Almost every asset that can be sold will also be taxed, including valuables such as antiques, fine art, and collectibles. In fact, the rate of federal taxation on collectibles is one of the highest for investment property. When you plan your estate, it is important to take this taxation into account.
You should not leave it to your heirs to decide what happens to your cherished collections. They might not have the same appreciation for these items that you do, or they might end up fighting over particular pieces and cause unnecessary conflict.
You have several options when thinking about what to do with your collections, but you need to know how you regard the collection before making any decisions. If you view the collection as an investment, then you should maximize your profit by timing the sale. It might be best to sell immediately or wait several years. If you only want to maximize the profit to add it to the value of the estate, it might make the most sense to simply pass it on in your will.
If you value your collection for its artistic value, this is another important factor to take into consideration. Maybe a particular family member would appreciate the collection more than any of the others, even if that member is not as closely related to you. Maybe the collection should be sold to an unrelated buyer that will ensure that its artistic value will be appreciated for generations to come.
No matter how you decide to pass on or sell your collections, you must take into consideration both state and federal taxes such as capital gains tax on collectibles, gift tax, and estate tax. These will be slightly different depending on your location.
40 percent is the current top federal estate tax rate, and the federal estate exemption is $5.43 million. What this means is that you can pass up to 5.43 million dollars to your heirs without incurring federal estate liability.
As of 2015, you are able to gift up to $14,000 per year to someone without incurring any gift tax liability. This has a lifetime maximum of the estate tax limit of $5.43 million, above which any further gifts will be taxable. If you gift away more than $14,000 in a year, it is included against your estate tax exemptions.
Capital Gains Tax
Collectibles include a wide range of items, such as stamps, coins, precious metals and stones, fine wines, glassware, or even such trinkets as political campaign buttons. Most antiques are also considered collectibles. The high capital gains tax rate results partly from the argument that such collectibles lack broader benefits, such as innovation or higher productivity. On the other hand, there is a strong argument that the preservation of such items benefit society in other ways.
The capital gains tax for the sale of collectibles is generally set at 28% in most areas of the United States. In California however, capital gains are considered ordinary income and taxed at the regular individual tax rate. Thus, no adjustments are necessary on the California tax return for capital gains income.
It is important to realize that some situations can cause double taxation. For example, if you sell a collection and then pass the money on in your estate, it may be double taxed (depending on the amount). Similarly, if you sell a collection and then gift a large sum of the resulting money to someone, it may be taxed twice.
Planning Your Estate
Here are a few factors to keep in mind while planning your estate when it comes to art and collectibles:
- Decide how you feel about the collection and how you want to deal with it. Is it simply a financial investment, or is there an emotional investment as well?
- When passing on certain items, further documentation may be required. Items of significant historical and military value may be subject to various state and federal laws.
- Get appraisals for all of your works of art. Understand that the value of particular pieces can change over time, so an appraisal done 50 years ago probably means little now.
If you have further questions concerning how to deal with your collections or estate planning in general, having an experienced and trusted estate-planning attorney is a crucial asset. Daniel Higson can give you the legal counsel you need to help you through every step of planning your estate. Call today! 805-644-7111