Art and tax are probably not the most popular topic for anyone involved; artists, collectors, buyers and sellers all dance around the subject of the art collector tax burden, not openly discussing the full extent of taxation in art, or simply trying to avoid the subject matter all together. But with the art market, being a multi-billion dollar industry, it’s no wonder the authorities are searching far and wide for instances of tax evasion and irregularities. Different laws and regulations apply to different parts of the world, but collectors are always looking for ways to alleviate their tax burden. Charitable Remainder Trusts can provide numerous benefits and tax-exemptions to art collectors, and here’s why every collector should consider a CRT.
One of the latest revenue procedures, brought up by the IRS, is the use of certain charitable remainder trusts (CRTs) as vehicles for tax deferral for art and collectibles. As the name suggests, it is the charitably inclined who typically use the CRTs in order to sell a highly valued asset without actually paying a big capital gains tax bill. Should an art collector venture to sell the art, he or she would owe income tax on the gain in the year of the sale. However, if the seller is a CRT, then the gain is taxed over time as distributions are made from the CRT. Furthermore, the CRT is generally exempt from state and federal income taxes, which means it can effectively reinvest the full amount of sale proceeds, completely untouched by taxes. And as if the benefits of CRT weren’t already enough, the collectors can take a charitable deduction on their individual income tax return – based on the remainder value of the projected amount to be left for charity. This is calculated by the established formulas from the IRS.
It all sounds great, but how does a collectibles CRT actually work? It’s all quite simple when you look at it. When a collector transfers the art to the CRT and the trust sells the said art, the proceeds are reinvested in a portfolio of stocks and bonds. Neither the transfer nor the sale of the art can result in a current capital gains tax bill for the CRT or the collector. After the initial transfer and the sale are done, the CRT makes a series of annual payments to a non-charitable beneficiary, typically, this is the art collector or their family member who created the trust. Essentially, the idea behind a CRT is that an individual receives income during the appointed trustee’s lifetime, or during a specific term of years, after which the remainder of the trust assets is to be distributed to charitable organizations.
In the climate of high state and federal tax rates for art and collectibles, CRTs act as a more than viable option for collectors. The higher the taxes, the higher the tax deferral benefit. Consequently, as the interest rates rise in the charitable remainder annuity trusts, the tax deduction for donors become larger as well. In the right circumstances, a CRT can be a valuable source of income.