Estate Planning for Art Collections

Key insurance considerations to help high-net-worth clients preserve their assets and legacy

By Katja Zigerlig

Key Takeaways:

  • A surprising number of people do not plan carefully for the distribution of their valuable collectibles.
  • An undocumented, un-appraised collection may increase estate costs.
  • Insurance is an integral part of asset protection, enabling collectors to preserve value when it’s time for pieces to change hands.

Art auction sales in 2013 are on track to surpass the healthy results of 2012. Record prices for blue-chip artists such as Berthe Morisot, Jean-Michel Basquiat and Roy Lichtenstein attest to continued collector demand and appreciation for top-quality work.

Passionate collectors typically buy out of love, but fine art also can be a shrewd investment, one that benefits future generations. Many collections—whether of paintings, antique furniture or other prized items—have timeless value. Yet while most individuals make careful plans about how to disperse their real estate and stock portfolios, few are as diligent about determining the fate of their collectibles.

Some owners may bristle at the suggestion that their carefully honed collections are commodities, but most would not want heirs or beneficiaries to face unexpected estate taxes or receive works that have lost their assumed value due to incidental damage, outdated appraisals and more.

As the commitment to collect increases, there needs to be a corresponding change in perspective. It is prudent and fiscally responsible for a client to decide how to distribute an art collection, whether during their lifetime or at death. And to preserve value along the way, it is critical for your clients to obtain adequate insurance coverage and implement sound risk-management tactics.

Dispelling a myth

Many collectors believe that purchasing an insurance policy or having an appraisal will result in a higher tax burden. This is incorrect. Sometimes there are tax implications for owning valuable collections, but holding an art insurance policy would not by itself increase one’s tax responsibility. Of course, you should always consult with your tax advisor for your specific situation.

An appropriate insurance policy provides protection for the duration of ownership, from the moment a piece is purchased until it is de-acquisitioned. Maintaining appropriate insurance on a collection ensures that the collector is compensated in the event of any loss or damage to the artwork, thereby preserving the value of the legacy that will eventually benefit heirs, family, the community or designated charities. In addition, an insurance company with expertise in protecting valuable art can provide the collector with suggestions about risk management and loss prevention. This will help prevent erosion of the collection’s value. Essentially, insurance protects the value of the estate for heirs and beneficiaries.

Defining the options

As a trusted advisor, you can help your clients effectively manage the transfer of high-value collections and educate them on the merits of related insurance solutions.

Many collectors choose to live with their art and disperse their collections at death. A comprehensive art insurance policy insures the collection against breakage or other damage during transit and major catastrophes such as wildfires, windstorms, hurricanes and floods. For clients who have promised gifts to local museums, those nonprofits can be added to the policy as “additional named insureds.” If collectors have trusts or LLCs, those entities can also be added to the policy as the “named insured.”

Setting up foundations has become another popular method for collectors to make tax-advantaged acquisitions and share their artwork with their communities. The insurance requirements for a private foundation can become more complex. An art insurance policy is only one of the key coverage needs. Also consider:

  • An excess liability (or “umbrella”) policy to protect the foundation against lawsuits involving personal injury or property damage
  • A “Directors and Officers” policy to protect foundation board members against lawsuits
  • Workers’ compensation insurance for the curator, security guards and other foundation staff
Outlining art insurance benefits

A private collections insurance policy protects heirs’ inheritance from the largest cause of loss—breakage and accidental damage. It also provides coverage that is not usually offered on a standard homeowners policy, including:

  • Automatic coverage for catastrophic perils
  • No class limits for scheduled items
  • Coverage for diminution of value
  • No deductibles (typically)
  • Worldwide coverage

Worldwide coverage is particularly important for your clients who have a global lifestyle, who have heirs around the world and/or who sell their collections in the global marketplace.

Financial advisors are in a pivotal position to help clients protect their collections during their lifetime and beyond. Collections are not only culturally and aesthetically valuable, but they are also a tangible asset that should be addressed in wealth management and legacy planning. Acknowledging (and clearly defining) the collection’s value and discussing the relevant decisions collectors need to make can help ensure the owners’ legacy continues to benefit their heirs and community.

About the Author

Katja Zigerlig is Vice President, Fine Art, Wine and Jewelry Insurance for AIG Private Client Group. Prior to joining AIG in 2004, she underwrote insurance for private collections, museums, galleries and exhibitions for AXA Art Insurance Co. She also worked at the Walker Art Center in Minneapolis and interned at the National Gallery of Art in Washington, DC. Ms. Zigerlig has BA and MA degrees in art history, with a specialty in 20th Century art. She is a member of several arts-related organizations and speaks internationally. She has been quoted in the Wall Street Journal, The New York Times, Financial Times, Bloomberg, Art & Auction and has appeared on CNBC's Power Lunch.