Do you think of your art collection as a financial asset?
Especially in uncertain times, it’s important to take a clear-eyed view of your artwork as a source of financial flexibility and part of your larger wealth plan.
Art, and the passion for it, can help sustain us, especially during difficult times. You know this well if you are a serious collector. Perhaps pandemic-related lockdowns gave you more time to spend with some of your favorite pieces. Perhaps you participated in the innovative global auctions held online by Christie’s, Sotheby’s, Phillips, Artcurial and the other auction houses as the art market, which shut down in early 2020, came back to life in late spring/early summer and accelerated its adoption of the megatrend digitization. Or perhaps you’ll soon be making an appointment for a health- and safety-conscious, in-person visit to a gallery.
Your private art collection also has value as a powerful financial asset. The question is: How might you best use and build this unique asset, particularly during this volatile period?
Precise answers are obviously idiosyncratic to each collector and depend on many factors, including home country and goals. Still, it is helpful to be aware of evergreen issues and some practices your peers successfully employ. So here is a quick tour of a few key questions—with answers that may help you decide what may work for you.
How do you own the art?
Owning each piece directly in your name, solely or jointly with your spouse, can be a great way to start. As a private art collection develops, owners often establish an intervening legal entity to hold title to their artwork. Doing so can give you a dynamic, consolidated view of your collection, allow centralized art collection management and mean that only one country’s laws may apply to the lot. It also can help you keep your collection together for future generations. Additional benefits depend on which country’s laws you’re operating under and which type of entity you’ve chosen.
In so-called “civil law countries” such as France and Mexico,1 the legal entities that collectors most often employ to invest in art are a corporation or foundation (especially if you want to establish a legacy with this collection). Prime benefits of this approach to art collection management include assistance in organizing, insuring and hiring professionals to care for a collection. There also may be cross-border advantages, such as protection from taxes outside your home country. For example: say that you’re a Mexican national with a painting hanging in a second home in California. If your Mexican company owns the piece, it’s likely that no U.S. capital taxes would be due if you sold the piece to a dealer in Malibu. In addition, the Mexican company can protect against U.S. transfer taxes if you decide to gift the artwork to a family member in the next generation.
In the United States, a “common law country,” the legal entities of choice for art ownership are typically a trust or a limited liability company (LLC). These entities also can help you organize and transfer your collection. Additional benefits for U.S. taxpayers who put their collection in a trust or have an LLC own the pieces include privacy and protection against personal liability.
Many U.S. owners want to keep the public and press from knowing the size, nature, value or extent of their holdings. Fortunately for them, art ownership is not typically part of the public record.
However, if you want your identity as an owner from being inadvertently disclosed or easily discovered, it is advisable to acquire your art, pay for expenses associated with it and even borrow against it through a generically named revocable trust or limited liability company (for example., “25 Elm Street Trust” or “25 Elm Street LLC”). To the extent the public and press can access information about an artwork’s owner, they might learn only the name of the trustee you selected (your attorney, perhaps) or the name of the LLC. (For the record: anonymity is not gained by owning art in a “civil law” country’s private company.)
A limited liability company (LLC) also puts a layer of protection between you and potential litigation in the United States. That protection runs in two directions—if a claim unrelated to your art is successful, the most a creditor might receive is an interest in the LLC that owns your artwork; the creditor cannot compel the art’s sale. Conversely, if the LLC is sued (e.g., for breach of a lease agreement involving the art), your personal assets would generally not be available to satisfy the claim.
How can your art increase your financial flexibility?
Thoughtful borrowing can support your goals in building your art collection. It also can help you keep your investments on track, which can be especially helpful during volatile times.
Collectors often benefit from lines of credit to help build and maintain their collections. In many cases, having ready access to liquidity allows collectors to move quickly to acquire important pieces newly introduced to the market through the settlement of an estate or from other unexpected events such as divorce. Of course, not every collector has sufficient cash on hand to acquire a masterwork that is suddenly available. For this reason, many collectors have lines of credit available, often secured by their existing art collection, to allow them to bridge the purchase of the art to a future liquidity event—or perhaps even maintain prudent leverage against the collection over many years as the collection appreciates in value. Access to liquidity through a line of credit is an essential tool for serious collectors, and working with sophisticated lenders allows them to avail themselves of an expanded range of options.
Collectors also benefit from having art-secured lines of credit in that they are not restricted to use loan proceeds solely to acquire art. They can also use their lines to fund unexpected outflows without having to liquidate investments or other assets and perhaps prematurely triggering capital gains taxes. Collectors can draw on their lines of credit to pay for unexpected or sizeable outflows, or even use their art collateral to fund investments to help diversify and grow their personal balance sheets. If structured correctly, borrowers would also benefit from the investment interest deduction to offset investment income, as long as proceeds from the art-secured loan are used for investment purposes.
How does your art fit into your financial picture?
Art is an unusual asset for many reasons, including the owner’s emotional attachment to it, artworks’ inherently illiquid nature—and its relative stability over the long term. Nevertheless, if you are acquiring art for significant prices, it is an asset. Some of our clients do see art investment as a way to diversify their portfolios. But even if you never view your holdings through this lens, we strongly recommend that you carefully evaluate your holdings in the context of your lifetime financial goals as well as your estate planning.
One of the many advantages of your working with J.P. Morgan is that, because art lending is one of our firm’s strengths, we have long-standing relationships with some of the world’s leading collectors and have built a breadth of knowledge over the decades working with our clients and as one of the oldest and largest corporate art collectors in the world. Your J.P. Morgan team includes a Banker, Wealth Advisor (often a formerly practicing attorney), and Lending Specialist who can work together—and with our specialists across the world—to help you and your professional advisors make sure your art holdings help you achieve your goals, wherever you and your art may live.