I enjoy visiting artists in their studios and I’m often amazed at how much art they have on hand. Of course they’re not thinking about the value of works that have never seen the light of day, and may never do so. Some of them are just waiting to be painted over. Canvasses are not free. If/when the artist dies though, all of that art is a part of the artist’s estate and will be valued at “fair market prices for tax purposes. An artist leaving a large number of paintings or other works of art at the time of his or her death can be relatively complex, but some basic tips will be useful. As you’d suspect, fair market values are subjective and the lecherous taxing authorities will abuse your estate and beneficiaries as much as they can. You will want professional help in dealing with them. Thorough inventory, proper appraisals and an accountant and lawyer who knows the art business are all very good ideas.
Contrary to stereotypes, many professional artists are savvy business people. They know that “sell the art and spend the money” is not a solution, for a number of reasons. Two that come to mind quickly are income taxes and the adverse affect of flooding the market with work that you’re not particularly in love with (that’s why it’s inhabiting corners of your studio and not your collectors' homes). If you’re leaving an estate larger than $5M or so - double that if you’re married - then gifting will be a useful estate tax management strategy. You can give a maximum of around $15,000, during your lifetime, without being taxed to any single individual, charity, museum or other entity, except to an employee or as an incentive to enter into a business transaction. That’s $15k to each of your six children, $15k each to your favorite museum’s and other charities, $15k to the ice-cream man if you’d like. That can really add up! The IRS will require a Gift and Generation-Skipping Transfer Tax filing, but your tax professional should be able to manage that for you rather easily. For the non-profits on your philanthropy list, you can give bigger tax-deductible gifts. Again, consult your tax pro on this because there are rules and complications to be managed.
For artists, this will apply to cash and other assets, but not likely to actual art – at least not your own art. Artists are not allowed to take fair market value deductions when donating their own work while alive. They can only deduct cost of materials. Their estates can deduct fair market value after their deaths. Owners of art other than the artists who made it can take fair market value for the art whether or not the artist is alive-- including artists who donate the work of other artists. Bartering with other artists might help here, but again; rules, conditions, restrictions, blah-blah-blah...so always consult with qualified professionals.
So, how do you determine the fair market value of the art you're gifting or donating? The Internal Revenue Code has a definition: "the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts." The IRS has afforded itself the right and privilege to challenge valuations on any gifts of over $5000 for a period of four years after they've been given. Make sure you're able to explain valuations based on facts about the market for your art.
A professional appraisal is highly advisable if you have any questions as to the value your art, and it’s required for donations of over $5000. Appraisals are faster, easier and probably cheaper if you keep good transaction records and a comprehensive inventory of the art you’re holding.
You are an artist. You get to live forever! Your work is your legacy. It is reasonable to treat your estate with great care.
William S Jiggetts