentioned with the Warhol Marilyn and the Calders, et cetera, we took, I think, a 35% discount, and we got millions of dollars out of the reach of the estate tax for that family. It was a really beneficial situation.
Sorry I’m talking so much. But the second strategy that I like is what’s called a charitable remainder trust. We’ve done this for art, we’ve done it for other assets. It works very well for appreciated assets, including, for example, family businesses, including art. You put the appreciated asset into a charitable remainder trust, as long as you demonstrate to the IRS that at the termination of that trust — it could be five years, ten years, twenty years — as long as you can show mathematically that 10% of the assets in the trust will go to charity at the end of the trust, then you’ve, A, removed the asset and its appreciation from your taxable estate. B, when the trust eventually sells the art, it doesn’t pay tax on that sale. It avoids capital gains tax. And we’ve done this, as I said, for important works of art. And we’ve gotten tens of millions of dollars out of my clients’ taxable estates via charitable remainder trusts for art and via family limited partnerships for art.
Stephan Shipe: In the charitable remainder trust, there’s the deduction opportunity as well, right, up front? So there’s a huge benefit. And then what do people commonly do then? If you do something like a charitable remainder trust and the art is going — is that mostly going to museums or different types of — like, the only thing that really comes to mind is it must be going to an art museum would be the path. What other paths are there, unless it’s to be sold and then the cash going to some other charity?
Asher Rubinstein: The charitable beneficiaries in the past, it’s been schools, it’s been museums, it’s been foundations. And on that last point, now we can get creative. Because if we’re setting up a charitable remainder trust for a high net worth family with a significant art collection, we can also set up a family foundation for the same client. So the charitable remainder trust distributes to the family foundation. That family foundation could display that art someplace locally, or donate or lend it out to a museum to be displayed, but that little tag near the art will say, you know, the Shipe Family Foundation. And it’s basically a two-step process. The art goes to the charitable remainder trust. The charitable remainder trust feeds into the family foundation. You’ve kept it within the family. The family and the public can enjoy the art, and it avoids estate tax.
Stephan Shipe: Beautiful. I like it. Those are some great strategies. And this is exactly why I don’t think people take this into account enough — how much planning has to happen ahead of time for these things. Because if you have this piece of art that’s appreciating over decades and decades, moving that out sooner, and you’re still able to enjoy it, makes a huge difference as opposed to trying to deal with this a lot later. So I appreciate you sharing that.
Asher Rubinstein: That reminds me also — you can, when you’re dealing with your estate planning ahead of time and you have, let’s say, the patriarch or the matriarch that really wants to enjoy the art. So they’re doing their will or their trust today, but they have many more years to live. They may not want to part with the art. They want to enjoy it. So they might say, okay, I’m going to put the art into this trust, I’m going to reserve a life estate for me to enjoy the art until, at the end of my days, it’s going to go to the kids, or it’s going to go by trust or to a foundation or whatever, but I’m still going to enjoy it while I’m here.
Stephan Shipe: Does that change the deductibility of that on the charitable remainder trust and everything, of when it actually moves? And does it have to move location? So for a charitable remainder trust, if I have a piece of art in the house and I put it in a charitable remainder trust, and ten percent of that at least is going to go to charity, do I have to put it somewhere else, or can it still hang above the fireplace?
Asher Rubinstein: Yeah, it does. That’s a really great question. There are so many technicalities. It might still be able to hang over the fireplace, but you might have to value that enjoyment and carve that out. That monetary value of your present enjoyment might have to be carved out.
Stephan Shipe: Wheels of happiness. Talk about something that becomes a mess of subjectivity for valuation. How much happiness am I getting from that art? I guess it could depend on the day. I wonder if we can even it out — like, some days it makes me happy, some days it makes me sad. So at the end of the year, it’s net negative, right?
Asher Rubinstein: That would be a really personalized appraisal.
Stephan Shipe: Exactly, right? The art’s got to pay me if it has to hang here. And so that works.
Wills vs. Trusts for Transferring a Collection — and Why It Matters
Asher Rubinstein: You know, there’s one other point that I think your viewers may be interested in, and that is, mechanically speaking, if we have another few minutes — what do you do with the art? Is it better to pass the art to the next generation by will or by trust? I think that’s a basic question that people should know about. Here’s the answer. Wills have to go through probate. What is probate? Probate is a court process where the will is literally handed over to the probate court. They look at it, they decide if it was done properly, and then the assets are distributed by the court according to the will. What’s the problem with that? Well, you’ve introduced the government, so it’s slow. Courts are slow. You’ve introduced lawyers and judges and delays. Probate is also public. Everybody can see what’s in the will. So you’ve now given the public at large a roadmap to the kids inheriting the Picasso, which you may want to keep under wraps for safety reasons, obviously.
So for those reasons — the public process, the delays, the costs, et cetera — it’s best to avoid probate. Probate is avoided via a trust. If you convey the art to the trust while you’re alive, and you then pass away, the trust continues to live. The art is owned by the trust, and it circumvents probate. That’s the benefit of a trust. In addition, you set the conditions on inheritance just like you would within the will. The Picasso goes to my son John when John turns 30. The very same provisions about inheritance are kept in the trust rather than the will. The trust avoids probate. And I can also write in certain things in my trust for asset protection. So for example, if the beneficiary of the trust is going through creditor issues or a divorce, in a trust I can write in certain spendthrift safeguards, where maybe distributions to that child who’s having a problem with creditors or a divorce, those distributions are turned off. So in other words, I can get more asset protection via a trust than in a will. Wills have to go through probate. Probate is long, public, and expensive. So for art, I think the best way to convey it to the next generation is by trust rather than by will.
Stephan Shipe: Makes perfect sense to me, putting all that together and having that thoughtfully appointed ahead of time. Well, thank you, Asher, so much for jumping on today and sharing your expertise with us. Really enjoyed the conversation, learned a lot of new stuff, and I’m sure our listeners did as well.
Asher Rubinstein: Fabulous. Thank you so much.
Outro
Stephan Shipe: That’s our show. Thanks for listening, and we’ll see you next week.
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