Whether your collectibles are of the very valuable sort, such as museum-quality paintings or antiques, or they are items of just sentimental value—or somewhere in between—your heirs might fight over them for years or, worse, stop speaking to each other, essentially tearing the family apart. It’s all-too-common, and it’s a terrible shame. But it can be avoided with some thought and planning.
Let’s start with a common mistake that people often make. Some folks believe they should not list their collectible items—which under law are called “tangible personal property”—in their wills for fear that the IRS will tax the value. But this approach is very short sighted since most individuals will not be subject to federal estate tax given the high exemption amount ($11,400,000) under current law. Furthermore, if the property will later be sold by the estate or the heirs, it is possible that the IRS will discover its existence. Aside from that, if the property is insured, then it will be discovered by the tax police if there is an audit of the estate. The failure to disclose such assets’ values could result in serious civil and criminal tax fraud charges to the estate’s personal representative. Finally, with regard to valuable collectibles, even if there is no estate tax return required, it is important to obtain a qualified appraisal to establish the date-of-death value, which will represent the new cost basis if the heir later decides to sell the property.
So, how to distribute your collectibles in a way that avoids disputes? One approach is to discuss your intentions with your heirs to determine whether they wish to retain any of the items or would instead sell them. Remember, just because you cherished and protected these items does not guarantee that your heirs will feel the same. If there are many items of disparate value, you might consider how to compensate those who might get less in monetary value than others. But keep in mind that “fair” does not necessarily mean “equal” in all cases.
You might also consider giving some pieces to your heirs while you’re alive to avoid disputes later. But one drawback of lifetime gifting is that the donee takes the cost basis of the donor. So if the heir later decides to sell the property, and if it has substantially appreciated in value, the heir will owe capital gains tax on any appreciation since you acquired the item—which may not have been the case if they received the property at your death with a stepped-up basis. Another thing to keep in mind is that gifts of cash or property valued in the aggregate over $15,000 to any one person in a calendar year require the filing of a gift tax return with proper disclosure in the form of a qualified appraisal. Larger gifts will also utilize part of the lifetime gift and estate exclusion.
If your collection is extremely valuable and difficult to divide fairly among your heirs, you might consider arranging either for an orderly sale during your lifetime or upon your death or leaving the collection to a charity. If sold during your lifetime, any capital gains will be subject to a special capital gains rate for collectibles of 28% (rather than the 20% rate on financial assets). If you plan to bequeath the property to a museum, it will be useful to explore such with the museum during your lifetime to ensure that the museum is interested in exhibiting it and to set out any restrictions you might want to include. Otherwise, the museum could either refuse to accept the property or simply store it in its warehouse for years to come.
If your intention is to have the property divided among your heirs in some equitable manner, you have a few options to consider. First, make sure you provide for the desired division in your will. Some states recognize as enforceable a separate writing, referenced in the will, that lists specific items and who receives them and that can be updated from time to time and kept with the will. If you live in a state that does not recognize such listings (check with your advisor), then only the specific distribution in your will is enforceable. If such is the case, then either list each item and who receives it separately in your will or permit your heirs to decide among themselves how to divide the items—but also provide for an independent executor to either make the final division or to sell the property in case your heirs cannot agree on a division. You might also consider using a rotating choice in which your heirs draw straws to see who picks first and then reverse the order for each succeeding round.
To achieve fairness and avoid hard feelings in the family, how collectibles are divided requires much more consideration than many people realize. There are many potential goals when people leave their collectibles to their heirs—these may include increasing their happiness, their security, and even their sense that a family legacy has been respected and preserved. Regardless of which approach you choose, if you do not have a will or include such a provision therein, you may wind up leaving your heirs with the potential for lifelong bitterness instead.