USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Matt Perotti, Drew Reitz and Ashley E. Huh, Pillsbury Winthrop Shaw Pittman LLP
10.5 Trusts Artwork can be placed in an irrevocable trust by gift or bequest, which may provide advantages over an outright gift or bequest of the art. Holding art in trust allows for the professional management of the art and also provides creditor and divorce claim protection. Additionally, by holding art in trust, the donor may have more control over directing who may possess or enjoy the art following the transfer. A purpose trust is a trust that is designed to hold assets for a specific purpose, rather than for the benefit of individual ben - eficiaries. A gratuitous transfer of an art collection to a non-charitable purpose trust would be a gift if the transfer is a completed gift, but retained powers may cause estate tax inclusion. In addition to transferring artwork to an irrevocable trust, which is a completed gift for gift tax purposes, individuals may also transfer artwork to a revocable trust. A revocable trust func - tions as a “will substitute” in that the trust provides direction for the distribution of the artwork upon the owner’s death. Transfers to a revocable trust are not a gift because the transferor retains full domination and control over the trust assets during the transferor’s lifetime. Importantly, assets held in a revocable trust avoid a court-supervised “probate” procedure upon the transferor’s death, which can be time-consuming and is generally available for public viewing.
Although the donee does not recognise income upon receipt of the gifted art, the transfer is not advanta - geous for the donee as the donee typically receives carryover basis, subject to adjustments under IRC Section 1015. A donor who donates the art to a qualified charitable organisation may receive an income-tax charitable deduction, subject to certain limitations. There are specific rules regarding appraisals for gifts of art. 10.4 Artworks Exempt from Inheritance/ Donation Taxes Artwork may be excluded from transfer taxes when the transfer falls under statutory deductions or exclu - sions. Transfers of art to qualifying charitable organi - sations, such as museums, are deductible for estate tax purposes under IRC Section 2055 and for gift tax purposes under IRC Section 2522. Transfers to a surviving spouse may qualify for the marital deduc - tion under IRC Section 2056 and IRC Section 2523. Lifetime gifts of artwork may qualify for the annual exclusion or fall under the lifetime exclusion amount (currently, USD15,000,0000). If a transfer of artwork does not qualify for an exclusion from transfer taxes and the value of such artwork exceeds the transferor’s available exclusion amount, then the transfer would be subject to gift tax (if the transfer is an inter vivos gift) or an estate tax (if the transfer is testamentary). The gift tax and estate tax rates are 40%. Gift and estate taxes are paid by the transferor and not the transferee. The US does not have a separate inher - itance tax. In addition to gift and estate taxes, the US applies a “generation-skipping transfer” (GST) tax on transfers to individuals more than one generation below the transferor (called “skip-persons”). The tax is in addition to any gift or estate taxes that apply to the transfer. Each individual has USD15,000,000 of GST exemption. Transfers to skip persons in excess of USD15,000,000 are subject to a 40% GST tax.
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