USA Law and Practice Contributed by: Jana Slavina Farmer, Adam Buchwalter and Dara Elpren, Wilson Elser Moskowitz Edelman & Dicker LLP
tions of Artwork Gifts and Donations (annual and life- time exemptions). Donations of artworks to qualified charitable organisations may be exempt from gift tax if the artwork is transferred to a charity that is recog - nised by the IRS as tax-exempt under Section 501 (c) (3). The donation must meet specific requirements, including proper documentation, a qualified appraisal for artworks, and compliance with IRS filing require - ments, such as completing IRS Form 8283. Estate Tax Exemptions Donations to qualified charities may be made in a will. Under IRC Section 2055, if a person donates art - work to a tax-exempt 501 (c)(3) organisation (such as a museum, university, or public library), the value of that donation is not subject to estate tax. Inheritance Tax Exemptions In the United States, inheritance taxes are imposed by five states as discussed in 10.2 Legal and Fiscal Issues in Artwork Succession , but not at the federal level. The exemption thresholds and tax rates vary by state and depend on the relationship between the decedent and the beneficiary. Generally, assets left to a surviving spouse are exempt from inheritance taxes. There are no specific exemptions from inheritance taxes based solely on the type of artwork. 10.5 Trusts Artwork may be placed in a trust. Trusts can be used to manage, preserve and transfer ownership of artwork while minimising tax exposure and ensuring control over how the artwork is used or displayed. Depend - ing on the structure of the trust used, the transfer of artwork to a trust may remove the artwork from the donor’s estate.
There are no special penalties for simply placing art in a trust, but collectors should beware of routine traps, including undervaluing art for estate or gift tax pur - poses, which may result in IRS penalties, or losing the step-up in basis if the artwork is transferred to a trust outside of the donor’s estate. Further, as mentioned in 10.2 Legal and Fiscal Issues in Artwork Succession , it is possible that an artwork will still be included in the donor’s estate if the artwork remains displayed in the donor’s home post-gift. Consideration can be given to establishing a special- purpose trust designed to hold and manage an art collection. These trusts differ from a “traditional” trust established to hold and manage assets for the ben - efit of named beneficiaries and, under the applica - ble law of certain states, may continue in perpetuity. Transfers to a special-purpose trust are taxable gifts if made during a donor’s lifetime. They require a quali - fied appraisal of artwork and for it to be reported on the donor’s gift tax return. These trusts can also be created and funded upon the death of the donor. A special-purpose trust would typically appoint a trustee or “protector” (to oversee the trustee) with knowledge and expertise on art matters, who would be entrusted to ensure the collection is managed and maintained as the donor intended.
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