The unprecedented global intergenerational wealth transfer continues to build momentum, with an anticipated $15 trillion expected to change hands over the next 10 years. Deloitte, in its latest Art & Finance Report, estimates that art and collectibles will represent nearly $1 trillion of this transfer.
While significant wealth transfer between the generations in ultra-high-net-worth families is not new, what has changed is just how rapidly wealth has accumulated over the past 10 years, including in the value of art collections.
“It almost seems since COVID, artwork as well as other luxury items such as wine and cars have exponentially increased in value,” says Blaine Cameron, national leader for tax, KPMG Family Office. “People are willing to pay for bespoke ownership entitlement.”
In her role as director of art and collectibles at Scotia Wealth Management, Robyn McCallum is seeing two key trends. “There is a growing realization that art collections are becoming more valuable over time, and families are starting to take a more holistic view of their wealth overall. Together, these factors mean the collections are becoming part of broader financial conversations rather than remaining what I call ‘passion’ assets for the collectors. I think this is positive.”
It is also necessary—especially in the context of the Great Wealth Transfer.
Why it’s time to get proactive and make art part of estate planning
“Art collections are becoming bigger and more valuable,” says Cameron. “Family situations are becoming more complicated and complex. The family balance sheet is becoming cumbersome to manage from a logistical perspective in terms of how you own, care and manage the tax consequences of those assets. And then, also, what is the legacy of the assets?”
McCallum is seeing more families transfer art, but she also sees, anecdotally, even sophisticated collectors who don’t have a full grasp of how much of their overall net worth is tied up in these types of assets.
“Part of the challenge is that art is both a financial and emotional asset, and both of these values are equally real,” says McCallum. “An estate plan has to reflect this dual nature.”
What to consider when including art in an estate plan
“It’s important to think about art and art collections as the lens through which you can see a family’s values, their relationships, their aspirations,” adds McCallum.
“When I meet with families, often we end up talking about identity, memory, passion and legacy. The conversations are rarely about the objects themselves. The best estate planning ensures that the collections continue to support the family’s goals. It’s not just about transferring assets. You also have to transfer the intention for what you want done with the art.”
That will vary depending on the family and their situation. For example, is the intention for the collection to stay intact within the family? Can it be split up? Is the goal to sell or donate part or all of the artwork? There are estate and tax implications to each of these scenarios.
How to transfer art
There are a few key options to transfer art to the next generation outside a will, mitigating taxable capital gains and probate fees.
A family trust protects art from creditor claims while allowing the family to enjoy the collection. It also ensures the owner/collector’s vision for the art is realized.
“When you personally pass down art, you are giving up any entitlement to control,” says Cameron. “With the trust, you will have a trust deed, which will identify the trustees in terms of who controls the art, the governance over how the art will be used, where it will be displayed, how it will be passed down to future generations, and future sales.”
Establishing a trust also means that tax can be deferred for 21 years, when the trust will face a deemed disposition—allowing time for tax planning.
Selling the art to a family-owned private corporation removes any individual tax liability and can ensure the collection will stay intact—if that’s the goal. However, it also means the family will never use the art personally. When one of Cameron’s clients passed away, the estate sold the artwork to one of the family holding companies, which is where it now resides. “It was a mechanism to take some of the corporate surplus out of the corporate shell and put it in the estate without further tax,” he says. “In that case, the family appreciated there was a corporate owner, that their customers and advisors could see the artwork, and that it will continue indefinitely.”
Establishing a private family foundation, also a corporate entity, offers a hybrid approach to transferring art to the next generation and philanthropy. “We have seen a family passionate about culture establish a family foundation whose long-term mission is the preservation and promotion of art within Canadian culture and society,” says Cameron. “It is very advantageous in that the family could claim a charitable credit in respect of the gift, but the art has to be used for the intended charitable purpose and not for the family’s personal benefit.”
There is a responsibility that comes with owning collectible assets.
Robyn McCallum
If the intention is to donate the art, there are two ways to do so in Canada. You can make a straight gift to a charity, which will issue a donation receipt for the asset’s fair value that you can use to offset tax on your broader estate. Or, if the art is of significant cultural value, you can go through the process of having the Canadian Cultural Property Export Review Board certify it as cultural property for income tax purposes and donate it to public museums and galleries. This will eliminate capital gains tax and generate enhanced charitable donation credits.
If you do decide to donate your art, be sure to consult with the receiving institution early to understand their collecting mandates and whether they are able to accept the donation. “We had a client whose gift to a major art museum was declined because it was over-indexed on that particular artist,” says McCallum.
The practical realities of transferring art to the next generation
Beyond tax and valuation considerations, transferring art is complicated because you are not just deciding who gets the art. You also need to address questions like, Does the next generation want it? Are they comfortable and able to steward these collections?
“There is a responsibility that comes with owning collectible assets,” says McCallum. “They have to be maintained and properly stored. Cultural property export laws dictate which countries they can be exported to.”
While there is no one right way to transfer art, there are three key steps to start the process:
Get an inventory of the collection. “Document the provenance of the work, original purchase records, appraisals, etc.,” says McCallum.
Obtain current valuations. Having a clear understanding of the current market value of the work is important.
Bring the collection into estate planning conversations. “Have these conversations with your family early. Communicate your intentions and why you feel so strongly about your plans for the art,” says McCallum. “If children are not interested in stewarding these assets, then going forward, what is the plan to ensure these assets get the respect they deserve?”
Mary Teresa Bitti is an award-winning journalist, content creator and entrepreneur who works with media, corporate and not-for-profit organizations to tell their stories.
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