As a lifelong “car man,” I have been adding to my car collection for 35 years. As a financial planner, I have come to realize that there are implications for my wife and daughter that are different from most other investments and assets that people own. In my case, it’s classic cars, but the same issues apply to any type of collectible that has substantial value. Your collection may be comics, baseball cards, fine art, jewelry, antiques, coins, or a library of rare books. Often people who have one collection have others, which complicates the situation.
The problems begin when you pass away and the heirs have no knowledge or interest in your lifelong passion. They have no idea where to start or even who to contact when it comes to their specialized interest.
This is only a partial list of details that need to be decided in advance for a spouse or children who are likely to be the executors of your estate. Often that is not the case, and the task is so daunting that the collection is sold at clearance prices just to get rid of the problem. Sometimes it is ignored and the collection is saved and forgotten. We’ve all heard of priceless works of art found in a basement or attic. Those of us in the world of classic cars dream of discovering a classic Jaguar or Ferrari barn. Sometimes entire car collections have been under lock and key for decades. There are television programs dedicated only to this topic. Every barn car was the pride and joy of someone who was left behind and neglected.
I realize that other than taking an occasional walk in the country or attending a national show, my wife has little interest in my lifelong hobby. Fortunately, she tolerates my habit. This leaves me and my fellow collectors with the problems I have outlined.
What to do about it?
The first and most important step is to document what you have. Make sure anyone who comes after you can easily understand what’s in your collection and how much it’s worth. This record must be updated when the collection grows and values change. If possible, include details about your collection in your records. This will help you understand why your 1966 Shelby Cobra is worth $1,200,000 and not $600,000. History and condition are often the difference between these values, whether it’s a classic car or a baseball card.
The next breadcrumb to leave is who they should contact to sell your collection. Executors find it easier to send everything up for auction in one lot, regardless of what is being sold. This liquidation sale approach can severely decrease what your heirs and your net worth are. Often you will want specific items to go to the specialist or place that will maximize the selling price. These specialists can also value the collection more accurately for estate tax purposes. This is especially important for high net worth individuals, where a federal estate tax may apply. A 40 percent tax is serious business and having the wrong value can be very expensive! I’m sure you don’t want the IRS looking for the values in a book or on eBay! Be sure to include who to contact in your notes.
Even if no federal estate tax is due, there can often be capital gains taxes. Without knowing the cost of the items in your collection, your spouse could end up paying hefty capital gains from the sale of a life passion that he has no interest in or knowledge of. Once again, keeping good notes and documentation is essential to not giving the IRA more than is necessary. Planning can also help reduce the tax impact. Most collectors prefer to see part of their collection given away to a museum rather than sell it to pay taxes to the IRS. If you leave instructions on what items and where to donate them, the tax deductions could offset most or all of the taxes due on the sale of the rest of your collection. Oftentimes, donating the entire collection to one or more museums can offset other estate taxes that may be due. Consulting with your estate planner and accountant will help you make the right decisions for your situation.
Artworks must be stored safely in a properly climate controlled environment while waiting to be sold or donated. A collection of cars needs maintenance and care. Jewelry, coins or any other valuables must be locked up for safekeeping. Collections are often huge, take up a great deal of space, and can take longer to determine their disposition than the house or property where they are kept. It is important that the executor knows where, who and how. The Store-More down the street is not going to cut it.
While we’re at it, let’s discuss the insurance you must have while you settle everything. The owner of the collection has died. In some cases, your insurance coverage ends when they do. The executor will need to purchase an insurance policy to cover charges for theft, fire, and other perils. Without it, everything can be lost and is often overlooked in a property.
Finally, make sure your legal documentation is up to date and in a safe and familiar place. The executor must have access to receipts, letters of provenance, and title deeds. Often in the world of classic cars, titles are signed but not processed in the name of the collector. This can be a nightmare when the details needed to prove ownership die with the collector. It can get worse when both the previous owner and the collector are deceased. Do yourself and your heirs a favor and make sure everything is in order.
There are now estate planning services that specialize in helping to ease the burden on families who are forced to deal with these types of situations. Specialists who collaborate with other experts to value and sell your life’s work. They help create a plan that reduces the tax burden and simplifies a complex problem. Find one that works in your area of interest and plan on making your family’s life a little easier. Don’t let your collection be the next barn find!
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