U.S. Trust, Bank of America Private Wealth Management, will host a panel discussion at the JAMES A. MICHENER ART MUSEUM in Doylestown, PA on “Effectively Managing A Fine Art Collection” on May 17, 2017 from 5:30 P.M. to 7:30 P.M.

The panel will be hosted by ERIC J. ABEL, Private Client Advisor at U.S. Trust and feature EVAN BEARD, National Art Services Executive, U.S. Trust; RAMSAY H. SLUGG, National Wealth Planning Strategist, U.S. Trust; and CINDY CHARLESTON-ROSENBERG, Founder and President, Art Appraisal Firm, LLC. The panelists will provide updates on trends in the art industry, the importance of appraisals and proper planning for collections, and how to address issues related to conservation and restoration of fine art.

The event is by invitation only. Interested parties should contact Eric Abel at 610-567-4735 or at eric.abel@ustrust.com.

The James A. Michener Art Museum is located at 138 South Pine Street, Doylestown, PA 18901. This event is a great opportunity to learn about art connoisseurship while enjoying the Michener Art Museum and its wonderful collection of Bucks County gems.

In an art market that has been defined by the uncertainty of world events and declining inventory, it was reported earlier today that Sotheby’s announced fourth quarter earnings of $65.5 million, which is an increase over that same period in the prior year.  The auction house had a loss of $11.2 million in the fourth quarter of 2015.  Sotheby’s adjusted net income for 2016 was $99.6 million, which is down from $143.1 million in 2015.

Sotheby’s has been working to counter this softening in the art market by diversifying its business.  In particular, Sotheby’s recently acquired art authentication firm, Orion Analytical, in addition to acquiring Amy Cappellazzo’s art advisory business last year.  The auction house further acquired Moses Art Indices, which monitor the auction business, and hired Christy MacLear, the chief executive officer of the Robert Rauschenberg Foundation, in an effort to expand its advisory services for both living artists and artists’ estates and foundations.

Further, although there is a widespread reluctance on the part of auction houses to give away profits through guarantees, Sotheby’s president and chief executive officer, Tad Smith, indicated earlier today that the auction house would use such guarantees when necessary.  With the expertise of Sotheby’s team, Mr. Smith affirmed that “we can confidently offer a guarantee to the seller and hedge it on the other side.  Used prudently, guarantees are good for consignors, collectors, the market overall, and investors.”

It will be interesting to see whether the other auction houses will follow suit in using such guarantees in future art auction sales this year.

Support of living artists can be rare.

Everyone knows the cliché “starving artist.”

However, things are about to change across the pond.  Last week, London’s mayor, Sadiq Khan, announced a new program designed to fund artist’s studio space through the financing of a special trust.  The trust known as the Creative Land Trust has been established through public and private dollars to keep artistic talent in the city of London and to avoid artist flight due to astronomical housing costs.

Somerset House Studio, a mixed used historic building along the Strand, is the first to reap the rewards.

This is an encouraging step in ensuring that there is continued investment in the arts. Large American cities like Philadelphia, New York, and San Francisco among others should take notice and strive to make similar investments.

Forbes recently published an informative online piece on a new IRS Revenue Procedure that makes the use of Charitable Remainder Trusts (CRTs) as a means for tax deferral more achievable for art and collectibles.  CRTs are generally used by those who are charitably minded and wish to sell a highly appreciated asset without having to pay a significant capital gains tax bill.

If the appreciated art is sold unconditionally by an art collector, the art collector, of course, would be responsible for income tax on the gain in the year of the sale.  However, if the appreciated art is sold by a CRT, which is typically exempt from state and federal income taxes, the gain is taxed over a period of time as distributions are made from the CRT.   In the meantime, the complete amount of sale proceeds unreduced by taxes can be reinvested by the CRT.  Moreover, in the year the art is sold by the CRT, the art collector is eligible to take a charitable deduction on his or her individual tax return in which such deduction is based on the remainder value of the CRT that is projected (based on specific IRS formulas) to be given to charity.

So exactly how does a collectibles CRT work?  Generally, art is transferred to the CRT by a collector and that art is sold by the trustee of the CRT who reinvests the proceeds in a portfolio of stocks and bonds.  As discussed above, the transfer of art to the CRT and the subsequent sale of the art will not result in a current capital gains tax bill for either the art collector or the CRT.

The CRT then makes a series of annual payments to a non-charitable beneficiary, usually the art collector who created the trust (or a family member) for his or her life or for a term of years.  The annual payments to the art collector or family member will be made from the CRT’s portfolio of assets, and the amount will vary depending on the structure of the CRT.”

This new change by the IRS is considered to have come at an “opportune time” with the Federal Reserve expected to increase interest rates later in the year as CRTs are most effective in higher interest environments.  In the meantime, art collectors may wish to consider this new IRS Revenue Procedure as we wait to see what happens with federal interest rates in the months ahead.

 

 

 

 

The New York Times recently featured an interesting article on the rapid growth of free ports around the world used by collectors and dealers for the temporary storage of art works.  Many would be surprised to learn that more than a million of some of the most treasured art works ever created, such as ancient Rome treasures, museum quality paintings by old masters and an estimated 1,000 works by Picasso, are crated or sealed in tight storage vaults within the walls of such storage facilities.

With the rise in the price of art, masterpieces and other exquisite art works are increasingly being stored away in free ports by collectors who are interested in seeing such works appreciate in value rather than filling up wall space to be viewed.  As collectors become more financially savvy with art being treated as a capital asset in their portfolios, free ports have effectively become the support for all of this.

This recent upsurge in the use of free ports by collectors has led to concerns over the use of such storage spaces for illegal activities as well as worries in the art world on the effect such wholesale storage has on art itself.  Within the last few decades, a small group of free ports have increasingly served as “storage lockers” for the wealthy.  Free ports are geographically located in tax-friendly countries and cities and offer attractive savings and security to collectors and dealers alike.

In addition to the at least four major free ports in Switzerland that specialize in the storage of art and other luxury goods, such as wine and jewelry, there are four more free ports around the world, including Singapore (2010), Monaco (2012), Luxembourg (2014), and Newark, Delaware (2015).

Out of concern that these rapidly growing private storage spaces could become havens for various illegal activities (i.e., contraband, money laundering, etc.), Swiss authorities initiated an audit back in 2012, the results of which revealed a significant increase in the value of goods stored in some warehouses since 2007 with an increase in high value goods such as art.  The audit estimated that there were more than 1.2 million works of art in the Geneva Free Port alone in which some of the art has not left the facility in decades.

Many in the art world remain critical of free ports.  With many valuable masterpieces being stored outside of public view, critics argue that works of art are created to be viewed.  Those who disagree point out that paintings are not a public good as much art work was created as private property. Others say that free ports represent a financial system in which investors lack a connection with the art they purchase, but recognize that the storage warehouses enable responsible collectors to manage their art collections and limited wall space.

Collectors and dealers often decide to utilize the free ports for the storage of their art for more common reasons than tax avoidance.  Some collectors and dealers simply have no more room in their homes and galleries.  In a free port, their valuable art works are protected in climate-controlled environments behind fire-resistant walls and often under video surveillance.  Some of the free ports even have viewing rooms where collectors can view their art and show it to potential purchasers.

According to an officer of the Geneva Free Port, as a result of the audit, the Swiss have been working to address concerns over the lack of transparency.  As of this September, all storage contracts will require clients to allow inspections of any archaeological artifacts they would like to be stored at the facility.

Only time will tell whether additional free ports across the world will take steps towards increasing transparency as to inventory and ownership as collectors and dealers continue to store their valuable art works in such warehouse facilities.

Southwest Airlines’ Heart of the Community program, launched in 2014, has given a $200,000 creative place-making grant to Minneapolis’ Hennepin Theatre Trust.

Last year the Hennepin Theatre Trust spearheaded two mural projects: a five-story-high mural of Bob Dylan (corporate sponsor: Goldman Sachs) and a smaller pop art style mural (corporate sponsor: American Express). It continues to run the ongoing Made Here urban walking gallery project. The trust is seeking public input on how best to use the grant.

The Wall Street Journal recently reported that the irrevocable trust, a common estate-planning tool, is increasingly being used by art owners as a tax-savings measure.

Here’s the gist.  An art owner gifts ownership of his or her painting or art collection to an irrevocable trust.  The painting is no longer part of the art owner’s estate, and so the value of the estate is reduced for tax purposes.

In addition, the painting is appraised at the time of the gift.  The amount of the appraised value above the $14,000 annual exemption from gift taxes will be deducted from the art owner’s lifetime combined federal gift-tax and estate-tax exemption (currently $5.45 million).   If that exemption has already been used up, the art owner will pay tax on the gift – however, this tax liability will likely be less than if the art owner keeps the painting in the estate.

Read more here.

News media reports that 2016 may be a challenging year for the art world.  Christie’s and Sotheby’s, the two largest international auction houses, recently released their 2015 results.  Each auction house reported a decrease in year-over-year sales with 2015 the first year since 2010 in which Christie’s and Sotheby’s were unable to yield an increase.

London-based Christie’s reported auctions and private sales of about $6.8 billion in 2015 (down by about five percent from 2014) while New York-based Sotheby’s reported nearly equivalent sales of about $6.6 billion in 2015 (down by about one percent from 2014).

While the above figures do not signal a “burst bubble”, they do hint that this year is going to be a challenging one for the art world and reflect the volatility going on throughout the world.

In particular, cautious owners have become increasingly hesitant to sell their high-value works in a downturn.  This is evidenced by Christie’s and Sotheby’s upcoming London auctions this month of Impressionist, Modern, and Contemporary Art, which are smaller with lower estimates than same such events at this time last year.

As investment-conscious buyers become anxious about spending significant amounts of money on art works by less established artists, the so-called new category of “20th-century art” now appears to dominate the art market.  Christie’s and Sotheby’s both used this new category to promote their respective February auctions.

It appears that “rediscovered” instead of “discovered” talent in the art world is going to be “a recurring theme of a bearish 2016.”  Only time will tell.

 

 

Inc. Magazine suggests there is.

Earlier this year, Sotheby’s and Christie’s had record art sales, each selling $1 billion worth of paintings and sculptures over the course of a week.  Now art sales are in decline, as demonstrated by Sotheby’s recent struggle to meet its minimum sales level of $375 million during its old master and modernist auctions.

“While the rarefied art world may seem like it’s worlds away from the concerns of your own company, you probably want to pay attention. Not only may the paintings and sculpture you bought now fetch less money, but your own company’s value may soon slide as well.”

Inc. identifies a “tenuous” link between art sales and stock market performance, and suggests that the “hype cycle” that has increased valuations for everything from technology startups to modernist paintings is coming to an end.

Entrepreneurs are warned that this may be a sign take a more sober approach to their businesses, as the “changing winds of the art market may further signal a retrenchment in the economy.”

“The big lesson is that you shouldn’t let over-inflated valuation expectations interfere with your exit plans, which could include a sale or plans to go public.”

Read the article here.

With the upcoming launch of Skate’s Art Loans Database next week, Skate’s, the global market leader in art business intelligence, has published some analytics in an effort to measure and track the use of leverage in the art trade.  Skate’s Art Loans Database is an extensive database of all the public Uniform Commercial Code (UCC) filings that are practiced in the United States as well as some international lending transactions to secure a pledge over artworks used as collateral in art lending agreements.

As a preview to the upcoming launch, Skate’s ranks the world’s most active borrowers in the art gallery world based on the number of UCC art-collateral pledges over the past ten years (note figure in [brackets] represents the number of borrowings) as follows:  (1) Gagosian Gallery [146]; (2) Paul Kasmin [26]; (3) Wildenstein & Co. [23]; (4) Pace Gallery [21]; and (5) David Zwirner [18].  Gagosian Gallery tops the list as the most aggressive borrower, according to Skate’s data.

Skate’s notes that art galleries do not typically use art lending in their business and the combined art-lending book of the above top five art galleries is “significantly less than the art-lending books of Christie’s and Sotheby’s.”

A glimpse of the above rankings reveals the Gagosian Gallery’s secret to success may simply be that the gallery makes better use of leverage than anyone else in the art gallery world.