Purchasing and Selling: Curb Your Emotions and Perform Dispassionate Due Diligence
Notwithstanding any “warranty of good title” that might come with a piece of art, clear title may still be compromised. To mitigate this risk it is suggested that purchases should be made only from reputable dealers and auction houses. The purchase of art title insurance—similar to title insurance on real estate—should be evaluated. Check to see if the dealer is subject to any litigation through a UCC (Uniform Commercial Code) search. If you are consigning art for sale engage an attorney who understands art law to review the consignment and commission agreement, and clearly define: 1) the minimum price for which the artwork will be sold, 2) when the art is considered sold, and 3) when payment is to be rendered to the seller. Avoid agreeing to arbitration; arbitration can be protracted and the courts will provide speedier protection under the law. The insurance policy covering the items may cover some legal expenses anyway. Never purchase any artwork sight unseen. Although they can be expensive, condition reports from a knowledgeable conservator are valuable for the information which may be revealed about a potential purchase.
Make sure you understand the terms and conditions of sales at auction. Do not agree to auction your artwork without advance agreement of the reserve price (the lowest comprice at which it will be sold) and the low estimate the auction house will make on an item in the catalog. Do not allow artwork to be sold below the reserve. Many auction houses will conduct private sales after the auction for works that have not been sold, affording access to a wider range of potential buyers. Clarify how long the auction house is entitled to keep the items both before and after the auction and who is responsible for the cost of shipping. Most fine arts insurance policies will include coverage for items while at auction. Be sure you are not required to purchase insurance from the auction house if your insurer will agree to maintain coverage during the consignment period.
Maintaining Your Collection
Understand your insurance policy. The coverages are not identical on all policies so ask your broker to review options with you. Be sure the appraisals on the collection are current so you know what the items are worth before they are damaged, stolen or destroyed. Thoroughly document the collection and keep secure backups.
Proactive risk management is essential for preservation of the collection if you live in a catastrophe prone region and for protection of items when on display or during shipping. Maintain a dialog with your insurance broker to inquire whether coverage extends to items on loan or on consignment.
Planning for your art after death can be even more important. A good estate plan begins with proper valuations. If the collection has significant appreciation in value that was not taken into consideration during the estate planning, the result could be family disputes over the inheritance and other unintended consequences for those who inherit the art without sufficient liquid assets to cover the estate taxes. The estate plan should be able to sustain the wishes of the collector but also take into consideration the interests and financial position of the beneficiaries of the estate. Some beneficiaries may be uninterested in maintaining the collection and the interest level will likely vary between the beneficiaries. Collectors who may be “art rich but cash poor” will need an even more carefully crafted estate plan. Setting up an irrevocable life insurance trust can be a major tool to combat these types of problems at death. In addition or in the alternative, the family may wish to leverage some of the collection with an art loan. Finally, tax fraud in the form of the “empty hook” whereby the artwork simply disappears from the walls does not help the beneficiaries. If the beneficiaries have no established basis when they decide to sell the art they can be faced with both a large tax bill and possibly fines for failure to report. A carefully considered estate plan will minimize both the emotional and financial consequences of the death of a collector.
Chartwell Bulletins are produced by Chartwell Insurance Services, Inc. an independent insurance broker specializing in the personal asset protection of high net worth individuals. Chartwell Bulletins address issues of general interest and since coverages vary by company and by state, should not be taken as an interpretation of a particular policy or advice on any individual situation. Chartwell Insurance Services, Inc. is not affiliated with any of the companies mentioned in this Bulletin and does not accept compensation from any of these entities.
A representative of Chartwell Insurance Services, Inc. will be pleased to discuss all aspects of your personal insurance. Contact: Rebecca Korach Woan | 312. 645.1200 | firstname.lastname@example.org