Hyden, Miron & Foster, PLLC Law Blog

Tuesday, October 14, 2014

Court Affirms New Estate Tax Strategy for Art Collectors

Collectors of valuable artifacts face a quandary when it comes to estate planning.  Their collections often appreciate substantially over time, so that, at death, their value may exceed state and federal estate tax exemptions.  The estate might then be taxed at a rate as high as 40%.  But giving away the art to avoid estate taxes would prevent collectors from enjoying their collections during their lifetimes.

Banker James A. Elkins pursued a strategy of giving away fractional shares of his art to his children.  He retained possession of the paintings, gradually relinquishing small amounts of ownership.   His estate planning involved a number of different tax avoidance tools, including a Grantor Retained Interest Trust (GRIT).  At the time of his death in 2006, he owned a 50% interest in three works of art and 73% interest in 61 others.  His children owned the rest.

Using calculations based on carefully documented appraisals, his estate discounted the value of his art collection by 44.75% because of his fractional ownership.  The IRS sent a deficiency notice, refusing to accept the discounted valuation.  Estate tax discounts on the value of assets because of partial ownership are often permitted, but they usually involve real estate or business holdings.  The IRS rejected the idea of fractional ownership of art, claiming there was no real market for a fraction of a work of art.

The Tax Court ruled against the IRS and said some discount should be allowed.  However, it rejected the 44.75% discount proposed by the Elkins estate, choosing, instead, a flat 10% discount.

The Court of Appeals for the Fifth Circuit rejected that approach and handed the Elkins estate a victory.  It scolded the IRS for offering no data to justify its position, in contrast to the Elkins estate, which offered extensive support for its valuation.  It permitted the 44.75% discount and awarded the estate a tax refund plus interest.

The Elkins decision could have far-reaching implications for art collectors in every state, who can now reduce the size of their estates by transferring fractional shares of art to their survivors.

The case demonstrates the importance of expert trust and estate planning advice, careful documentation, and advocacy in the event of a dispute with the IRS.  Whether you have a valuable art collection or seek to reduce estate taxes, the experienced Arkansas tax lawyers at Hyden, Miron & Foster, PLLC can help.  Call (501) 376-8222 for a consultation.


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