USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Matt Perotti, Drew Reitz and Ashley E. Huh, Pillsbury Winthrop Shaw Pittman LLP
10. Gifts, Donations, Trusts and Inheritance 10.1 Planning for Generational Transfer of Artworks Estate planning for art should consider whether to transfer the art during the lifetime or at death. The owner should also consider whether they wish to retain control over the art during their lifetime and pro - vide for a disposition of the art under their will or revo - cable trust. This would result in the inclusion of the art in the owner’s gross estate for federal estate tax pur - poses, although it may offer administrative benefits. If the owner holds the art until death, the art receives a step-up in basis to fair market value as of the date of death (or if elected, the alternate valuation date). Any lifetime-gifting should consider federal gift, estate and GST tax exposure, along with income tax conse - quences for both the donor and donee. An owner may consider making a lifetime gift to prevent inclusion in the owner’s gross estate, particularly if they expect the art to appreciate significantly in value between the time of the gift and the owner’s death. Although the owner may have to pay gift tax, the owner is not subject to transfer taxes on the post-gift apprecia - tion. Lifetime gifts may qualify for the annual exclusion under Internal Revenue Code (“IRC”) Section 2503 (b) as well. The owner may also consider making a gift to a grantor trust and holding a substitution power, which would allow the owner to exchange the gifted art with an asset of equivalent value without any income tax consequences. However, there are other factors that makes a tes - tamentary transfer more favourable, especially if the owner wishes to retain assets for use during their life - time, the owner does not wish to make inter vivos gifts, the owner’s gross estate at death is not expect - ed to exceed the lifetime exemption amount, or if the owner is married and lives in a community property state, the surviving spouse may lose the benefit of the step-up in estate tax values on the surviving spouse’s one-half of the community property. Additionally, if the art is held in trust, the owner should consider appoint - ing a trustee or adviser with expertise in art who can oversee the administration, valuation, conservation, sale and promotion of the art. The owner of the art should consider whether to appoint the specialist as
an executor or trustee, or as an adviser to assist the trustee. The owner of the art may also consider wheth - er the trustee should have exclusive authority to make decisions regarding the sale, license or use of the art. 10.2 Legal and Fiscal Issues in Artwork Succession If the deceased individual does not leave a Will or trust that directs the disposition of the art, intestacy under state law would determine how the art is distributed. Under intestate and/or testamentary succession, the art collection can be fragmented among multiple heirs under state probate rules, which may lead to disputes, including but not limited to control, possession, or conservation. Title to the art may become contested. Additionally, if the individual owns art that consists of cultural property from other nations, a foreign nation can assert ownership and seek to recover the art on the grounds that they were stolen. Similar rules may apply with respect to collections of Native American cultural property. Fiscal issues centre on federal estate tax valuation. Artwork is included in the gross estate at date of death value under IRC § 2031 (with possible alternate valu - ation under § 2032). If the estate, gift or income tax return has been selected for audit and includes art valued at USD50,000 or more, it faces heightened scrutiny through the IRS Art Advisory Panel process. 10.3 Tax Implications of Artwork Gifts and Donations Gifts of art would be taxed to the donor and not the recipient. An individual donee generally does not rec - ognise income upon the receipt of the gift artwork because the value of the property acquired by gift is excluded from gross income under Internal Revenue Code (“IRC”) Section 102 (a). A donor can make a gift up to the annual exclusion amount per donee (for example, USD19,000 in 2026) without using the donor’s lifetime exemption. Gifts above the annual gift exclusion will use the donor’s lifetime exemption and the gift must be reported on a gift tax return. In 2026, each individual may gift up to USD15,000,000 in assets before being subject to gift tax. Under current law, the gift tax is 40% on transfers over the donor’s available exemption amount.
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