By Susan Harvey Dawson

As a tax lawyer, I enjoy working with artists because of their focus and concern on truth and on beauty. A serious artist lives life a bit differently from the rest of us, and yet still must cope with practical, everyday matters. So too, in death, the distribution of the estate of a deceased artist needs to be carefully carried out to fulfill the artist's last wishes.

There are two major concerns for an artist's estate. The first is the actual gathering, storage, disposition and distribution of property, including accumulated art work. The second is the necessary legal and tax considerations of any estate.

After someone dies, all of the property he or she owned at the date of death (the estate) will be distributed under court supervision (probate) by a person named as executor by the artist in a will. If there is no will, the estate will be distributed by a person appointed by the probate court as the personal representative under the laws of intestacy. It is the duty of the executor or personal representative to gather, list, value, maintain and distribute the items in the estate after the federal and state tax obligations, if there are any, are satisfied. In the case of property, such as real estate or art work, the executor or personal representative has to maintain the property until it can be sold or distributed in kind, which may require cash from the estate.

Any artist who has sold art work and has accumulated a body of work should be concerned about the person who will handle the art work for his or her estate. If desired, a special executor can be named by the artist in a will or trust to separately administer the body of art work.

TAKING INVENTORY
Here are some important questions to consider when planning for the future of your work: Who will benefit most from the art work after your death? Can the work be liquidated to meet financial needs? Who is best qualified to handle the body of work? How will the costs of storage and maintenance be covered? Are specific works to be given to specific recipients? Do you wish to give works to institutions? What is the current marketability of your work? Will your marketability change after you are gone? Is your body of work well documented?

This last question is very important. Even if you have designated a trusted dealer or agent to take care of your body of work for your estate, you are the one with the most knowledge about each piece. It is most important that you clearly identify, sign and date each work and keep an inventory with accurate descriptions as to size, media, date, exhibitions, insurance value, sales price, current locations, awards and any facts relating to provenance. Photographs of art works help a great deal in identification. It is also important to distinguish between finished pieces and works in progress. Making an inventory is something you can do right now. Even if you do not get to any other estate planning, this should not be neglected.

ESTATE TAXES
Another concern for an artist's estate is valuation. A federal estate tax is imposed on the transfer of property at death. For estate tax purposes an estate consists of the value of all property owned at the time of death plus the value of all taxable gifts made since 1976. The taxable estate is the amount remaining after funeral and administration expenses, claims and losses, charitable transfers and marital deduction are subtracted. The 1976 Tax Reform Act unified the federal estate tax and gift tax systems. Each taxpayer now has a single exemption which may be used for gifts given throughout a lifetime and/or at death. The current unified credit is equivalent to a $600,000 exemption. Estates valued at over $600,000 are subject to tax rates starting at 37 percent and going as high as 60 percent on very large estates of $10,000,000 or more.

Consider the case of Ann Artist, a sculptor in her mid 50s, who owns a house worth $200,000, a mountain studio retreat worth $75,000, a life insurance policy for $100,000 for the benefit of her grown children, personal effects and furniture worth $25,000, and investments in stocks and mutual funds valued at $200,000. So far, the estate totals $600,000. In addition, Ann Artist has a body of work consisting of 180 pieces of welded sculpture and 200 drawings. She recently had a show and sold several pieces for $3,500 each. If she dies suddenly, her otherwise modest estate may present an unwelcome surprise.

Without planning, the value of art works can push an ordinarily exempt estate into taxable brackets, requiring the liquidation of estate assets and the use of available cash for taxes, leaving little or nothing for the heirs.

Valuation of the art is crucial. IRS regulations require an outside appraisal by an expert for works of art with a value of $3,000 or more. The IRS maintains an 18-member Art Advisory panel which meets three times a year to review and evaluate appraisals.

The determination of fair market value includes many factors: recent comparable sales; the costs of selling; costs of preparations for exhibition; framing; shipping and transportation; dealer commissions or fees; the costs of replacement; terms of the sale, time and place of sale, and any unusual circumstances which affect price. Sometimes the sudden death of an artist can cause a marked increase in the sales prices of his works.

In Ann Artist's case, if the sculptures are valued at $3,500 each and drawings at $100, and 50 percent is allowed for commissions and for handling costs, the art work will add $325,000 to the value of the estate and will cost $105,250 in federal estate tax. (In this example, funeral and administration expenses were disregarded for the sake of simplicity). This outcome can be avoided with careful planning and with the help of an estate lawyer familiar with the needs of artists.

Note: Part II of Estate Planning for Artists will explore the legal tool, available to plan an estate to ensure smooth transfer of property and to minimize costs to the estate.

Susan Harvey Dawson is an attorney who specializes in tax matters for artists. Special thanks to attorney Joy Chambers, who specializes in estate matters for artists, for her assistance.