Learn the ins and outs of building, managing and divesting a collection of worth—wine, art, cars, watches, or whatever your passion may be.
Transcript
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Stacie Jacobsen: Thanks for joining us today on The Pulse by Bernstein, where we bring you insights on the economy, global markets, and all the complexities of wealth management. I'm your host, Stacie Jacobsen.
What's your passion? Do you have a well-stocked wine cellar with rare finds you've held onto for years? Possibly a 10-car garage filled with antique autos? Or maybe your walls are decorated with paintings by great masters or modern art legends. Thanks, if you follow your passion by collecting items of worth, then you know that the value is not only monetary.
There's an emotional connection as well. That's why it's important to plan for the future of your collection. Without careful planning around things like valuations, laws and regulations, and taxes, collectible assets can become liabilities for you and your heirs. Our guest today, Colleen Boyle, is a leading expert on the intersection of art and finance.
She's the head of business development and strategy for The Fine Art Group. Colleen has valued art and collectibles for companies, museums, and private collectors across the globe. And she regularly assists collectors in their charitable endeavors, both in direct donations and monetization strategies.
Colleen, I'm pleased to welcome you to The Pulse.
Colleen Boyle: Thank you, Stacie. It's a pleasure to be here with you today.
Stacie Jacobsen: Thanks, we're excited to have you here on the show to share some of your wisdom with our listeners. Let's start with the definition. What is a collectible or what you may call a passion asset?
Colleen Boyle: Sure, Stacie.
So, when we think about a collectible, often known as a passion asset, there's actually a wide variety of objects to consider. Clients may own some jewelry. They may own watches. They may have a wine collection or a spirit collection. Wine collectors, they enjoy going to wine tastings, maybe traveling. What makes these types of assets very different than other types of financial assets is that they are oftentimes affiliated with the end experience.
And then in some cases, there are individuals who've inherited these assets. So there tends to be an emotional component related to these types of assets, which is why oftentimes they're referred to as passion assets.
Stacie Jacobsen: And I'd imagine out of that list that you just shared, there's some discreet concerns with each one of them, right? What are some of the things that you might need to think about?
Colleen Boyle: Yeah, yeah. So, it's real important to really understand and have a plan. We see clients that will start collecting in a specific category and they really enjoy the collecting process because it is experiential, but then at a certain point in time, you have to really think through, well, if you've accumulated 2,500 bottles of wine from around the world, What's your divestiture plan?
Are you going to drink all 2,500 bottles of wine? And if you're not going to drink 2,500 bottles, then what are you going to do with them? For example, with wine and spirits, clients might think they could sell privately. But in reality, you have to have a liquor license if you're going to sell via a private transaction.
But other assets such as art and jewelry and watches can easily be sold on a private transaction. So, there is nuance to these types of assets, and there's certain due diligence practices, both on the acquisition side and on the divestiture side that, you know, individuals should really be aware of and have a well thought through plan while building collections, as well as managing the collection, and then ultimately the disposition of the collection.
Stacie Jacobsen: You mentioned a lot of this is that emotional tie to the collection, but how do clients typically view these collections? Are they even thinking about them as a financial asset?
Colleen Boyle: Stacie, that is one issue with this portion of a client's financial portfolio because clients are using or experiencing the objects, they're not always thinking about these objects as impacting their financial balance sheet.
And what we're seeing, depending on how clients acquire, a lot of these assets can really appreciate over time. And an individual can incur capital gains. So, it's important to be aware of value, be aware of value changes, and to have a well thought through strategy to minimize any type of tax implication.
The antithesis though is not everything does go up in value. So sometimes clients do think that their objects have escalated in value over time, but there are market changes and what might have been really, really popular 10 to 12 years ago, maybe less so today. So, there's always that possibility that the value may have depreciated.
Stacie Jacobsen: I definitely want to get into the value side of it, but you brought something up that made me think that this is an area where some expert guidance can add tremendous value. So, unless it's an impulse buy, like you had mentioned, what are some of the things that collectors should look out for when they are accumulating these assets?
Colleen Boyle: Stacie, the one thing I want to highlight is the importance of having a team of experts who can support you and guide you through this process of acquiring and managing and divesting passion assets. This is an area that is very unregulated and as a result, clients can overpay for. These types of assets, there are a lot of fakes and fraudulent practices.
And so, it's real important to get very good guidance and education, because at the end of the day, particularly if you're looking to build an investment quality collection. It's like really any other type of asset that you'd be acquiring. If you decide to invest in real estate, you're going to execute a certain set of due diligence practices prior to acquiring the real estate.
The same should really be applied to whether you're buying art, jewelry, watches, wine, cars, because at the end of the day, the value can be fairly significant over time. As we're talking about value, what are the different types of value of a collection? How do you think through that? This is probably one of the more confusing aspects of managing passion assets.
Clients will get what's called a retail replacement value for an object because they want to insure the object in case of a loss. So for example, maybe Stacie, you may travel a lot, you may have certain jewelry pieces that you like to wear when you travel, and as a result you want to make sure they're insured appropriately, just in case they get misplaced or lost. We would put together what's called a retail replacement valuation, meaning that if that jewelry was misplaced or lost or stolen, how much would you be compensated from the insurance company for those pieces?
And that's really based on if you went out to replace them in the retail market, as in, you go to your jeweler to buy something similar, maybe not the exact object, what would that value be? In other cases, though, individuals are wanting to do some planning around these assets. Maybe they're thinking of gifting assets to their heirs.
Maybe they're thinking of donating some of these assets to institutions, or maybe they need an estate plan or a state settlement valuation. In those cases that are often driven by the IRS requirements. The value that's used for that purpose is called a fair market valuation and it's really a willing buyer and a willing seller in an open marketplace is how those values are determined and that tends to be mostly derived via the historical auction results.
So how much did something sell for at auction, which is an open market. Anybody can bid at auction. Those values are going to be very different most of the time than your retail replacement value, and sometimes that gets very confusing for clients. They don't always understand that differential.
Sometimes the values are closer in alignment. Sometimes the retail replacement value may be significantly higher than the fair market value. Again, it just depends on the item and the market.
Stacie Jacobsen: If you do have an asset in your home that's been passed down through multiple generations and suspect that there might be more than a sentimental value to it, what should you do?
Colleen Boyle: So, it really does start, Stacie, with understanding the value. There was a couple that was in the process of transitioning from their primary home in New England, and they had inherited a lot of blue and white porcelain, and some of it was very modest in value, but there was one piece that was fairly significant, but they did not realize that they had an estate sale at their home.
They had people come through and they sold this 1 blue and white porcelain bowl about 6 inches in diameter for $35. The person who bought the bowl. wisely took it to one of the international auction houses and sold it for over $700,000. And, and that happens, really, more than you would think. Sometimes things just get passed down generation to generation and they're not always aware that the item could have significant value.
We see the same occur on the opposite side. We had met an individual who had amassed a really lovely collection of music memorabilia, signed guitars, and signed records, and signed photographs. It was an absolutely fabulous collection. Initially, turned out the client had bought from two primary dealers over about a decade, and unfortunately, what they ended up buying was not authentic.
And the collection, which was close to two million dollars, uh, was all fake, sellable, but not sellable at that value threshold. It's very important for clients to really be aware of how and where they're buying and to seek advice.
Stacie Jacobsen: If you are in the disposition phase, what should you look out for to maximize the value?
Colleen Boyle: Oftentimes clients have really more of a hybrid approach, so the heirs might be interested in a few pieces within a collection, but maybe not the whole entire collection because maybe their aesthetic's different or their interests are different. So, Stacie, I'm going to give you an example of a family that we worked with that had a coin collection.
And this was a coin collection that was worth about $800,000 and nobody in the family wanted the coins. And so, we sold the coins for them at a highly specialized coin auction. And they allocated all the proceeds into a multi-generational donor advice fund. This family was very philanthropic and very concerned about the environment.
And they wanted to use the coins as a tool to help people. to fund their donor advised fund to really teach the next generation about philanthropy, how to choose different philanthropies related to the environment. How much money do they allocate each year? How do they go about thinking through how to support different types of initiatives?
And it really started because nobody wanted the coin collection. So, it was an opportunity for them to use that asset as a way to support a philanthropic strategy, and we're seeing more and more of that as a trend where families are looking at these assets and trying to figure out how else can these assets be utilized.
In some cases, it may just be a sales structure. So, for example. We had the opportunity to work with a family that had a fabulous Americana collection, and we sold it in a single owner sale, meaning it was a sale just for this particular family's collection. And what was really nice about that, is the Matriarch and Patriarch were highlighted.
There was a lovely write up about them as collectors, their involvement in the community, and then proceeds went to the two heirs. And what was nice about that, it was a lot easier to divide the proceeds than it was to divide the whole art collection. So, a lot of it really depends on what is the intent of the family?
Do they have other ideas in addition to possibly just monetizing? Is philanthropy part of their overall desire? And if so, what type of sale makes the most sense? Should it be in a specialized sale? Should it be a single owner sale? Should it sell in the U. S.? Should it sell internationally? Should it be marketed globally, regionally?
There's a lot of factors to consider in order to have a successful sale.
Stacie Jacobsen: So, for a minute, I just want to expand on the charitable giving side of it. I know that's an area that you have a focus in. So, what are some of the ways that you could potentially donate a collection?
Colleen Boyle: So, the first thing you have to be aware of is if you're looking to donate to an institution, there is something called related use.
If you have an art collection or a couple of art items and you want to donate them to an art museum, usually that would be related use. The art museum is going to exhibit the artwork, use the artwork as part of their overall mission. What we're finding right now with institutions is they also have processes for accepting these types of assets.
And in a lot of cases, institutions already have a lot of artwork or may have a lot of manuscripts, but they also may be looking for specific items to complete their collection. So most of the time there's going to be a committee that discusses the various items that clients may want to donate and they'll either agree to accept the object or not, and it's something that individuals that are wanting to donate to institutions should be aware of, because if the object is not going to fit into that institution's mission or collection, they really want to have a plan B, because it does cost money for institutions to maintain these objects and also their storage considerations. So, institutions are being more selective.
Let's suppose it's a non-related use. So, let's suppose somebody wants to support their local hospital. And again, maybe they have a jewelry collection or an art collection or a book collection.
And they're trying to figure out how to go about supporting the hospital or another nonprofit. In some cases, those nonprofits will accept those assets and oftentimes will work alongside them to put together the monetization strategy. In other cases, we may work directly with the client first, put together the monetization strategy with the proceeds then going to that nonprofit that they want to support.
And oftentimes there is a marketing approach to that as well. We had worked with a family who had a variety of items, a Tiffany lamp, British watercolors, some other contemporary artwork, some art nouveau furniture, and the matriarch of the family had fallen ill very unexpectedly. And the family was really trying to figure out how to create a legacy around their mother.
And what they decided to do, we put together a single owner sale with all the proceeds going to her alma mater to create a scholarship fund. So, at the end of the day, the heirs, they were not interested in being custodians of the Tiffany lamps or the British watercolors. They were more interested in this whole idea of, oh, a legacy using these assets, particularly a scholarship fund at their mother's alma mater, because that's how she was able to go to school.
She went because she had gotten a scholarship. So, it was a fabulous scenario, a way to really honor their mother through this legacy creation using these assets that while the matriarch and patriarch enjoyed them during their lifetime, they were now ready to figure out another usage. So, we're finding more and more creative solutions for assets that really meets the needs of the family and having these conversations on what's meaningful for the family and how can they use these passion assets to fulfill that goal.
Stacie Jacobsen: I see the theme that's running through here is having these conversations about what the heirs may want to do with this collection, right? Because it seems like it could be a dangerous assumption that the heirs will just want to take it over without having that conversation up front. For those that do have a collection, how do you start to work with them and their family and figuring out what's right for everybody?
Colleen Boyle: Yeah. So, Stacie, that's an excellent question. And communication is key. It's really about initiating conversations, and they're not always easy conversations to have, but it is very important to at least initiate conversations from the standpoint of interest. Is anybody in the family interested in any of these types of assets?
And if so, what are they interested in? And there could be definitely scenarios where heirs are interested in a few items, they just may not be interested in an entire collection. The alternative is there may not be any heirs. And we have clients that we've worked with who do not have any heirs and they have had to think through what to do with these types of assets and really creating a plan and making sure the recipient is interested.
And usually they tend to be, you know, institutions or items are transferred into foundations and then a monetization strategy may take place through the foundation. It just depends on the size of the collection and again, what the real overall intention is of the collector and the families.
Stacie Jacobsen: If you flip it the other way and assume that actually multiple heirs want to be the custodian of the collection, do you find that it loses value if you split a collection?
What if it's not something that you can divide? What are some of the solutions that you've experienced on that side?
Colleen Boyle: We actually did have that situation where we were working with a family with two heirs. The mother had inherited the art collection and it hung in really their secondary residency for a very long time because that's where the family gathered for holidays.
They also had a very, very large silver collection. What happened was when they were starting to talk to the two heirs about the assets, they didn't know what the value was. So, we started with evaluation and it turned out there were probably about 22 pieces of artwork. 21 of them were all about the same value and about the 15 to 20,000 range, but there was 1 piece that was valued at over a million dollars. The family had absolutely no idea. It had hung in the secondary home for years, and now all of a sudden, they're in a situation of there's capital gains. Is one heir going to get the million-dollar painting and the other heir is going to get the other 21 paintings?
How are they going to divide it? But because they understood the value, now they could start having these conversations on what they were going to do. So obviously they had to do some advanced planning to minimize the capital gains taxation and ultimately we structured a single owner private sale for the one piece and the two heirs were able to divide the proceeds equitably and then the heirs divided the remaining artwork between them because it was all fairly similar in value and they just chose the pieces that they liked the most.
Stacie Jacobsen: That sounds like a reasonable solution. I also think I'm going to start to go look around my house or my parents’ house to see what we might have as a hidden treasure.
Colleen Boyle: There usually always is something.
Stacie Jacobsen: Yeah, right. You've mentioned capital gains a few times during this conversation.
I do just want to point out that first of all, you should speak with your tax advisor, but the definition of capital gains on collectibles are different than your traditional investment portfolio.
Colleen Boyle: That's correct, Stacie.
Stacie Jacobsen: All right, Colleen, do you have any last words of wisdom or final thoughts that you'd like to share with us today?
Colleen Boyle: Yeah, so Stacie, I would say, and we talked a lot about conversation and communication. It's very important to at least initiate conversation around these assets to really understand if there are errors, if they're interested, if family's thinking about a donation strategy, is the institution interested, and making sure that that conversation is initiated. That would be the first thing.
The second thing is to really understand value, and not just at one point in time. Values do change, and so it's very important to understand, have a baseline, understand value. How does that compare to your cost basis? So, you can understand whether or not there's going to be any capital gain situation, or not and then keeping up to date with those values.
We're really working in a global setting and it's always interesting to see how desires say in Asia or Europe or Latin America can influence the value of what individuals own here in the U. S. and vice versa. So, it is important to understand value not just at one point in time but really over the lifetime of ownership.
And then the third thing is really to have a plan, and it can be a plan that pivots, but at least having an initial plan of what you're thinking of doing with these assets. Are you thinking about incorporating a philanthropic aspect using these types of assets? Are the assets going to be divided equitably?
Are they going to be sold? And at least having some sort of a plan, again, that can change over time. But at least it's a starting point. So those would be the three things that I'd recommend.
Stacie Jacobsen: So, start the conversation, understand the value and have a plan. Exactly. All right, Colleen, with that, thank you so much for joining us today.
Okay. Thank you, Stacie. Thanks everyone for listening. If you'd like to learn more about collectibles from a wealth management perspective, Bernstein recently published a white paper titled Rare Finds Can Become Slippery Slopes for Wealth Transfer. We'll link it in the show notes. I'm your host, Stacie Jacobsen, wishing you a great rest of the week.