Collecting art is one of life’s great pleasures. The thrill of the hunt can take you to the world’s great cultural centers and introduce you to a community that shares your passion. Of course, you also get the pleasure of living with your treasures and sharing them with those you love.

If you are building or expanding a collection for investment as well as enjoyment, it is important to keep several key considerations in mind.

State of the Market and Emerging Trends

As reported on Artnet, the global art market, valued at $65 billion dollars, scaled back modestly in 2023 from its record level the prior year.[1] The trend continued into 2024. The Wall Street Journal noted that bellwether spring auction sales in New York brought in $1.4 billion. While this sum was largely in line with estimates of $1.3 billion to $1.8 billion, it is roughly half of the record proceeds. One factor contributing to a recent correction is the lack of blockbuster sales we saw in 2022, which included Christie’s sale of Paul G. Allen’s collection and Sotheby’s sale of the Macklowe’s collection. The spring auctions were notable for several high-profile, one-bid sales, further indications of the market’s thinness.

Conventional wisdom holds that in times of economic uncertainty and geopolitical tensions, collectors gravitate to blue-chip assets. However, results from the most recent auction season seem to defy that truism. As younger collectors join the ranks, the trends are shifting away from the art world’s traditional favorites, High Modernism and Old Masters. Ultra-contemporary artists, those under 40 years old, and, especially, female artists and artists representing minority groups, are becoming increasingly popular. It’s all about identity and how one relates to both the artist and their works of art.

With the art market becoming ever more globalized, Asian, Native American, African, and Latin American art are in the spotlight and are taking market share from Western canonical art. The season’s highest record belongs to “Untitled (ELMAR)” by Jean-Michel Basquiat, an American neo-expressionist of Haitian and Puerto Rican heritage, sold for $46.5 million. The auction results are reshaping art history, as the artist was hailed as the “new Picasso” by Phillips, the auction house that facilitated the transaction.

Sales of Old Masters have been trying to stage a comeback, propped up by prominent interior designers who are adept at mixing old and new. However, the trend seems to be stalling due to limited supply and changes in collector demographics.

Getting Started: The Collecting Conundrum 

New collectors often struggle to balance expressing personal tastes with making sound acquisitions in their desired price range. They often assume that working with an art advisor is reserved for more sophisticated collectors. In fact, it’s frequently beginners who stand the most to gain from an art advisor’s guidance and expertise.

“Many collectors have their earliest purchases tucked away in the closet. Avoid making rookie mistakes by seeking out sound advice from knowledgeable unconflicted professionals from the beginning,” says Nancy Harrison, Partner and the Senior Fine Art Specialist at Emigrant Bank Fine Art Finance and past President of the Appraisers Association of America.

Similar to the wealth management industry, collectors are encouraged to work with advisors who represent their interests and not those of auction houses and galleries. Consider selecting a USPAP-compliant Appraiser per federally mandated guidelines endorsed by The Appraisal Foundation and by the U.S. Congress. 

In addition to helping define the goals and vision for the collection and selecting what they believe to be the best pieces within a defined price range, a knowledgeable art advisor can assist with a variety of critical tasks, ranging from legal structuring (LLCs are preferred for privacy and estate planning reasons), to authenticating, to negotiating with sellers, to shipping, crating, installation, preservation, and storage – more on that later. 

“Nascent collectors starting out have the opportunity to train their eye and learn their personal tastes, but also to develop best practices with managing and maintaining a collection that’s likely to grow and evolve over time,” says Emily Thompson, a New York-based art advisor and valuation expert. These best practices include keeping sales receipts and invoices, along with relevant exhibition collateral and sale catalogs, all of which will help establish a cost-basis for future planning and aid in any further authenticity or provenance research that may be required by the IRS, appraisers, or selling venues down the road.

Risk Management 

Art values are influenced by many factors, including aesthetic quality, condition and dimensions, subject matter and provenance, curatorial support, and gallery representation. Consequently, insurance values can change significantly over time. Celia Santana, President and CEO of Personal Risk Management Solutions, recommends updating appraisals every three to five years.

Most elite insurance carriers will insure fine arts on a blanket or scheduled basis. Scheduling an item lists individual pieces with specific values, while the blanket option provides one coverage limit that can be utilized as needed across multiple pieces of art. Celia points out that if art is not scheduled, it is considered “contents” on a homeowner’s policy. The coverage is, therefore, more limited, and it is typically subject to a high deductible. For example, if art is damaged from a flood, it is covered under a schedule but not under the homeowner’s policy. Increasing climate risks make obtaining coverage more challenging, especially in coastal areas such as Florida and California.

Transit – whether it’s acquiring art, loaning, framing, restoring, or moving between residences – is one of the top causes of loss for fine arts. Celia Santana recalls an instance when a new purchase of a $5 million painting by a modern master was about to be shipped by an overnight carrier rather than a specialized carrier, which could have ended in disaster. She recommends always retaining professional packers and shippers when transporting art.

Condition reports should always be completed prior to and post shipping to ensure no damage has occurred in the moving process, and the responsible party can be held accountable if it has. If art is loaned, the gallery or museum’s insurance policy may not cover it. Before agreeing to lend your art, you will want to read the loan agreement carefully. Art installation should be done by experienced, insured, and bonded professionals, and you’ll want to be aware of temperature, humidity, exposure to sunlight, and the display location, which could be risk factors. Importantly, storage facilities should be vetted to ensure that art is properly protected. Facilities should adhere to environmental controls, have a strong security system, and have staff trained to handle fine art. 

Take on Taxation

“Buying art is easy; selling art is hard,” says Suzanne Gyorgy, a Partner at Emigrant Bank Fine Art Finance. Similar to financial markets, taking a long-term view is key to building a fine art collection. That said, selling is an integral part of the collecting process, either to make space for new pieces or to reap the financial benefits of works that have gone up in value.

Taxation of artwork is complex and varies greatly by jurisdiction and type of market participant. According to the IRS, in the U.S., works of art held for one year or less are subject to personal marginal income tax of up to 37%. In addition to the Federal income tax, most states levy state income taxes, ranging from 2-13.3%. Works or art held for more than one year are taxed at the maximum rate of 28%. There is an additional tax on net investment income in excess of $200,000 for a single taxpayer ($125,000 for a married taxpayer filing separately, $250,000 for a married taxpayer filing jointly). 

In those instances where art is sold to raise funds for new acquisitions or other cash flow needs, art lending can be an appropriate – and tax-efficient – solution. Lenders typically underwrite both the borrower and the work of art. Terms vary, yet a common structure would include a floating interest rate, an approximately 50% loan-to-value, and a loan term of up to ten years. Art lending can also be an effective estate planning tool that may provide liquidity in an estate that is otherwise illiquid.

Legacy Planning 

Fine art collectors have several options for transferring assets during their lifetime and at death. In addition to selling outright, they can make a gift to family members or donate to charity. The hard truth many collectors eventually face is that while their heirs might inherit their passion for collecting, they might not want the actual pieces, be it “brown wood furniture” or Ming Dynasty ceramics, that their family collected. Where lifetime transfer is appropriate, advanced gifting techniques such as family limited partnerships, limited liability companies, and grantor-retained annuity trusts can be used to minimize transfer taxes. A common technique is using one’s annual exclusion amounts to transfer fractional entity interest to the next generation.

While donating artwork to charitable organizations can result in significant tax benefits, finding a suitable recipient is not a trivial matter. “Do not blithely assume The Met or the MoMA would be thrilled to accept a donation of your artwork. Consider that on average, only 5% of a museum collection will be on display at any given moment, and the mounting costs of storage, insurance, and conservation necessitate selectivity and precise curatorial criteria,” cautions Gabrielle Segal, art consultant, accredited appraiser, and founder of GS Art Concierge. Gabrielle encourages collectors to look beyond major museums to university collections, libraries, or even hospitals as potential donation recipients. There are also online resources such as MuseumExchange that help match artworks to institutions.

If you have a prominent or extensive collection, creating your own museum using a private operating foundation can be an option. However, in addition to vision and passion, this path requires substantial resources, both at the outset and on an ongoing basis, so you’ll want to conduct serious due diligence with knowledgeable advisors.  

In Conclusion

Whether you’re starting out, adding to the collection, or planning a legacy, our advice is to choose quality over quantity. At the end of the day, the most successful collectors buy what they love – they educate themselves and develop their connoisseurship. If one truly loves a work of art, the fluctuations of the art market will matter less than having works of art to live with and enjoy. Surrounding yourself with qualified professionals including art advisors, appraisers, attorneys, risk managers, and financial specialists makes your collecting journey more secure and enjoyable.

Contact us to connect with a Cerity Partners advisor who specializes in tax and wealth planning.

  1. Source: The Art Basel & UBS Art Market Report 2024. ↩︎

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