Why You Need To Document Your Clients’ Art Collections

Documenting an art collection may seem daunting, particularly where a collector has not been diligent in the past and views the works primarily as a source of enjoyment and not as assets. But no matter the size of the collection, the value of the works in it, or the collector’s future plans for it, properly documenting a collection yields undoubted benefits and minimizes unnecessary risks.

Wealth Management

Authenticity, provenance, and title all play a role in determining a work’s future resale value, which can be difficult to pin down in comparison to more traditional assets. Lack of regulation of the art market compounds these complexities. In recognition of these unique circumstances, financial advisors and wealth managers typically treat art as a separate asset class.

In this largely unregulated environment, documentation gives wealth managers a broader range of options for the works in both the short and long terms. For example, if a collector wants to use a work as collateral for a loan, an appraisal establishing the work’s value is essential, and a reliable appraisal requires reliable documentation. When thinking ahead about the legacy of an art collection, early planning can reduce tax burdens and give the collector more control, whereas the failure to plan can increase taxes and administrative costs. Maintaining a well-documented collection will ensure that the collector, and later their heirs and beneficiaries, is able to enjoy the benefits of their investment many years into the future.

Loaning or Donating a Work to a Museum

Many collectors anticipate loaning or donating works to museums or other non-profit institutions. To do so, the collector must establish the fair market value of the work for tax purposes through an objective appraisal which, as noted above, is only as reliable as the underlying documentation. In addition, following good record-keeping practices can prevent IRS penalties imposed upon poorly-documented or excessively-valued works.

Documentation is also important for works while they are out of the collector’s control, for instance, while the works are on loan. Maintaining paperwork that establishes the work’s value, condition, provenance, and title is critically important—particularly for insurance and in the event of damage, theft, or challenges to ownership.

Insurance

Insurance alone justifies the efforts needed to ensure a collection is properly documented. Under a scheduled property insurance policy, which is most often utilized for high-value objects, the value of each insured work is listed individually, so appraisals must be kept up to date. In one cautionary tale out of New York, the owner of a damaged painting could recover only the value listed in the scheduled policy ($18,000), even though the painting’s value had increased to six figures. For blanket policies, in which works are not listed separately, documentation (including appraisals) is perhaps even more important, as the collector must prove the value in the event of loss. If the work is stolen, proof of value could be close to impossible without documentation.

Resale

Maintaining complete and accurate documentation reduces legal risks that might emerge at the time of a sale to impact the price, especially where the documents definitively establish that the work is authentic and that the seller has proper title. When selling a work, owners usually must guarantee title, and making such a guarantee without sufficient documentation could expose the seller to liability.

Litigation Over Title or Authenticity

Litigation over title arises in a variety of contexts, and documentation collected at the time of purchase could be the key to prevailing. For the current possessor of the work, documentation is necessary to defend a challenge to title by establishing proper ownership or, relatedly, to establishing good faith and due diligence, which are often relevant in such claims.

Additionally, U.S. courts sometimes address authenticity, though they would prefer not to, such as when a buyer seeks damages from a seller claiming a work turned out to be fake or otherwise inauthentic. In such a case, documentation concerning authenticity would be indispensable.

The Four D’s – Death, Divorce, Debt, and Disaster

In the event of any of the infamous four D’s, documentation will be vital to establishing ownership and the value of a work or collection. For example, in another tale of woe (PNC Bank v. Buzzelli (In re Buzzelli), 246 B.R. 75 (W.D. Pa. 2000)), an individual was unable to discharge certain debts in bankruptcy, in part due to the failure to provide sufficient documentation proving the value of an art collection—meaning the obligation to repay his creditors continued.

Protecting Against the Unforeseeable

A well-documented art collection can protect collectors against numerous risks associated with collecting, even where those risks cannot be predicted. The formerly legal ivory trade, for instance, is now illegal with limited exceptions. Those exceptions require documentation – such as, in order to export worked African elephant ivory for commercial purposes, one must establish that the object is an antique under the Endangered Species Act (and that it meets any restrictions imposed by state law). The laws governing the art market are becoming stricter and being enforced with greater vigor; maintaining complete documentation can help protect against that unpredictability.

Diligently documenting an art collection enables a collector to address provenance or authenticity issues before deciding to loan, donate, or sell. It also ensures that the collector has the required proof of ownership and of the work’s value in the event of unforeseen (or unforeseeable) circumstances. In short, it makes financial sense to invest in documenting an art collection – both to increase the financial strength of the collection and to decrease the likelihood of future costs or liabilities.

This article, written by Eden Burgess and Olga Symeonoglou was published at wealthmanagement.com.