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| Risk & Reward |
The Collector's Conundrum
Mary Lowengard
05/03/2004
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Elaborate Chess Game
One effective legal tool for passing on collectibles
to heirs—a Chippendale highboy, for instance—is a dynastic generation-skipping
trust. Such trusts bypass gift and estate taxes. They do not, however, survive
more than 21 years beyond the death of the last beneficiary alive when the trust
was settled—or possibly longer, depending on where it was written.
Dynasty trusts are often initially funded during one’s lifetime by
harnessing the $1 million gift tax exemption, and later by using the estate tax
credit of $1.5 million for an individual or $3 million for a couple. High-value
assets like the Chippendale highboy then reside inside the trust as long as the
trust exists. However, since a highboy does not produce income by itself, it
could be sold and the money held in the trust or distributed according to the
discretion of the trustee. “[A dynasty trust] is a good vehicle in just about
all circumstances,” says CPA Larry Lipoff of Perelson Weiner in New York City.
“It defines succession and protects the assets against acts of malfeasance.” If
a lawsuit is initiated against an individual whose assets are held in trust, the
assets are virtually immune. The generation-skipping trust, a variation of the
dynasty trust, can be exempt from the Generation Skipping Tax for as long as the
trust exists. Any person can transfer up to $1.5 million into it without
incurring the generation-skipping trust tax.
While quite effective, these
trusts are not perfect. Because the assets do not produce income to pay taxes
and other costs, experts suggest that collections worth less than $2 million
be placed in trusts that can provide tax exemptions. Above this threshold, a
collection can be donated en masse to museums. Second, the actual possession of
the asset is significant—especially to the IRS. That means the collectible must
be in the physical possession of the beneficiary. It also may be loaned to a
museum, kept in a warehouse or even displayed in an in-home museum. It cannot,
however, reside in the grantor’s own home.
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