Investment News has a good article titled “The Art of Legacy Planning – 7 Best Practices for Gifting Art to Museums”. In the article they state that high net worth individuals spend an average of 17% of their wealth on art and antiques, a passion investment. Part of managing this investment is planning for the future of the collection. One option is to donate to a non-profit organization such as a museum. To maximize the benefit from a donation these steps are suggested:
1. Create a plan with your client, legal counsel and an independent art adviser that includes the donor’s close family or other heirs as appropriate. Including family and/or heirs in the process can help clarify a donor’s intent, prevent future conflict and actively aid in preserving the donor’s legacy. The plan should include having the artwork professionally appraised by an accredited appraiser with relevant experience in the type of artwork being donated. The appraisal cannot be made earlier than 60 days before the donation. In cases where donors are concerned about whether the IRS may accept a valuation, such as when there are fluctuating markets for similar artwork, an IRS Statement of Value may be obtained for artwork valued at $50,000 or more to provide the donor with certainty.
2. Try to place artwork in museums that have missions and continuing collection interests that strongly align with your clients’ intent and contents of their collection. Clients often will know of strong prospects. But clients focused and passionate about their collection may not recognize how their collection will best fit with a museum’s broader collection, its goals and its limitations in space and other resources.
3. Consider art museum policies and practices for donors and “deaccessioning” (removing items from museum holdings, usually to sell them). Mr. Welch pointed out that “many museums want to retain the ability to improve their collections through the acquisition of better examples. In such a case, a gifted artwork might be deaccessioned and the proceeds used to acquire a superior work. When that happens, the donor’s name of the original gift typically appears in the newly acquired work’s credit line.”
4. Consider museums that are members of monitoring or regulating associations. For example, the Association of Art Museum Directors requires a written policy for “deaccession principles, procedures and processes”. They also require that “funds received from the disposal of a deaccessioned work shall not be used for operations or capital expenses. Such funds, including any earnings and appreciation thereon, may be used only for the acquisition of works in a manner consistent with the museum’s policy on the use of restricted acquisition funds. In order to account properly for their use, AAMD recommends that such funds, including any earnings and appreciation, be tracked separate from other acquisition funds.”
5. Check the health of organizational finances by looking at Form 990 tax filings and/or charity rating agencies like Charity Navigator. One quick test is to look at total assets and total liabilities. Stable charities — like stable businesses — generally have assets exceeding liabilities.
6. Consider supporting museum operating costs as part of a donor’s commitment to their gift of artwork. Financially supporting the museum is another way of helping to preserve a donor’s legacy and a logical step in a client’s charitable, financial and tax planning.
7. As you draft an agreement for the gift, consider including a “statement of intent” that clearly and personally outlines the desires and expectations of the donor for their donation. Sharing this statement with family (and/or other heirs) and the beneficiary museum can help clarify intent, expectations and address any concerns of heirs or the museum. A statement of intent can also clarify donor intent for future generations and may help prevent legal challenges. Donors who bequeath their art collections to museums share an intimate part of their lives. Advisers can help provide guidance that will preserve and protect their client’s wishes, smooth the process and help establish their client’s legacy for the benefit of future generations.
About the Author: Kathi Jablonsky, ISA CAPP is a certified appraiser of personal property designated in Antiques and Residential Contents with the International Society of Appraisers. She is based in Southern California and serves the San Diego and Palm Desert regions.
The IRS has released a list of tips to assist with obtaining tax deductions on charitable contributions. For non-cash contributions with a fair market value of $5,000 or more, a qualified appraisal is required by a “Qualified Appraiser”. See tip #9.
Giving to charity may make you feel good and help you lower your tax bill. The IRS offers these nine tips to help ensure your contributions pay off on your tax return.
If you want a tax deduction, you must donate to a qualified charitable organization. You cannot deduct contributions you make to either an individual, a political organization or a political candidate.
You must file Form 1040 and itemize your deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must also file Form 8283, Noncash Charitable Contributions, with your tax return.
If you receive a benefit of some kind in return for your contribution, you can only deduct the amount that exceeds the fair market value of the benefit you received. Examples of benefits you may receive in return for your contribution include merchandise, tickets to an event or other goods and services.
Donations of stock or other non-cash property are usually valued at fair market value. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.
Fair market value is generally the price at which someone can sell the property.
You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Cash contributions include those made by check or other monetary methods. That written record can be a written statement from the organization, a bank record or a payroll deduction record that substantiates your donation. That documentation should include the name of the organization, the date and amount of the contribution. A telephone bill meets this requirement for text donations if it shows this same information.
To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.
You may use the same document to meet the requirement for a written statement for cash gifts and the requirement for a written acknowledgement for contributions of $250 or more.
If you donate one item or a group of similar items that are valued at more than $5,000, you must also complete Section B of Form 8283. This section generally requires an appraisal by a qualified appraiser.
For more information on charitable contributions, see Publication 526, Charitable Contributions. For information about noncash contributions, see Publication 561, Determining the Value of Donated Property. Forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
I frequently receive calls regarding valuation for non-cash charitable donations, so I’d like to address questions from an appraiser’s point of view. I cannot give tax advice, so a consultation with the appropriate professional is recommended.
Prior to accepting the assignment, the appraiser will ask a number of questions:
What do you have to donate? How were the items acquired? Which charity are you donating to and is it a related use? When is the date of donation? Is it a 100% interest and unrestricted donation?
When is an appraisal required?
A Qualified Appraisal is required if an item or group of similar items has a Fair Market Value of $5,000 or more. It is also required if an item is worth $500 or more and is in less than good (e.g. poor) condition. The appraiser will also complete the appropriate sections of IRS Form 8283. The reporting requirements increase as the value of the donation increases.
Which value is used in donation appraisals?
The appropriate level of value for most tangible personal property donations is Fair Market Value defined by the Income Tax Regulations 1.170A-1(c)(2) as,
“The price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both having reasonable knowledge of all relevant facts.”
Many times this is what the item would sell for in its current used condition at an auction, estate sale, garage sale or wherever the appropriate market is for each item. There are special rules pertaining to business inventory and artist’s donating their own work. These are considered ordinary income properties and the deduction may be limited.
The IRS has established the following requirements:
A Qualified Appraiser has earned a professional designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised, or has met certain minimum education and experience requirements.
The individual regularly prepares appraisals for which he or she is paid.
The individual demonstrates verifiable education and experience in valuing the type of property being appraised.
The individual has not been prohibited from practicing before the IRS under section 330(c) of title 31 of the United States Code at any time during the 3-year period ending on the date of the appraisal.
The individual is not an excluded individual.
Choose a 3rd-party independent appraiser that has no connection to the item, donor or donee. For example, the dealer who sold you the item would be an excluded individual.
Can the donor or donee tell the appraiser what values to place on the objects?
Absolutely not. The appraiser must independently arrive at a value through research of current market data. The appraiser is subject to stiff penalties from the IRS if the valuation is too high or too low.
What about the cost for storage, moving, cleaning, installation or maintenance of items donated?
These costs are not part of Fair Market Value and cannot be included on the appraisal. Consider donating money to cover some of these costs.
When does the appraisal need to be completed?
The appraisal should be completed no more than 60 days prior to the donation or anytime after, up to the deadline when the tax return is due.
Is the cost of an appraisal deductible?
The cost of the appraisal may be deductible under IRS Schedule A, Miscellaneous Deductions. Consult your tax professional.
Can the charity pay for the appraisal?
Usually the donor pays for the appraisal. If the donee pays, then the cost of the appraisal should be subtracted from the total amount of the donation.