Collectors and the Fiscal Cliff: Ho Hum

Advisors can help affluent accumulators long before the euphoria of a new acquisition (or sale) wears off

By Randy Fox

Key Takeaways:

  • Collector cars are considered tangible personal property. When the property is sold for a profit, owners must pay capital gains tax at a higher rate than for marketable securities.
  • Because they are so caught up in the fun part of acquiring, collectors and their advisors often overlook various planning methods they can use to reduce tax liabilities prior to the sale.
  • A Flip-CRUT is a special type of charitable trust that is suitable for holding non-income-producing assets that will be sold at a later date. At some point the trust converts permanently, or “flips,” to making regular payments just like a standard CRUT.

The recent “fiscal cliff” crisis that pervaded much of the year-end financial news ended up being resolved with very little impact on most taxpayers. No real surprises were in the new law except perhaps the continuation for the foreseeable future of the $5 million estate exemption. The wealthiest taxpayers will pay higher income taxes, and the rest of Americans will remain mostly unscathed until the next crisis comes along. With the uncertainty behind us, it is now somewhat easier to undertake planning with a degree of confidence that the tax law won’t change dramatically enough to nullify otherwise thoughtful decisions. With more predictable tax rules as a backdrop, it may be helpful for advisors and their affluent clients to review various planning solutions for the longer term.

Collectors, especially car collectors, have been of interest to me for many reasons. Not only do they tend to be HNW individuals, but they also tend to be uniquely passionate and driven by their hobby (no pun intended). At a recent collector car auction, a rare Ferrari sold for $7.5 million in less than 10 minutes of bidding. In fact, at this particular auction site, 12 cars each sold for more than $1 million, while the auction average was more than $336,000 per vehicle—serious financial commitments for all sides of the transaction indeed.

However, when you take away the passion of the frenzied bidding and the joy of the new acquirer and the relieved seller, there is a personal economic impact that must be considered. Collector cars and other collectibles are considered tangible personal property. So when they’re sold for a profit, capital gains tax is owed by the seller. Tax at the federal level is 28 percent, while state tax varies depending on the residency of the seller. Because they are so caught up in the fun part of collecting, collectors and their advisors often overlook various planning methods they could have used to reduce taxes prior to selling.

Real-world example

As an example, let’s take the $7.5 million Ferrari. The seller purchased the car for $2.3 million and invested another $600,000 in a complete ground up restoration. That means that before selling costs his tax basis is $2.9 million and thus his capital gain was $4.6 million. A nice check to the federal government of nearly $1.3 million is now owed by the seller. He nets around $3.3 million, and life goes on.

However, let’s look at an alternative approach that might make this transaction much more favorable for the seller. Prior to the auction, our 63-year-old seller and his 61-year-old wife transfer the Ferrari to a Flip Charitable Remainder Unitrust (Flip-CRUT). A Flip-CRUT is a special type of charitable trust that allows non-income-producing assets to be placed in trust, and sometime later in the future after the asset is sold, generally the trust “flips” to a Standard Charitable Remainder Unitrust (SCRUT) and begins distributing income normally to the husband and wife who established it.

What are the consequences of this transaction for the seller? First, because the balance of the trust will pass to charity when the last of the sellers dies, there is a charitable income tax deduction available. The amount of the gift is based on the current value of the property, not on what it will be worth in the future. Because this is tangible personal property, the deduction is calculated on the tax basis of the contributed property, not on the full fair market value. In this case, we know the basis was $2.9 million. This produces a charitable income tax deduction of a little more than $683,000. Even in the 35 percent income tax bracket, this will save almost $240,000 in income taxes. And, like other charitable deductions, our Ferrari seller has this year and the next five years to utilize the deduction on his income tax return. Next, there is NO capital gains tax due on sale. Flip CRUTs are exempt from income tax, and therefore the sale leaves the entire $7.5 million available for reinvestment. Ultimately, this will produce an income stream for our selling couple that will continue for their lifetimes. Income from a 6 percent payout trust, which was used for this example, begins at $450,000 per year.

If all goes perfectly, the Ferrari sellers will receive more than $12 million in income from the trust over their lifetimes. They’ll save more than $1.5 million in income tax and leave a charitable gift of close to $10 million to the charities they choose. They will also remove the value of the Ferrari or its sales proceeds from their estates. And while they have done that, they have also removed it from their children’s inheritance. That issue can be resolved if they so choose, normally with the purchase of life insurance outside the estate to replace the “lost” asset.


While collectors pursue their passionate assets, advisors must position themselves in a way that allows the collector to be better-informed about the various choices that are available for the ownership and effective disposition of their collectible assets. This may mean millions of dollars to the collector over the course of a collecting lifetime.

About the Author

Randy Fox is Editor in Chief of Planned Giving Design Center and is the regional representative of Charitable Giving Resource Center.