Estate Planning for Artists

What is estate planning?

Planning how to accumulate and maximize wealth is a lifelong process, and it's important to consider how to pass it on at appropriate times and at the lowest possible tax cost.

In fact, estate planning is important for everyone. It is simply a process by which people determine what will happen to their property after they are gone, and attempt to minimize the "bite" of taxes imposed by the federal and state governments. Some people avoid preparing wills because it makes them think of unpleasant (but inevitable) events. The same people insure their homes against fire and their cars against accidents. Again, some people say: "I'll let my kids worry about it. They can pay the taxes. I won't be around anyway." They are placing a needless burden on their children and making an often avoidable payment of taxes to federal and state governments. Estate planning also concerns providing for disability or incapacity, or for problems arising from serious illness. Planning how to accumulate and maximize wealth is a lifelong process, and it's important to consider how to pass it on at appropriate times and at the lowest possible tax cost.

Federal and state taxes upon death

Federal estate taxes are imposed at death, and are payable nine months after death. There is an exemption for the first $600,000 of assets owned at death, after which rates begin at 37 percent and rise to 55 percent. The assets owned at death generally include: the value of a home; stocks, bonds, and bank accounts; life insurance proceeds; the value of pension plans, IRAs, tax-sheltered annuities and other retirement accounts; and the value of any artworks owned. Any amount passing to a surviving spouse is free of tax, but will be taxed when the surviving spouse dies.

In addition, many states impose inheritance taxes, sometimes on the same basis as in the federal system, but often excluding and including different items. Some states, such as Florida, are considered tax havens because they impose no inheritance tax. (Florida also has no income tax.) This is true for modest-sized estates, but Florida and most other states impose supplementary taxes that result, for larger estates, in the same levels of taxes being charged in those tax haven states as in the other states.

What a will does and does not do

A will is the basic legal instrument for passing property at death. However, joint property with a right of survivorship passes directly to the co-owner or co-owners. Similarly, life insurance and other assets with beneficiary designations (such as retirement accounts) pass to the named beneficiary. These assets do not have to pass through a will.

What else can a will do?

Some people, mostly younger, say that they don't need wills or estate planning because they don't have much property, or that everything is owned in joint names. Frequently, such people have minor children. What happens if both parents die? Who will care for the children? With a will, the parents can name someone to be the guardian of minor children. Without a guardian named in the will, the result in many states would be that the children would be taken before a judge, who would decide on an appropriate guardian. The judge may make the right decision, but why take a chance? Similarly, if you do not have a will, who will administer any assets you leave that aren't in joint names? Again, some government official may name the person to administer the estate. So, even if your assets are not substantial, there are good reasons to do some estate planning and have a will.

Other estate planning documents

In addition to a will, estate planning can involve other types of documents. Many people are familiar with advance healthcare directives, so-called living wills, which deal with the often difficult problems that arise when someone is terminally ill and being kept alive artificially. This situation raises not only legal issues, but also religious and ethical ones. It should not be left to chance, or be placed as a burden on family members who may not know the person's wishes.

Another important document is a power of attorney. This allows someone else to act for you if you are disabled, primarily in financial matters. Since, statistically, most people will suffer a period of disability before they die, a power of attorney may be a very useful document to have, ready to be used when necessary.

Special concerns of artists

Anyone who leaves assets without a readily ascertainable value faces problems in determining date of death values and the amount of tax that is owed. Government taxing authorities, of course, want to use the highest possible values and have their own sources and resources for valuing art. Those resources are quite extensive in the case of the Internal Revenue Service. If a high value is placed on artworks, a large tax may be due, and what is the source for those tax payments? Artwork or other assets may have to be sold to pay taxes.

How to make the process less painful

Artists and those who own artworks should prepare and maintain detailed information about the artworks purchased and created. This will be of great benefit later, when tax returns are being prepared. So, the first piece of advice is to get organized. You may need the help of an art appraiser to make this effort successful.

Second, plan ahead. Determine the likely size of your estate and obtain advice on how to dispose of it in accordance with your wishes and with the best possible tax consequences. Know what planning techniques are available to you and prepare for the disposition of your estate in a way that you think appropriate and at the lowest possible tax cost. Don't wait to do this, because you could wait too long.

Don't consider estate planning a prelude to death, it isn't. It is a responsible action that helps you and your family. Once you have completed estate planning, review it every few years. Ask your lawyer to keep you posted on any new developments in the law.

Don't listen to the grapevine

Finally, don't do estate planning on the basis of what a friend or neighbor has done, or on advice you hear over the radio or on the Internet. Every case is different, and estate planning is an area in which misinformation abounds. Seek professional assistance.

Robert H. Louis is a member of the Pennsylvania and New Jersey bars, and is a frequent lecturer and author on tax, estate planning and employee benefits topics. He also serves as president of the Philadelphia Volunteer Lawyers for the Arts. Along with several co-authors, he is working on a book titled Estate Planning for Artists.