Interview of the Week: Evan C. Beard, Art & Finance Leader, Deloitte Consulting
How is management of an art collection similar to the management of other financial assets?
The increasingly financialized, globalized, hedge fund-ized art market has cultivated a new breed of art collector who examines art as much for its behavior as a capital asset as for its aesthetic utility. This is quite a shift from the Renaissance ideal of art collector as patron, passion-seeker, and status-signaler.
Until recently, managing an art collection was largely curatorial or conservationist in nature. Yet with art market’s global expansion, its new sources of liquidity, its new financial structures, and its evolving tax & regulatory regime, collectors now have little choice but to incorporate traditional asset management techniques into the management of their art collections. Sure art is a heterogeneous, cash negative asset subject to shifts in prevailing taste and critical acceptance, but it still deserves as much bespoke tax and wealth planning considerations as your financial investments.
Why should one analyze the potential future value of a work of art before making a purchase?
We all love price appreciation but price appreciation in the context of an art collection can generate unique financial hurdles. Take for example the U.S. Tax Code and its byzantine treatment of capital gains on art.
The long-term capital gains rate on art varies based on whether the IRS considers you an artist, collector, dealer, and investor. Artists and dealers are limited in their charitable tax deductions up to their cost basis while investors may claim a deduction equal to fair market value of their work. It’s all absurdly
complex. But collectors should know that despite the art market’s famously violent price swings, returns of high art have consistently managed to keep pace with inflation over the last 100 years, which means you will likely be faced with capital gains consequences in an estate planning or de-accession situation. So start planning early. Seek advice on the various planning strategies and trust structures at your disposal. Don’t be the collector that leaves your heirs with an illiquid tax liability.
When and how often do artworks require appraisal?
The required frequency of appraisal is situation dependent. For insurance purposes, three to five years is typical. If using your art as loan collateral, most financial institutions will require annual appraisals by a qualified professional appraisal firm.
In certain situations like paying estate taxes, dividing property in a divorce,
conducting a like-kind art exchange, or determining the reserve price of an auction consignment, you will need a spot appraisal. The critical step is to find an appraiser with deep knowledge about the type of work you collect.
Why is it imperative that the works in the collection are insured?
Property and casualty insurance has been customary in the west since 17th Century when the Great Fire swept through and destroyed much of Early Modern London. Still art insurance is not always an imperative. Collectors should first ascertain whether their art collection is covered by their existing property or casualty policy. If so, they should determine the scope of that coverage. If the collection is significant in size, collectors should consider a specialized art policy. Although such policies typically won’t cover losses from
regular degradation, re-attribution, forgery, or damage from conservation work, they will accelerate the claims process in case of loss. Second, collectors should determine whether a blanket (set amount) or scheduled (per painting) policy is more cost effective. If the entire collection resides in a flood or tornado zone, scheduled coverage may be necessary. If the collection is spread among many homes, then a blanket policy will likely be more cost effective.
Third, regular collectors should consider title insurance to mitigate the risks of acquiring a work of art that has previously been stolen or when issues impair clear title transfer. Finally, rare situations exist when art insurance is simply not cost effective. Many would be surprised to learn that institutions that hold art in perpetuity often don’t have art insurance. The Oslo National Gallery was not insured against theft when Edvard Munch’s “The Scream” was stolen in 1994 and the Isabella Stewart Gardner Museum lacked coverage when works that included a Rembrandt, Degas, Manet, and Vermeer were famously lifted in the biggest art heist in history. Insurance coverage would have been little consolation.
Why do all transactions need to be documented, properly recorded and securely stored?
Provenance is a key price driver. A gap in provenance, especially if it appears during the Nazi era, can significantly impact the market value of a work of art. At Deloitte, we’ve worked with clients who’ve had works appraised well into the eight figures but due to a gap in provenance or lack of proper documentation, the ultimate value of the work was significantly impaired. There are several new collection management companies like Collectrium that can help collectors document the history, provenance, and title of their pictures.