Helping Clients Inherit a Gemstone Collection
Dealers are often the most trusted advisers on gemstones for their clients and their clients families. Here is how you can help support your clients and their families in handling gemstones both as a collection and as an investment.
Antiques Road Show has long lines of people bringing their art, jewelry, furnishings and other collectibles to be appraised. The excitement of someone realizing that he or she has inherited an item worth tens, if not hundreds, of thousands of dollars, as well as the agony of watching someones face crumble after being told a treasured heirloom is junk, is what makes the show so interesting to watch. Most often, these are not the people who purchased the item, but rather those who inherited the items. The families of your clients have the same emotions when they inherit gemstones and jewelry. They are thrilled, but they are also agonized. They hope that the inheritance is worth a fortune, but they fear that it is worthless and consequently are indecisive over what to do next. Often, as the trusted adviser and dealer of the gemstone collector, the family will turn to you for your support and guidance.
Since The Erskine Company specializes in representing collectors and their families, many times we have had clients referred to us by their trusted advisers in similar situations. One client who was sent to us by an antiques dealer had inherited his uncles collection of Americana, which included many fine pieces of furniture. When a proper inventory was done, the most valuable piece was found to be, not the furniture that was appraised highly in the estate, but a greenish pot that always had sat on top of the family refrigerator. The clients pot sold for more than twice what the rest of the collection was valued at, and we were able to defer income taxes through a like-kind exchange through the antiques dealer.
In another situation, a coin dealer sent us his clients who had inherited their fathers coin collection. Only eleven coins from this vast collection were worth more than their face or metallic value, yet those eleven were worth many times the value of the entire rest of the collection.
Your clients, and eventually their families, will find that their gemstones or other treasures, may suddenly represent a significant fraction of the familys net worth. Moreover, this is increasingly likely: a recent Barclays Wealth Insight1 report showed that these treasure-assets are becoming a major percentage of the mid-tier clients wealth up to 10% in the U.S., and 20% globally.
As a dealer, your focus is providing the bespoken services to your clients in this niche, along with all of the regulatory and specialized knowledge that implies. You have provided your clients with direct advice on specific gems, managed the outside expertise connections and experience to locate buyers and sellers of the desired gems, and brought your knowledge to bear on your clients gem collection. For this loyalty and service you have earned the respect and loyalty of your clients, and after them, their families.
The greatest risk, and concern, of your clients is that their families will not know you, and so will not realize the true value of the artwork or other collectibles your clients now own. Oftentimes, even before the administration of an estate is properly begun, or before the required expert opinions on the value of each item are obtained, the family may have the collection sold for a fraction of its worth without your guidance.
To properly support your clients and their families, there are three steps that you should to take when your clients own gemstones:
1.Inventory the collection;
2.Simplify the collection through a process of aggregation; and
3.Lay the groundwork for the management of your clients collection.
All of these are necessary to avoid selling a rare piece at a fraction of its value, or spending a large amount on an item that has legal ownership or other defects.
Step One: Inventory
Most collectors do not have a current inventory of their assets; or if the inventory does exist, it lacks critical information or is in a format that is cryptic in the extreme. Inventories of an estate often are geared towards minimizing the estate tax value of the asset, and are rarely complete or sufficiently detailed. In addition, inventories can sometimes be confusing because artists often work in many different media, so it is often difficult to determine who created what artworks in the collection. The same is true for gemstones (who cut them and when it was done), as well as how jewelry is commissioned. Therefore, your client needs your expert assistance to describe assets for the inventory.
At the minimum, inventories should include a list of gemstones, their physical descriptions, who cut them, date of cutting, date of acquisition, where the items are located, dealer names and contact information, and any paperwork that refers to the gemstones such as catalogs, bills of sale and so forth. Whether you use a spreadsheet, a software program or even an old-fashioned card catalog system, beginning the inventory is critical.
Include in the inventory any reference to contractual relationships that might exist, such as consignment agreements, copyrights, distributions and reproduction rights and so forth. Remember that the ownership of a gem does not convey the copyright to that gem set in jewelry as a piece of artwork, and in some countries artists retain some rights over the transfer and display of art even after sale.
Step Two: Aggregate
Even when there are occasions where all of the significant gems are clearly inventoried, researched, labeled and stored, your clients family will most likely be confronted with a large number of items, and may not recognize them as valuable gemstones and jewelry, never mind realize the importance of the associated masses of documents, catalogs, notes, letters, bills of sale and paperwork. Although it does not seem like much, a single piece of paperwork can be critical for determining the provenance (and, therefore, the value) of the gemstones. In order to support your clients family and their new collections of items, each with many different taxes, provenance and valuation issues, you must help them simplify.
A critical first step to simplification is aggregating items and the associated paperwork. Items with similar characteristics are formed into groups and these groups are given certain rules or guidelines based on the trends in the taxes, recognition, liquidity premium, as well as your clients desires.
Taxes: Your clients income from transacting tangible assets is taxed differently than their investment or ordinary income. How your client handles the ownership of the collection will control the subsequent income tax treatment of their buying or selling tangible assets. The IRS recognizes four distinct types of taxpayers based on the role that the taxpayer plays prior to a transaction: Collector, Investor, Business Investor, and Dealer. Although the IRS will assume your client to be a collector (thus imposing the highest capital gains tax and allowing the fewest deductions), in reality your client may qualify for the more advantageous tax status of an Investor, where more deductions are allowed as well as techniques such as like-kind exchanges. Qualifying as an Investor is not as simple as a declaration, and requires a well-documented pattern of behavior by your client, but a qualified expert can help your client position himself to obtain the most desirable tax status.
Recognition: The value of one part of your clients collection may be much more susceptible to market forces than other parts. This could be because of the general standards of taste, critical acclaim, the vagaries of provenance and authenticity, the role the item plays in the culture, and changes in laws banning the sale or purchase of certain items. The collection needs to be aggregated in terms of what has the most stable pricing versus what has more volatile pricing, questionable legality, or uncertain provenance.
Liquidity: The ease with which your client can sell a gemstone also is a factor in aggregation. Rare, or unique, gems by themselves may not be enough to provide liquidity for they must also be sought after by those willing to pay for the ownership and control of the item. A highly sought after gem can easily be sold at auction or private sale even if poorly executed or heavily damaged, while a well-executed and flawless item may languish for months or years. In many cases, your clients will inherit a few highly liquid gems, along with many illiquid gems in the collection. Your clients family will look to you for guidance. By aggregating together the highly liquid gemstones that your clients family wants to sell with the more illiquid gemstones that they need to sell, you can give your clients leverage on negotiating fees, commissions and other costs on the sale.
Premium: Occasionally your client will inherit a gem or collection that they could only hope to own if they are willing to compete at auction with the most well-heeled collectors and institutions. Such items can be key to the preservation of the rest of the collection, especially if planning has been done beforehand to allow for some of the estate tax avoidance in the settlement of the estate. These premium items are truly in a realm of their own, and require the most expert help in managing the preservation, transfer or sale.
Step Three: The Management of the Collection
While you may play an active role in the buying and selling of gems, jewelry and other collectibles, you also need to support your clients in managing their collections, by helping them find the professionals with expertise and experience in collection management. Toward this end, the following questions can guide you in steering your clients in the right direction:
Does your client understand the buy-sell discipline for his or her collection? As with speculative investments, your clients may own gems that rapidly and permanently decline in value after they purchase or inherit them. Conversely, gemstones that are out of fashion, or temporarily a glut on the market at the time they were inherited, may just as rapidly increase in value, but only temporarily. Your clients family needs the same sort of discipline in managing the collection as you originally provided your client: namely, when to hold gems until the value recovers, when to sell gems to cut their losses, and when to sell some or all of a collection before the market declines. A collection needs to be reviewed with a critical but unbiased eye, and your client needs help understanding when a collection should be sold, or how it should be enhanced.
Does your clients personal representative readily know how to maintain, and ultimately dispose of, any gemstones in your clients estate? In some circumstances a cultural executor, such as a private curator or expert in the field, may be better equipped to manage the disposition of artwork than family members. When this is the case, additional funds should be allocated for administrative costs. Does your client have insurance policies or funds from the estate to help alleviate the burden of additional administrative and tax costs for the collection? Life insurance should be held in a specified Irrevocable Life Insurance Trust intended to provide liquidity to a collection, and should be drafted specifically to allow investments in, and loans collateralized by, artwork and collectables. In addition to Property and Casualty Insurance, your client should also consider Title Insurance on high value gems with questionable provenance.
Does your client keep purchase and sale inventory records? The names of galleries, dealers and auction houses or other persons who might be interested in buying or selling your clients gemstones should be in a place where your clients personal representative could readily find them in the event something happens to your client. Again, provenance has become critically important in the art world in the last decade, especially gems and jewelry coming out of Europe immediately before and after WWII; and those coming out of countries in economic and political turmoil, such as Russia in the 1990s or Burma today, have particularly special risks. Provenance will continue to grow in importance in the valuation of gemstones. All ephemera associated with the gemstones such as auction catalogues, notes, etc., should be retained and catalogued for future reference.
Has your client specifically addressed the disposition of any copyrights your client may own in his or her Will? Unless the deceased was also an artist, it is unlikely that your client will inherit copyrights; but where there was collaboration between a collector and an artist, such rights may exist. Be aware that copyrights can be created of an image of an object (such as a piece of furniture), which might otherwise be in the public domain. Also, if your client is planning to donate a specific item to a charity during their lifetime or at their death, remember that that donation does not carry the copyrights to the object unless specifically mentioned; but a gift to an individual beneficiary of the same object will carry such rights. Also, make sure that your clients personal representative finds records of the copyrights. By law, copyright transfers must be in writing and signed by the copyright owner. In addition to a signed writing, the transfer may need to be recorded with the US Copyright Office.
Does your client have specific instructions or restrictions on how gemstones or jewelry may be used or licensed? Some clients have a deep emotional attachment to an inherited collection and may feel a moral obligation that the items should not be sold, that new reference books in the same series should not be commissioned, music should not performed at certain venues, and so forth. Dealing with these restrictions will require significant cooperation with the future owners of the gemstones or other items, so these restrictions should be clear and well drafted.
Has your client made arrangements for the maintenance and storage of the collection in his or her estate? The estimated total cost of your clients planned disposition of the gems, equipment and supplies upon your clients death (including storage, distribution and conservation) should be made, even if only in the most basic terms. Sending a large mineral sample across the globe may cost much more than the piece is worth, and the beneficiary may not be able to carry those costs without assistance. Also, if gems or other items are placed in long term storage, you run the risk of damage or loss if the storage faculty has a catastrophe. In particular your clients visual art associated with the gemstones will need to be stored properly, as will photographs, film and digital files.
Has your client considered the use of split interest trusts and charitable foundations as helpful vehicles in which to manage art? A trust, LLC or Family Limited Partnership is the best way to manage a collection that will be shared by a number of beneficiaries. In addition to a management trust, your client should be familiar with the use of split interest trusts, such as CRT, CLT, GRIT, GRAT and so forth, for transferring collections between generations.
Your clients family may not be a star on Antiques Road Show, but it is likely that they intend their families to inherit some or all of their collection. With your help in sustaining your client now, you are helping your clients family when they become the new owners of the gem collection. You need to help your client get the expertise and experience to properly plan for the collection, including an inventory of the collection, simplification of the collection management through aggregation, as well as preparing your client on managing the collection when their time comes to pass it on to another generation.
-Matthew F. Erskine is principal of The Erskine Company LLC, a strategic advisory firm located in Worcester, Massachusetts, that offers expertise in the management of unique family assets, including multi-million dollar family businesses, numismatics collections, fine art and Americana collections, commercial and residential real estate holdings, and family compounds. More information about The Erskine Company LLC can be found at www.erskineco.com.