ELITE ADVISOR BEST PRACTICES

Red Ferrari Sells for Nearly $18 Million

Why are the buyer’s and seller’s advisors worried?

By Elite Advisor Report

Key Takeaways:

  • Interest in collectible cars has been growing since the financial crisis ended, with more than 5 million collectible vehicles in circulation.
  • A popular index of collectible cars’ value has surged 230 percent since 2008 versus 117 percent for the S&P 500.
  • Collector cars and other collectibles are considered tangible personal property and incur capital gains tax when sold for a profit. A Flip-CRUT can ease the tax bite.
  • Experts say many collectible cars—and their owners—are significantly underinsured.

Late last month, at RM Sotheby’s, a 1964 Ferrari 250 LM—one of 32 of its kind—sold for $17.6 million, a record for the car. It was among ten Ferraris in the collection.

An orange 1998 McLaren F1 sports car sold for $13.8 million, a record for the car. Its value had been estimated at more than $12 million. A 2005 Ferrari Enzo, built as a gift for Pope John Paul II, fetched $6.1 million, which was at the high end of its estimate. But a rare yellow 1960 Ferrari 250 GT SWB Berlinetta Competizione, with an estimated value of $17 million, failed to find a buyer.

Demand for Ferraris and other desirable vehicles is at an all-time high, while pickup trucks and station wagons are joining the ranks of collectible vehicles. There are more than 5 million collectible cars in the U.S. Hard to believe, but with more buyers than sellers, valuations continue to rise.

Hagerty, an insurance company that focuses on classic cars, tracks the value of collectible cars. Hagerty’s Blue Chip Index, which tracks 25 collectible automobiles from the post-World War II era, gained roughly 230 percent over the five years ending in May 2014. That easily tops a 117 percent increase in the S&P 500. The Hagerty Blue Chip Index was up about 14.7 percent year-to-date through May—again far outpacing the S&P 500.

But before you and your clients rush off to get rich and have a blast at the next high-end auto auction, make sure you know all the tax and insurance issues before you hit financial potholes that you’ll regret more than rush-hour traffic on a toll road.

Make sure you can sell before you buy

If you have clients thinking about selling a collectible car, make sure they don’t drive off the tax cliff. Collector cars and other collectibles are considered tangible personal property and incur capital gains tax when sold for a profit. However, as Elite Advisor Report contributor Randy Fox explains, your clients can use a Flip-CRUT to ease the tax bite. According to Fox, co-founder of EzCharitable and editor in chief of Planned Giving Design Center, “a Flip-CRUT is a special type of charitable trust that allows non-income-producing assets to be placed in trust and then, following a ‘triggering event’ defined in the trust document (in this case, the car is sold), the trust ‘flips’ to a Standard Charitable Remainder Unitrust (SCRUT) and begins distributing income normally to the husband and wife who established it.”

What’s more, because the balance of the trust will pass to charity when the second of the sellers dies, Fox says there is a charitable income tax deduction available. The deduction is based on the present value of their future gift and is calculated by a formula that takes into consideration the cost basis of the car, the amount of income to be paid from the trust, the number and ages of the income recipients, and current interest rates.

Getting up to speed on collector car insurance

If parts, labor, repairs, storage and taxes are not enough to make you think twice about taking up this turbocharged hobby, there’s the matter of insuring your automotive babies.

When it comes to specialized collection insurance, people tend to think of policies that cover rare and often irreplaceable items such as Impressionist paintings, Bordeaux wine or Tiffany lamps. But what about cars? As guest contributors Rand Silver and Ron Fiamma from AIG’s Private Client Group explain, part of your strategy is to ensure that everything has been done to protect your clients’ portfolios, including specialized insurance for collector cars. Insurance policy details for collector cars can vary from carrier to carrier, but these are some key coverage details, according to Silver and Fiamma:

  • Agreed value coverage
  • Worldwide coverage
  • Full transit coverage
  • Single liability policy for the entire collection
  • Market appreciation coverage to account for rising values
  • Diminution in value coverage for partial loss
  • Automatic coverage for new purchases

Silver and Fiamma explain further that a knowledgeable insurance carrier also will draw from its risk management experience to help your client answer these key questions:

  • Are the vehicles’ values accurate, and is the collection insured to value?
  • Is the garage facility properly constructed to withstand floods, tremors or storm surges?
  • Is there an emergency evacuation plan in place for the collection?
  • Are vehicles in low-lying areas on risers to prevent damage from a flood?
  • Are necessary vehicle repairs or restoration being performed by qualified experts?
  • Is the transportation company suited to the needs of the car and the move?
  • Has the appropriate international shipping protocol been put in place for a smooth overseas transit?
Conclusion

While collectors pursue their passion for assets, advisors must position themselves in a way that allows the collectors to be more 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, and peace of mind while enjoying the finer things in life.

Click here for more about Understanding the Collector’s ‘Disease’.