Tips for Dividing Art in a Divorce or Death

Fights and Taxes Can Arise When Art Collections Must Be Broken Up

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Who gets that painting?

Of all the fights that can erupt during divorce proceedings or when a family member leaves behind a large estate, some of the biggest take place over the artwork.

"I'd put it in the same category as child-custody battles," says Suzanne Landers, an attorney specializing in family law in Memphis. Emotional attachments to art can outweigh financial considerations, Ms. Landers says. It takes far longer to decide who gets what painting or sculpture than it does to divvy up houses, cars or even money, she says.

Serious art collectors might roll over in their graves—or never marry—if they knew what feuds their purchases were destined to inspire. On the other hand, lots of friction can be avoided if lovers of art and their families acquaint themselves with a few legal and tax basics.

What follows are some tips on how to decide, peaceably and equitably, who gets what, and ways of disbursing an art collection and minimizing taxes.

In Case of Divorce

Make an Inventory. For divorcing couples, the first step is to develop a detailed list of all the art bought before the marriage; bought during the marriage; art sold and at what price; and art that hasn't been sold, says Raoul Felder, a divorce attorney in New York City.

Art bought or obtained before the marriage, or acquired after the couple has separated or filed for divorce (depending upon the jurisdiction), is not considered marital property. It belongs to the same spouse as before. If one partner agreed to buy a piece before the marriage and it arrives after the wedding, it also is excluded from marital assets.

Hiding artworks or failure to disclose relevant documents could lead to lawsuits. If fraud is determined, "half or even 100% of any undisclosed and unallocated assets may be awarded to the other spouse," warns Valerie L. Patten, a family and art law practitioner in Palo Alto, Calif.

Hire an Appraiser. "The love of art grows exponentially after the appraiser's report comes in," especially if items have grown in value, says Dallas-based lawyer Ike Vanden Eykel.

A couple may agree on one appraiser, or each may hire their own. Mr. Felder warns that appraisals can be far apart. Parties can agree to split the difference between two conflicting appraisals or take the differences into account when negotiating which partner gets which piece.

Artworks then may be divided equally by value, or other assets can be made part of the bargaining—the house, the vacation home, the car, even primary custody of the children.

And as Mr. Vanden Eykel says, "You don't want to leave things up to a judge to decide, because the court will only order that everything be sold."

Estate Planning

Security First. When a collector dies, before any art changes hands or is sold, the estate must clear probate court. This can take years. If the home of the deceased is unoccupied, consider changing the locks, hiring a security firm or moving the art to a climate-controlled fine-art storage facility. No items of value can be removed before a formal distribution of assets.

"I hear people every so often say that when their parents die they will just go into the house and take things. I just shake my head," says Ramsay H. Slugg, managing director and a member of the National Wealth Planning Strategies Group at U.S. Trust, Bank of America Private Wealth Management. He refers to such practices as "moving-van planning." Removal of valuable items is "a criminal offense," he adds. "You can go to jail."

Plan Ahead. Ideally, decisions about art should be part of estate planning. Like houses, art that passes at death receives a step-up in value for tax purposes. But even if a collector specifies who gets what, problems may arise.

"Say, you have a $20 million estate, and $10 million of that is a Rembrandt painting," says Patricia M. Annino, an estate-planning lawyer in Boston. "The collector wills the painting to Susie and everything else to Charley. Charley is stuck paying the estate tax for Susie's Rembrandt." To be fair, Ms. Annino says, the will should specify that each heir will pay his or her share of taxes on the assets received.

For a person who dies this year, no federal estate tax will be owed if the estate is appraised at less than $5.34 million. But there only needs to be one Picasso or Warhol to trigger federal estate tax of as much as 40%. And some states charge as much as 20% above a $1 million threshold.

Objects will need to be appraised professionally. "Most of the time, if the work is good, of real value, it will go to auction," Mr. Felder says.

Selling and Gifting. Sometimes collectors will sell art to help cover anticipated estate taxes. By placing the art in a tax-exempt charitable remainder unitrust, the collector can receive distributions from the sale for the rest of his or her life, taxable as ordinary income, allowing the collector to avoid a 28% capital-gains tax. When the collector dies, remaining distributions go to a designated charity.

If an art collection is donated to a nonprofit, the gift can be made all at once or in installments. If in parts, the collection can be donated incrementally over a period of up to 10 years, permitting the donor to take full advantage of tax deductions and to keep some objects over that time. When a donation is valued at $5,000 or more, it must be reported in the donor's tax filing, accompanied by a qualified appraisal, says Catherine Schmidt, chair of the trusts and estates group at the New York City-based law firm Patterson Belknap Webb & Tyler.

Gifts to individuals valued at $14,000 or more must be reported as well, and an appraisal may be required. To qualify as a gift, Ms. Schmidt adds, "objects actually have to be transferred from one person to another."

Be forewarned: Appraisals can be audited by the IRS' Art Advisory Panel, and in 2012, only 51% of appraisals audited were accepted. Decisions may be challenged, but most parties pay the additional tax and any penalties.

Another piece of advice: If a collector decides to donate their art to a museum, make sure the museum wants it first.

"Collectors can be so attached to certain artworks, they assume that their heirs, or some museum, will want to own it, too," says Ms. Annino. The museum may put the art in storage, or not accept it at all, leaving the family or estate executor to scramble for some option of disposing of it.