Many people don’t think about art as a traditional asset such as cash, securities, or real estate. However, art collections are often quite valuable and can make up a significant portion of your entire estate. Art collectors may own art for many reasons – some have a passion and love for art, some own an art collection to decorate their homes, and others own art strictly as an investment. Some art collectors may be artists themselves, creating works as a source of income. They also may create and own a large collection of their own works, as well as a collection of works from other artists.
Currently, U.S. citizens and residents are subject to estate and gift tax on their worldwide assets at rates up to 40%. For 2025, the unified lifetime gift and estate exemption amount is $13.99 million – this is the total amount of wealth that a U.S. citizen or resident can transfer either during life or at death. Under the 2017 Tax Cuts and Jobs Act, this exemption amount is scheduled to drop by 50% (to approximately $7 million) on January 1, 2026 unless Congress takes action to extend the higher gift and estate exemption levels. For artists and art collectors who have a taxable estate, proactive planning around their art collection is critical and can help reduce their estate taxes when they pass away for multiple generations.
This article will review some strategies that artists and art collectors can use to transfer their art collections in a tax efficient manner.
Lifetime Gift and Sale of Art Collection to a Trust
In order for artists and art collectors to gift some or all of their art collection, they must be willing to forego use and enjoyment of that art collection. Under Internal Revenue Code (IRC) section 2036i, if a person transfers ownership of an asset but continues to use or retains the right to possess or benefit from the asset, the asset would be included in the client’s taxable estate. If the collector wants to continue using or enjoying the artwork, they must pay a fair market value rental fee for the continued possession and enjoyment of the collection.
For example, you can transfer art with high growth potential to your intentionally defective grantor trust (IDGT) by either gift (which would use some of your unified gift and estate exemption) or sale. An IDGT is a trust in which the grantor is treated as the “owner” of the trust assets for income tax purposes but removes the trust assets from the grantor’s taxable estate for estate tax purposes. Because the IDGT is ignored for income tax purposes under the IRC sections 671-679, the sale of art from you to your IDGT has no income tax consequences yet removes the art from your taxable estate. If selling the artwork to the IDGT, you should first gift the IDGT with enough cash to finance the purchase (at least 1:9 debt to equity ratio is commonly used). This gift would use some of your lifetime gift and estate exemption. You would then sell the art to the IDGT at fair market value in exchange for a promissory note. The promissory note must bear an interest rate at least equal to the applicable federal rate for the month the sale occurs – the applicable federal rates are published by the IRS monthly.
Alternatively, you can just gift your art collection to your IDGT. If so, the amount of your federal unified gift and estate exemption used would equal the fair market value of the collection being gifted.
For all gifts or sales of artwork to an IDGT, a qualified appraisal prepared by a qualified appraiserii is needed to determine the fair market value of the artwork at the time of gift or sale. The IRS defines the fair market value as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.iii
Fractionalizing Ownership/Valuation Discounts
Though IRS scrutiny will be rigorous, there is case law that supports taxpayers seeking to discount valuation of art that is co-owned with others if the owners voluntarily subject their respective interests to various restraints on possession, partition, and sales.
In Estate of Elkins v. Commissioneriv, the Estate challenged the IRS’ denial of a discount for decedent’s fractional ownership of 64 pieces of art. The value of each piece of art was agreed to; the only issue at hand was the value of the fractional ownership interest.
Decedent owned 50% and his three children each owned 16.66% each. Decedent and his children signed an art lease for 2 of the works, in which decedent made monthly payments to them for exclusive use and enjoyment of those two pieces of art. He and his children executed a co-tenants agreement, permitting each he and his children possession and control of 61 pieces of art for the portion of the year relative to their respective ownership percentages in the art and prohibiting the sale of an interest in any work without the prior consent of all the co-owners. The Estate hired Sotheby’s to appraise the art and Deloitte LLP to determine the fractional ownership discount for lack of marketability and control.
The Estate applied a fractional ownership discount of 44.75% to decedent’s interest in each piece of art. The IRS claimed that no discount should apply, and the Tax Court disagreed, asserting a 10% discount without offering any evidence or rationale for the 10% discount. The Estate appealed the Tax Court’s decision to the Fifth Circuit, who rejected the Tax Court’s 10% discount and accepted the Estate’s 44.75% discount, emphasizing that the Estate’s asserted 44.75% fractional ownership discount was supported by uncontradicted, unimpeached, and credible evidence which the Tax Court failed to provide in support of its 10% discount.
Art collectors looking to fractionalize ownership can transfer their art collection to a limited liability company (LLC) in exchange for 100% membership interest in the LLC, then gift or sell a portion of those LLC membership interests to an IDGT. The LLC must have a legitimate business purpose. For example, the LLC’s purpose would be to centralize ownership, management, and maintenance of the art collection. The managers of the LLC would obtain insurance coverage, ensure proper storage, and transport and coordinate possession of the artwork among the LLC members in exchange for fair market rental or use fee. Because the asset being gifted or sold is an LLC membership interest rather than the art itself, you can claim valuation discounts to reduce the gift or purchase value. Assuming the LLC is properly structured, you can claim a discount on the value of the membership interest to reflect the recipient’s lack of control over the LLC (because the LLC is manager-managed) and lack of marketability (because the recipient cannot easily liquidate the membership interest). Artists and art collectors should be way of IRS audits that may result in a gift tax if the artwork’s value (and consequently the value of the LLC interest being valued) is determined to be more than initially reported on your gift tax return.
Charitable Planning
Some charitably inclined art collectors may want to sell highly appreciated artwork and donate the proceeds to a public charity or donor advised fund. However, doing so would cause an immediate and large capital gains tax on the artwork’s appreciation at up to a 31.8% tax rate for artwork owned for at least one year, or up to a 37% tax rate if you owned the artwork for less than one year (based on 2025 tax rates).
For those charitably inclined collectors, it may be better to donate artwork directly to a qualifying charity. There will be no capital gains tax owed, and if certain requirements are met, that collector may also claim an income tax charitable deduction equal to the fair market value of the artwork when donated. The donor must have held the artwork for at least one year, the artwork must be donated to a public charity or private operating foundation, and the public charity or private operating foundation must use the artwork in a way that is related to its tax-exempt purpose (referred to by the IRS as “related use”). If one of these conditions are not met, the donor’s charitable deduction will likely be limited to the lower of the donor’s cost basis in the artwork (i.e., the value at which the donor acquired the artwork) or its fair market value at the time of donation. If the collector is the artist who created the donated artwork, the artwork is not a capital asset for the artist and the artist’s cost basis is the cost of the materials used to create the artwork. If the charity uses the artwork in a way related to its tax-exempt purpose but then sells the donated artwork within three years of the donation, the sale must be reported to the IRS and the collector’s charitable deduction could be retroactively reduced to the donor’s cost basis (if lower than the artwork’s fair market value at time of donation).
If the donor is claiming a charitable deduction of $5,000 or more on the donated artwork, the donor must obtain a qualified appraisal prepared by a qualified appraiser no earlier than 60 days prior to the donation. The charitable deduction that the donor may actually use in the tax year is subject to donor’s adjusted gross income (AGI) limitations. For donations of art to a public charity or private operating foundation that is not for a related use, the deduction is capped at 50% of the donor’s AGI. For donations of art to a public charity or private operating foundation that is for a related use, the deduction is capped at 30% of the donor’s AGI. If a donor has a charitable deduction in excess of these AGI percentage limitations, the excess deduction may be carried forward and used in the next five tax years.
Internal Revenue Service Review Process
The Internal Revenue Service (IRS) Art Appraisal Services (AAS) is a team of professionally trained art appraisers who assist on the valuation of art. Each appraiser has specific training in appraisal methodology, the Uniform Standards of Professional Appraisal Practice (USPAP), and education and experience in fine art, decorative arts, and collectibles, including paintings, drawings, prints, sculptures, antiques, ceramics, textiles, carpets, silver, rare manuscripts, antiquities, ethnographic art, coins, and sports, entertainment, and historical memorabilia. The AAS helps review appraisals and responds to taxpayer requests for charitable contributions, gift or estate transfers of art.
Taxpayer cases selected for audit that include a piece of art with a claimed value of $50,000 or more are automatically referred to AAS. AAS may be advised by the IRS’ Art Advisory Panel (“Panel”), which consists of up to 25 renowned art experts who serve without compensation and provide advisory opinions. In the most recent IRS Publication 5392 (Fiscal Year 2023)v, there were 17 members on the Panel. AAS has discretion in determining what pieces of art are sent to the Panel for review.
Upon Panel review, AAS provides written reports to the requesting IRS office, with a copy for the taxpayer, outlining the AAP’s recommendations for any adjustments to fair market value with all supporting evidence. Taxpayers may request reconsideration of an adjusted claimed value only if they provide substantial new information or evidence. AAS may submit such new information or evidence to the Panel for reconsideration.
According to IRS Publication 5392 (Fiscal Year 2023), the Panel reviewed 195 items with an aggregate taxpayer claimed value of $795,527,954 on 37 taxpayer cases. The average claimed value for an item reviewed by the Panel was $4,079,631. The Panel recommended accepting the value of 103 items or 53 percent of the items presented. The Panel adjusted the values of 92 items or 47 percent. On the 92 items adjusted, the Panel recommended total net adjustments of -$16,946,454 to the claimed values, a 2% percent decrease.vi
Conclusion
When implementing any of these strategies, it is critical to hire appraisers experienced in the art market to provide expertise and credible evidence of value. You should also consult with qualified tax professionals and legal advisors on these or any other planning strategies around your art collection to ensure proper implementation and consistency with your estate planning and philanthropic goals. Your Wealthspire advisor and the Family Office Services team are happy to discuss.
i https://www.law.cornell.edu/uscode/text/26/2036
ii 26 CFR § 1.170A-17 defines and lays out requirements of a qualified appraiser and qualified appraisal
iii IRS Revenue Ruling 59-60
iv Elkins v. Commissioner, 767 F.3d 443 (5th Cir. 2014), Court Opinion
v https://www.irs.gov/pub/irs-pdf/p5392.pdf
vi https://www.irs.gov/pub/irs-pdf/p5392.pdf
Wealthspire Advisors is the common brand and trade name used by Wealthspire Advisors LLC and its subsidiaries, separate registered investment advisers and subsidiary companies of NFP Corp., an Aon company. © 2025 Wealthspire Advisors
This material should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The information provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use.
Wealthspire Advisors and its representatives do not provide legal or tax advice, and Wealthspire Advisors does not act as law, accounting, or tax firm. Services provided by Wealthspire Advisors are not intended to replace any tax, legal or accounting advice from a tax/legal/accounting professional. The services of an appropriate professional should be sought regarding your individual situation. You should not act or refrain from acting based on this content alone without first seeking advice from your tax and/or legal advisors.
Certain employees of Wealthspire Advisors may be certified public accountants or licensed to practice law. However, these employees do not provide tax, legal, or accounting services to any of clients of Wealthspire Advisors, and clients should be mindful that no attorney/client relationship is established with any of Wealthspire Advisors’ employees who are also licensed attorneys.
