3 Tips for Bequeathing and Inheriting Collectibles

A private wine collection shattered records when it sold for nearly $30 million at Sotheby's in 2019. Three years later, a rare Mickey Mantle rookie card sold at auction for a record-breaking $12.6 million. And in April 2022, a copy of the first Superman comic went for $5.3 million.

Even far more prosaic pieces can contain real value. However, they can also present unique challenges when it comes to estate planning—both in terms of the financial implications and emotional stress if you haven't had an open conversation with your heirs about how to care for, or dispose of, your collection.

Here are three steps to help ensure the collection's transfer honors the efforts and passion that went into its creation.

In general, there are three options for distributing collectibles:

1. Leave them to heirs: If this is your preference, you'll need to make sure the intended recipient has the interest, means, and willingness to maintain your collection. Fine wine, for example, must be stored in a humidity- and temperature-controlled environment; rare coins and stamps must be secured; and even comic books and trading cards must be cared for lest their condition—and value—deteriorate.
2. Sell them during your lifetime and distribute the proceeds: Collectors who go this route should seek out independent advisors, who can present a plan for the best path forward. They should help you answer questions like: Is the collection more valuable as a whole or broken up into multiple sales? What are the tax implications of any capital gains?
3. Donate them and possibly realize a tax benefit: Many collectors or their heirs choose to donate to a charity or nonprofit, potentially realizing a tax deduction equal to the collection's fair market value and avoiding capital gains taxes that might otherwise have been owed on the sale. If the collection is left to charity in the original owner's will, its value will be removed from the taxable estate, which may help reduce or avoid estate taxes.

Since a collection's value can fluctuate based on the market and the economy, it can be helpful to get multiple appraisals—particularly since the more proof an estate has of a collection's value, the more likely the IRS is to accept it. (The International Society of Appraisers has an online tool to find qualified appraisers in your area.)

The Fine Art Group, an independent art advisory, also recommends performing an annual review of a collection, which can help identify its market value and inform whether to keep, donate, or sell it. Depending on the size and value of your collection, you may want to enlist a professional collection manager, who can help with cataloging and appraising your assets as well as negotiating a sale.

Whether you're the original owner or an inheritor of a collection, there are several tax implications to consider:

• If you sell any items for a loss, be aware that you cannot deduct losses from your taxes if you're considered a hobbyist. (Due to a provision in the Tax Cuts and Jobs Act of 2017, collectors who are considered investors—meaning they acquire a collection explicitly to sell it for a profit—aren't currently able to deduct losses either, but this provision is set to expire after 2025.)
• If you sell any items for a long-term capital gain, collectibles are subject to a maximum tax rate of 28%—higher than the top rate of 20% for securities—plus a 3.8% net investment income tax if your adjusted gross income exceeds $200,000 ($250,000 if married filing jointly).
• If the collection forms a significant portion of the estate and the estate's total value exceeds the lifetime exemption of $13.61 million, heirs may be forced to sell all or part of it in relatively short order to pay estate taxes or other costs associated with the estate. Any estate taxes that are due generally must be paid within nine months of the owner's death, which can present special challenges for appraising and potentially selling an inherited collection.

Given the many considerations that come with passing down or inheriting a collection, it's wise to plan well in advance—particularly for rare or especially valuable assets. Spending some time and attention on it now can help ensure the collection lives on with an owner who understands and appreciates its value.