MARKET INTELLIGENCE ISSUE 7 APRIL 2014 MARKET INTELLIGENCE

Transcription

1 MARKET INTELLIGENCE ISSUE 7 APRIL 2014 MARKET INTELLIGENCE 1

2 Market Intelligence Issue 7 APRIL 2014 JEREMY ECKSTEIN & LINDSAY DEWAR, ARTBANC... 7 ArtBanc Market Focus - The British Contemporary Art Market Fiona Moseley, Advantage Life & Annuity Company SPC.. 10 USING LIFE INSURANCE TO PRESERVE FAMILY ART COLLECTIONS: OPPORTUNITIES AND LIMITATIONS Dorit Straus Musical instruments and insurance NICOLAS MARINIER, DELOITTE About the need of Forensic and Anti-Money Laundering services for art market professionals CRAIG DAVIES & NIGEL MEDHURST, RAWLINSON AND HUNTER VAT and the UK Art Trade Richard Clark, Slaughter and May Mediation in Art Law and Cultural Property Disputes Correction: Michel s Strauss article in Issue 6: January 2014, the first image was incorrectly captioned, and should have been labelled Gustave Courbet, Étretat: les falaises, Oil on canvas, 1870

3 Fiona Moseley is President of Advantage Life & Annuity Company SPC, a division of Advantage Insurance Holdings Ltd. Established in 1993, Advantage specializes in delivering highly customized insurance products and services to high net worth individuals and business owners worldwide. Advantage administers over $1.4 billion in insurance assets on behalf of over 200 clients in the United States, Canada, the United Kingdom and worldwide. Ms. Moseley is recognized globally as a leading expert in the use of private placement life insurance structures for complex estate planning needs. More information on Advantage and customized life insurance is available at USING LIFE INSURANCE TO PRESERVE FAMILY ART COLLECTIONS: OPPORTUNITIES AND LIMITATIONS Fiona Moseley, Advantage Life & Annuity Company SPC Heirs to collections of fine art are often forced to sell prized family treasures in order to satisfy estate taxes currently 40% at the Federal level for United States taxpayers. In addition, because the value of an individual artwork is determined as of the date of death of its owner, or six months following death, the heirs to the collection are at risk to cover any shortfall in sale proceeds compared to the estate tax valuation. In a period of volatile market prices for works by certain artists or genres, it is possible that the heirs to a valuable collection will end up owing more in cash taxes than the liquidation value of the collection at the time it is sold. To avoid this problem, a number of family owners of art collections have turned to an innovative form of life insurance to ensure that subsequent generations may continue to own and enjoy family collections without the risk of a forced sale upon the death of the collector. Traditionally, families may have purchased life insurance - or more accurately, death insurance - to provide a source of cash to pay inheritance taxes without having to sell artwork from the collector s estate. The new innovation in life insurance is for a collector to purchase a policy using an art collection as partial payment of the required premium. Then, upon the death of the policyholder, the contributed art collection and additional cash amount is paid out to the beneficiaries, free of any federal estate taxes. Other taxes may be imposed, such as gift taxes at the time a policy structure is established, but a wellstructured life insurance plan can help collectors ensure continued family ownership of an art collection for generations to come. DEATH AND TAXES Life insurance has been used for estate tax planning purposes in the United States since 1916, when federal inheritance taxes were first imposed on a broad scale. Proceeds paid to family members from bona fide life insurance policies were declared exempt from the new tax, thanks to the widespread popularity of life insurance at the time, as well as the political influence of the life insurance industry. Similar exemptions from inheritance taxes for life insurance proceeds exist in many countries other than the United States. CONTRIBUTING YOUR ART COLLECTION TO A LIFE INSURANCE POLICY Families using life insurance policies to transfer art collections between generations are participating in a niche segment of the $5 trillion dollar US life insurance industry known as Private Placement Life Insurance (PPLI). The private placement designation comes from investments in unregistered vehicles such 10 MARKET INTELLIGENCE

4 as hedge funds, private equity funds or real estate to fund the policy. The recent emergence of fine art as a distinct, investable asset class has enabled the life insurance industry to include fine art collections as eligible investments for PPLI policies. Certain states and countries allow contributions of specific, non-cash assets into policies (in-kind premium), and the subsequent distribution of the assets to the policy s beneficiaries upon death of the policyholder (in-kind benefits). By utilizing fine art as a selected asset class for policies funded with in-kind premium, it is possible for an existing collection to be contributed directly into a life insurance policy. Then, upon the death of the policyholder, the collection would be paid out in kind to the policy s named beneficiaries. Rules and regulations differ greatly between states and countries, but a family with descendants located in the United States that has a meaningful art collection that it wishes to preserve over multiple generations should be able to establish a Fine Arts PPLI program to help achieve this goal. HOW DOES A FINE ARTS PPLI PROGRAM WORK? Using an art collection to fund a life insurance policy is simple on the surface, but highly complex underneath the cover. The following is a high-level example of a PPLI policy using a contributed art collection as its primary asset: The Collectors: a married couple, ages 65 (male) and 60 (female), in good health with normal life expectancy. The Family: children and any future grandchildren of the Collectors. The Collection: 20 individual works of art valued between $10,000 and $250,000, with a total appraised value of $2 million. The Policy: $10 million face amount funded with $2 million art collection and $500,000 cash The Trustee: Independent third party designated by the Collectors and approved by the insurer to oversee Collection while held in the Policy with fiduciary control of the Collection and other policy assets. The Result: Upon death of the Collectors, the Family receives the Collection plus cash with a combined value of $10 million of value free of any federal estate tax. Collector A married couple, in good health with normal life expectancy Collection 20 individual works of art valued at between $10,000 and $250,000 each, with a total appraised value of $2 million Policy $10 million face amount funded with a single premium of $2.5 million, comprising a $2 million art collection and $500,000 cash Trustee Independent third party designated by the Collectors and approved by the insurer to oversee Collection while held in the Policy Upon Death of the Collectors Family Children and any future grandchildren of the Collectors inherit the art without any liability to death duty Fine Arts PPLI Program MARKET INTELLIGENCE 11

5 T he recent emergence of fine art as a distinct, investable asset class has enabled the life insurance industry to include fine art collections as eligible investments This simplified example is intended to highlight the basic benefits of a Fine Arts PPLI program. However, there are significant constraints, costs and other complex factors that must be taken into account when considering this type of structure. Fine Arts PPLI is not for everyone. WHAT ARE THE LIMITATIONS? The major drawback to contributing art to a life insurance policy is the requirement to give up control of the collection. In order to maintain tax-exempt status, in the example above, neither the Collector nor a Family member beneficiary can control the Collection. This is a hard-and-fast requirement and must be taken seriously by the Collector, the insurance company issuing the policy, and the fiduciary assuming control of the Collection held inside the policy. This control extends to purchase and sale decisions for the Collection, investment of the cash component of the policy, and safekeeping of the Collection. Art from the Collection may be displayed in locations selected by the Collector with the consent of the life insurance company and the Trustee, subject to their fiduciary obligation to ensure the assets are properly secured and are available at any time to be removed by the Trustee for safekeeping or other reasons. Ideally, the Collector will need to be comfortable handing over control of the Collection to an independent collection management service. A second limitation on using life insurance to hold a family art collection is the requirement for diversification among the individual objects comprising the collection. The practical result of the diversification requirement is that a minimum of 20 individual artworks will need to be included in the contributed collection, ideally with no single work accounting for more than 20% of the total appraised value. The diversification requirement continues to apply over the full life of the policy, with no single asset of the policy (other than cash or treasury securities) allowed to account for more than 50% of the total value of policy-held assets. By starting with a diversified collection, the risk of catastrophic success where a single piece becomes too valuable for the policy is minimized. A third issue to consider with a Fine Arts PPLI program are the ongoing costs and expenses. Although there is typically no sales commission associated with establishing a Fine Arts PPLI program, there are upfront and ongoing costs which include the following: Set-up Costs Advisory and legal fees, and appraisal fees for the contributed collection are paid by the policyowner at inception. Costs of Insurance The cash component of the policy requires cash premiums. These can be funded up-front or over the life of the policy. Costs of Administration The fiduciary and/or trustee of the policy assets must be paid an appropriate fee for their services - in addition to the Insurance cost described above. OTHER TAX CONSIDERATIONS Establishing a Fine Arts PPLI program can result in up-front taxes. Most states charge taxes on life insurance premiums, which are the responsibility of the purchaser of the policy even if the policy is issued by a life insurance company in another state. For purchases of policies issued by non-u.s. carriers, a federal excise tax of 1% of the premium applies, potentially in addition to state premium tax. There is also the potential for gift tax to apply, or for the policy to count against a beneficiary s individual lifetime gift tax exemption, which has been set by the IRS at $5.34 million for MARKET INTELLIGENCE

6 PROFESSIONAL ADVICE IS REQUIRED As is the case with all complex financial planning, professional advice is critical when considering a Fine Arts PPLI program. An experienced trusts and estates attorney, along with specialist PPLI and fine art consultants must work together to structure and implement the program. Finally, most traditional bluechip life insurance companies do not offer PPLI, or the ability to fund a life insurance policy using in-kind premium. Most PPLI policies are issued by smaller, niche life insurance companies. An experienced PPLI consultant (and not a commissioned sales agent) is invaluable in navigating the steps required to set up a Fine Arts PPLI program. CONCLUSION Careful estate planning for collectors of fine arts is required if families wish to keep a collection intact over successive generations. Using a Fine Arts PPLI program, designed and implemented with the assistance of tax, insurance and fine arts experts, can be an important component of an effective overall estate plan. Ongoing high tax rates, combined with appreciating valuations of art collections, will result in estate planning techniques such as Fine Arts PPLI becoming more commonplace for collectors in the United States and other countries with similar tax regimes. g FINE ARTS PPLI: WHEN TO CONSIDER IT A private collector should consider using a Fine Arts PPLI (Private Placement Life Insurance) program if one or more of the following is true: The Collection is intended to be passed on to future generations of the same family The Collection is diversified by artist, genre and number of works of art The Collection has the potential for significant increases in appraised value over time The Collector is willing to cede fiduciary control of the Collection to an expert third party manager MARKET INTELLIGENCE 13