Manage your passion assets and minimize taxes

Tips for passing your valuable collection on without sparking a feud or drawing Uncle Sam's ire

By David Ringold

Oct 14, 2014 @ 2:41 pm EST

For our fifth wedding anniversary, my wife bought me a gold Patek Philippe. It is a passion asset twice over. I've spent decades collecting watches. And of course there are emotions wrapped up in the chunks of metal that are invisible to anyone but me.

All of which will mean nothing to the market. Unless you are a famous figure, the appraisers will not consider you or your loved ones when he gives your treasure a valuation after you are gone.

But you can still try to assure your passion assets continue to bring maximum pleasure after you're gone. The fundamental question any collector should ask when estate planning is whether your heirs will be happier with the objects that meant so much to you or, instead, with the proceeds of their sale.


Since the only relevant sale proceeds are after-tax proceeds, it is important to remember that assets held in your own name at death will enjoy a basis step-up to fair market value, so a sale soon after death is not likely to produce much taxable gain. When basis step-up is available, gain is computed by comparing the sale price to the object's market value at your death, instead of comparing it to your purchase price. However, if your collection is owned in a typical irrevocable trust, or in various other sorts of entities, there will be no basis step-up, so a sale of an asset that increased in value during the trust's ownership of it will be taxable.

Dividing the collection

If my watches are to be passed on, how are they to be divided? I understand their relative merits, so I can leave lengthy lists of specific bequests, but I'm not done collecting, so I'd best be ready to update my documents regularly. I could leave their division to my executor, and avoid updating, but she knows little about watches, so something will be lost in the translation.

I could leave the division to the heirs themselves, selecting by rotation, and hope that they treat each other fairly. However, if a collection includes a showpiece that is worth a high multiple of the next most valuable item, or includes items that are properly lotted together, instead of treated singly, designing a fair rotation system may not be so simple.

Who has control?

If your collection is held in a trust or other entity, instead of in your own name, further issues may arise, depending upon whether you enjoy the ability to compel the trustees to act, via a power of appointment, or must simply make your desires known to them in a non-binding memorandum of wishes.

What if some of your heirs share your passion while others don't? Do you craft one solution, based on the majority view? Or divide your passion assets among your interested heirs and consider whether their value is large enough to warrant a financial true-up for the less interested heirs?

Given the complexity of passing either a collection or the proceeds of its sale on, I suggest following some basic rules to give your executor the most flexibility possible.

1. If it came with the object, keep it. You may have accumulated so many presentation boxes that you now see them as silly. But this may be your buyer's first fine watch: its box and papers will make it seem new, and indicate that you cared for it.

2. Save your service records. I just saw a complicated 1998 piece lotted at a very low estimate accompanied by a single piece of paper: a 1999 service receipt. Message to bidder: “I broke after one year and I'm keeping secrets about the last 15 years.” Best of luck.

3. Keep your collection in good repair. Would you like to pay top dollar and then wait six months while your purchase is serviced? Your buyers won't either.

4. Talk with your executor about where to sell what. There may be different answers for different items. Private sales can avoid commissions but require the appropriate circle of acquaintances and temperaments on both sides of the transaction that can turn friendships off and business on as needed.

5. Keep good relationships with dealers and auctioneers. If you had a cordial relationship with them during life, they may remember to tell customers that your pieces were used by someone who knew how to take care of things. Moreover, since your collection came from their stock, others in their customer base are likely to have similar tastes.

If the size and value of your collection warrants it, an auction may be the best alternative, but choosing the venue is particularly important. As the markets for many passion assets have become international, time constraints have caused collectors to become specialized: one or two pieces by a modest maker are not likely to attract attention in a 300-lot catalogue dominated by more mainstream names.

I hope that helped. I'm going to go and wind some watches.

David A. Ringold is a principal at Withers Bergman and an avid watch collector.

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