For families who own large collections of wine, art, cars and so on, what happens when your kids don’t want it? This is the big question Andrew Cohen tackles this week after speaking with industry experts who specialize in collectibles. There’s clearly the sentimental connection and family dynamics issue for any family, but there’s so much more to it from a tax, trust and estate planning perspective. Read on to see some of the challenges that can lie ahead for collections that need to be transferred.
In the newly released annual UBS Global Family Office Report, the data showed something quite intriguing: Family offices have a major opportunity for institutionalization. While digging into the meat of the study, I saw that governance and succession planning are still lacking with most families. And if they get the message that it is important, they can make the most out of their family office structure.
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: Your heir doesn’t want to keep your collection. Now what?
By ANDREW COHEN
When Cuban-born art collector Rosa de la Cruz passed away at 81 years old in February after an illness, the Miami art community mourned the loss of a culture-defining figure and philanthropist who helped build their city into a premier art destination.
De la Cruz settled in Miami in the 1970s with her husband, Carlos de la Cruz, who built wealth through his beverage distribution business. Together, in 2009 they opened the de la Cruz Collection, a private museum in Miami’s design district that showcased their contemporary art to the public for free. In the early 2000s, the de la Cruzes began hosting an annual dinner party at their Miami home during Art Basel to exhibit their collection, before crowds became too large for their home.
In early April, not yet two months after Rosa’s death, the de la Cruz Collection museum permanently closed after 15 years. Neither her husband nor their five children chose to keep the collection, which is now being auctioned by Christie's and which brought in $34 million in its first sale May 14 in New York.
“Rosa’s wish was for each of the artworks she loved so dearly to find new homes where they can enter their next chapter and continue being seen, loved and appreciated for years to come,” said Carlos de la Cruz.
The sudden transfer of Rosa’s collection jarred the local arts community, said Karen Boyer, an art adviser based in Miami.
“It came as a huge shock to the art world that literally a couple weeks after she died, it was announced that they were selling everything,” Boyer told Crain Currency. “People are devastated about it because that’s all she cared about was her art collection. But I guess the family doesn’t want it, the kids don’t want it. They’d rather have the money. They don’t want to pay for storage since they closed the museum.”
Whether a family has collected art, cars, watches, jewelry, yachts, wine, etc., the passion and sentimental value of these objects often are not passed down to heirs.
“It’s much more common for the kids to not be interested in their parents’ art,” said Matthew Newton, an art advisory specialist with UBS Family Office Solutions. “A lot of times, the parents love it so much, they just assume the kids will want it.”
Having forthright conversations about how family members view their collections is paramount to a successful transition of assets to the next generation. Of course, these can be uncomfortable conversations around planning for the deaths of loved ones — and some families mistakenly delay these discussions until the near end of life or never have them at all.
“I really feel as much as you can have those conversations directed by the matriarch and patriarch of the family as to what their intentions are, that is the best possible solution,” said art adviser Warren Winegar, a former head of client services at Sotheby’s.
Winegar also worked with a family whose patriarch collected over 200 cars.
“There were only three sons that stood to inherit all this. One of them is a big car enthusiast, and the other two are not so much,” he said. “They’re having conversations about what they’re gonna do, and the pieces that the car enthusiast really wants, he’ll have that value deducted from his overall inheritance. He gets those objects, and the other pieces will either be donated or sold in time.”
Tom Ruggie, CEO of the Destiny Family Office, owns a multimillion-dollar sports memorabilia collection. “If you have a $10 million collection, and you want that to go to one heir, you want to equalize the estate,” he said. “So that means the other heirs might receive cash, a house, insurance policies or whatnot.”
Before selling collectibles or donating to charity, family members should seek an appraisal to understand the market for their asset. The insurance company Chubb generally recommends that items get reappraised every three to five years to match their insurance policy value with the market outlook. Items that have recently had hotter markets, such as postwar contemporary art, should be appraised every one or two years, said Laura Doyle, Chubb’s senior vice president of fine art and valuable-collections product manager.
“Provenance documentation is incredibly important anytime a collection is transferring,” Doyle said. “The provenance would be the ownership history of an item; that can include things like invoices, prior appraisals, fact sheets, condition reports, any documentation that’s affiliated with the collection. That can be critical for the purposes of valuation — establishing ownership, title and authenticity.”
DEATH AND TAXES
One of the main reasons that next-gen heirs decide to sell collections passed down to them is the costs associated with storing these assets, such as renting lot space, insurance and maintenance upkeep for a luxury car collection. “Do they have the ability to afford to maintain the collection?" Ruggie said. "And if not, is your estate large enough to appropriate funds so that they can continue to maintain the collection?”
“Significant collections usually have a staff taking care of those vehicles,” added Scott Devine, a car specialist and southeast growth leader at the Marsh McLennan Agency.
Some of New York City’s most notable public art collections were donated by the estates of individuals, such as the Frick Collection from Henry Clay Frick or the Whitney Museum of American Art from Gertrude Vanderbilt Whitney. In these cases, it is important to understand the moment that insurance policies kick in for these collections heading to museums.
“If you plan to donate something to a museum, have a written agreement in place, and understand when title will transfer to that museum and when the museum is actually responsible for insuring those items,” Doyle said. “In some cases, museums will agree to insure items as soon as they physically accept them; so the moment it’s transported and delivered to the museum, they can start insuring it. In other cases, some museums will offer to insure items while they’re still in the collector's possession before they’re physically transferring over to that institution.”
While auction houses can typically net the largest returns for art, working with advisers for a private sale provides a safety net for sellers who do not initially fetch their desired bids. Since private sales data is not tracked, failing to reach a desired sale price won't be made publicly available knowledge, unlike recordkeeping from auction houses.
“If you’re doing a private sale, and you’re doing it on your own, you have to make sure the sales tax is paid wherever there is sales and use tax, because both seller and buyer could be responsible ultimately if it’s not paid to the state,” Rosemary Ringwald, managing director, wealth strategies adviser and head of art planning at Bank of America Private Bank, recently told Crain Currency at the TEFAF New York Art Fair. "When you go through an auction house, they take care of that for you."
A recent study by Bank of America Private Bank found that the average price of artworks sold at auction in 2023 decreased by 32%, the largest single-year decline in over seven years.
“The timing of sales is a really important factor," Newton said. "And this is where it can get a little tricky for families, because if you have an estate tax liability to settle, then there’s a certain timeline that a sale may need to be accomplished in. The art market, however, is incredibly illiquid for most objects. So you might need to wait as much as two or five years.
"Navigating the timing of when and how to sell something to optimize value can be tricky. Some families choose to use a credit facility to bridge that gap. They might take out a loan on the value of the collection that would allow them to pay the estate tax bill while they look for the optimal time to sell something.”
Estate planning attorneys will be very involved in the transfer of collections to heirs. The federal government’s estate tax exemption currently allows gifts of up to $13.61 million in assets tax-free, and married couples can give roughly $27 million. But with the Tax Cuts and Jobs Act, signed by then-President Donald Trump in 2017, set to expire on Jan. 1, 2026, those exemption figures could be cut in half depending on results of the upcoming elections.
“That’s a significant earthquake in the tax planning and estate planning world,” said Bank of America's Ringwald.
“In the meantime, everyone that has the financial wherewithal is moving assets out in order to meet the $13.61 million on each side, in terms of a married couple if they can afford it. If they can’t, they’re using spousal access trusts that allow them to set up a trust for their spouse and ultimately receive back income potentially in principal from their spouse in a tax-free transfer. For getting assets out of their estate, a lot of people want to use art and collectibles for that.”
Families commonly seek to take advantage of the step-up in U.S. tax policy that lets heirs reduce capital gains taxes on inherited assets and property. Instead of imposing tax on the value that an heir sells an item for, the Internal Revenue Service resets that value to the original owner’s purchase price.
Doug Johnson, a chair member for the ultra-high-net-worth peer group Tiger 21 and a lifelong wine collector, warns against letting tax advantages weigh too heavily on decision-making.
“One thing we always hear in our family office groups is don’t let the tax tail wag the dog,” Johnson said. “Yes, if there are tax benefits, definitely take advantage of them, but don’t let it determine the timing. Is this something I still want to hang onto, is the market timing right for this type of asset? If no one in my family is interested in it, and the state of the market says I could get top value for it, I’m going to sell it potentially regardless of the tax implications.”
UBS study uncovers staffing, succession planning as major pain points for family offices
By KRISTEN OLIVERI
UBS’ newly released 2024 Global Family Office Report revealed that most family offices need to better prepare to address potential challenges to their governance, success planning and staffing.
Judy Spalthoff, UBS' managing director and head of family office solutions, told Crain Currency that many family offices should shift their thinking and view risk management more holistically.
Among the report's findings, 59% of family offices say they have measures or procedures, or both, in place to deal with financial risk and 40% to handle economic risk. But only 24% focus on reputational risks, and just 14% address medical risks and travel emergencies.
Furthermore, planning is inadequate for “key person” risk and overall succession planning. Among respondents, 39% of family offices say they currently have a plan to address “key person” risk within the family office, yet only around a quarter have a succession plan for the family office to deal with business risks such as continuity of staff and services.
“It’s not just the financial capital,” said Spalthoff. “It’s also the human and intellectual capital that the family needs to be looked after holistically.”
In terms of investing, the report also indicated that family offices followed through on their plans to make material shifts to asset allocation from the previous year, rebalancing portfolios and making allocations to developed-market fixed income. Also, because of commercial real estate prices, families have pulled back for the moment in that sector, awaiting a correction in the market.
This year’s UBS report had its largest amount of responses to date — from 320 single-family offices across seven global regions, representing families with an average net worth of $2.6 billion.
LOOSE CHANGE
A $1.7 million supercar for penthouse use is latest Seattle bet: First Light’s top condo ($5.1 million) comes with the use of a custom-designed McLaren Elva.
Orion hires Ron Pruitt to lead wealth management division: He previously was senior vice president of Nasdaq Analytics, where he oversaw the acquisitions of two investment analysis software firms.
Official debuts luxury home design services in Aspen with Jake Arnold: The new program will begin in Aspen, where Official just opened its office designed by The Expert, a firm owned by Arnold.
Help us with a story: We’re working on a story about investing in sustainable fashion. If you have any comments on the topic, reach out to [email protected].