When A Client Inherits A Collection: Advice For Advisors

When a client inherits a collection—be it art, antiques, coins, sports memorabilia or other unique assets—the emotion is often a mix of excitement and uncertainty. The new owner hopes for hidden value but may worry about making costly mistakes. For advisers, guiding clients through this process is both an opportunity and a duty, as collections can quickly become a significant component of one’s net worth.

Essential Steps for Advisers When a Client Inherits a Collection

1. Inventory the Collection

Most inherited collections lack a comprehensive inventory, or what exists is incomplete, outdated, or focused purely on lowering estate tax value. Begin by cataloging every item—including photographs and documents—listing key details: creator, date of acquisition, contracts, provenance, and related paperwork. Include references for licenses, assignments, copyrights, and location of each item.

2. Aggregate and Simplify

Collections usually have a mix of high-value and ordinary items. Advisers should help group items by type, value, legal status, and market volatility. This aggregation assists in identifying the pieces that are most significant for retention, sale, or donation, and it streamlines paperwork crucial for establishing provenance and legal title.

• Tax Classification: The IRS distinguishes between collectors, investors, and dealers, each with different tax treatments. Advisers should help clients understand and document their activities to support the appropriate tax classification, while noting that attempting to manipulate classification solely for tax advantages may constitute tax evasion.
• Legal Title: Ensure clear legal title for valuable items. Consider title insurance when provenance is in question, much like with real estate transactions.
• Liquidity: Identify which items are easily sold and which are illiquid. Sometimes aggregating liquid and illiquid pieces gives leverage when negotiating fees on sales.
• Premiums: Occasionally, a client may inherit a “marquee” item—one that is both rare and highly prized. These require specialized management, potentially including tax planning based on their disposition.

3. Manage and Plan for the Collection

Advisers may not manage daily sales, but you can ensure clients work with experts, appraisers, curators, insurers, and tax professionals. Key issues to address:

• Buy/Sell Discipline: Help clients understand when to hold, sell, or donate items—mirroring the discipline used for financial assets.
• Proper Documentation: Ensure that all associated ephemera (catalogues, notes, receipts) are preserved, as they are essential for provenance and future valuation.
• Insurance and Risk: Advise on appropriate insurance, not just casualty but also title coverage on major items.
• Estate & Succession Planning: Collections should be addressed specifically in estate plans—Wills, Trusts, or LLCs. Consider split-interest trusts, family limited partnerships, and donation strategies to ensure continuity for future generations.
• Legal Process & Tax Implications: Understand how probate or non-probate transfers affect collections. Proper documentation and executor instructions are critical, as art and collectibles often pose unique valuation, discounting and taxation challenges. Advisers should recommend qualified appraisers who meet IRS requirements under Treasury Regulation § 1.170A-13(c)(5) for high-value items.

Communication and Advocacy

Both adviser and client should communicate regularly. Advisers must actively listen and understand the emotional connection to collections, coordinate a multidisciplinary team, and integrate the collection into broader financial and estate planning. Collectors, on their part, should share the stories behind their pieces and provide context, ensuring their adviser appreciates the collection’s intangible value.

Final Takeaway

Inheriting a collection represents both a financial asset and responsibility for stewardship of the collection. Advisers can add immense value by bringing expertise, organizing information, protecting assets, and planning for the future. The goal is not just to preserve wealth, but to honor legacy, unlock opportunity, and guide the next generation of collectors.