A perfect pairing: art appraisals and insurance

Tea and biscuits. Peanut butter and jelly. Coffee and cake. Gin and tonic. These are attractive pairings. Yet in my world, collectors also lump “insurance and taxes” together. This effect of this pairing is usually not so attractive—the image evoked can ruin your appetite and leave you reaching for antacids rather than another cookie.

Yes, there can be tax implications to being a collector, but most “taxable events” are triggered by acquisitions or de-accessions, not by the mere fact of owning valuable collectibles, and not by protecting your collecting legacy with a solid arts insurance policy. Although taxes and financial regulations are never set in stone, one thing that doesn’t often change is the need to proactively protect your collecting passion with appropriate insurance and financial planning.


Selling or buying may trigger taxes. Owning doesn’t.


When you fall in love with a work of art and purchase it from a gallery located in the United States, you often have to pay state sales tax. If you purchase artwork in another state where you are not domiciled (i.e. you live in Chicago, but purchase the art from a gallery in Los Angeles and ship it back to the Windy City), you may also be obligated to pay a use tax in the state of Illinois. A use tax is a state tax on goods purchased in another state in lieu of local sales tax.1 Consult with your accountant or tax advisor about any applicable use tax in your state.

Taxes can also be triggered by selling an object. When you sell a work of art for a profit, a capital gains tax may apply to the profit made in the sale. A maximum federal long-term capital gains tax rate of 28% currently applies to collectibles.2 This has been a sore spot with many collectors, as profits from a stock market portfolio, by contrast, are only taxed at a 20% rate.3

The good news is, you are not taxed on your collection during the period called “ownership.” This is the period between the purchase and the sale (or donation) of your artwork, when you are living with your art and, hopefully, enjoying the intellectual and aesthetic pleasure of your collecting hobby.


An illuminating tale of dark perils


While you are enjoying your collection, a good art insurance policy can protect it daily against covered perils. Flood, fire and losses in transit are more of a threat in everyday life than the taxman as you are in the period of possessing and enjoying your collection.

Elizabeth von Habsburg, managing director of the independent appraisal firm Winston Art Group, tells the story of a client of hers who owned a work by a well-known contemporary painter. Thinking that nothing would ever happen to it in his NYC apartment, he chose not to schedule the work on his insurance policy, covering it instead under a blanket policy with a per item limit of $10,000. But the work was worth about $250,000.

One night, a candelabra was lit for a dinner party and placed on a console in front of the painting. The painting included encaustic, and given the heat from the candelabra, the surface of the work melted and shifted downwards. The work was irreparable. It was a total loss, which would have been bad anyway, but was worse because the client was not properly insured.

“For us,” Elizabeth told me, “This story shows the importance of knowing the correct value of your collectibles, so you can protect them correctly. Fine art insurance is an extremely low cost way to protect a valuable—and often irreplaceable—asset.”

If only this collector with a penchant for romantic candlelight had been as thoughtful in creating a protective ambiance for his paintings, he would have found himself in a much less unfortunate situation.


Blankets vs. schedules


Insurance—whether blanket or scheduled—only works when a collector insures artwork for the appropriate value. Scheduled coverage specifies the collectibles to be insured, with relevant information about each object’s value, material, age, condition, title and name of the artist, designer and/or time-period. Blanket coverage is based off of one blanket value, and is meant to cover lower-priced valuables.

For example, it makes sense to schedule an engagement ring, but lower-valued costume jewelry would be appropriate for blanket coverage. A $50K blanket coverage limit for jewelry or fine arts can have a maximum limit per item, such as $5K or $10K. This way, it can provide coverage for modestly priced jewelry or collectibles, without the need to schedule every item. A collector should also be aware that although no description, documentation or list is required for blanket coverage, in the event of a loss, clients are usually required to demonstrate proof the item had been in their possession before the loss.

A blanket policy shouldn’t be used as a catch-all or as a substitute for scheduling a serious collection. The collector with the valuable painting and potent candelabra learned this the hard way. Most collectors submit invoices and receipts for their art, furniture, decorative arts and jewelry purchases. If you have been collecting for many years, or inherited items of unknown value, an updated appraisal is necessary to determine insurable value.


Insurance valuation vs. Fair Market Value


When engaging an appraiser to value your collectibles, you may want to consider asking for two appraisal documents. First, an appraisal with values based on insurance valuations, so you can replace your collectible with an object of similar kind and quality in the event of a loss. Second, an appraisal based on Fair Market Value, which is a helpful tool when planning for charitable donations and your estate. One object, two values.

How can an object have two values? Elizabeth von Habsburg says it is one of the questions her clients ask most.

She elaborated on the differences why this makes sense. “Retail Replacement Value reflects what the collector would have to pay to replace a work through a dealer or gallery, in a short period of time, with something of comparable quality, style, date, and condition by the same artist. Insurance values are equated most often with this higher Retail Replacement Value, in order to insure at a level that would protect a client’s art assets. Fair Market Value, by contrast, is often significantly lower than Retail Replacement Value. Fair Market Value reflects what a client would receive (or would pay) if a work were sold (or purchased) in the open market. In many cases, this open marketplace is equated with what a work would sell for at auction (the so-called secondary market). Fair Market Value is required by the IRS for use with gift, donation and estate tax valuations.”


Planning and peace of mind


If you currently collect, your objective is to preserve the value of what you have by keeping it in good condition, a safe environment, well documented and well cared-for. Knowing the value of what you have can empower you to make financial decisions that make sense for you.

So it’s true! Champagne and oysters, planning and peace of mind, blankets and schedules, appraisals and insurance policies—good things really do come in pairs!

The next article in this series will discuss possibilities for leveraging your collection within your estate plan. 

Katja Zigerlig is Vice President, Art, Wine + Collectibles Advisory at Berkley One.

3“An overview of the 2017 tax legislation: impact to individuals.” PricewaterhouseCoopers and Morgan Stanley Wealth Management. Dec 2017.