This is the second half of a feature examining the right fiduciary structures for family art collections, produced by two specialist experts in the field.

This is the second half of a feature, drawn from an abstract from a new White Paper on Fiduciary Structures for Family Art Collections. It is written by Randall Willette of Fine Art Wealth Management (also a member of WealthBriefing’s editorial advisory board) and Matt Litten of Collas Crill Trust. To see the first part of this feature, click here. As always, readers are invited to respond with their views.

Performing due diligence on art held in trust
Since most family collections are unique and irreplaceable, proper documentation is critical to their investment value. Unlike the financial markets, the art market lacks professional regulation and there are no industry wide standards of best practice. Just as one undertakes professional due-diligence with financial investments the same should apply for collectors and fiduciaries investing in art. Attributions of works to certain artists can and does change. Adequate research and regular review ought to identify out any issues in this regard. Old Masters are usually the most problematic area, but contemporary works are bringing their own challenges even where the artist is still living.

Over the past few years, provenance, or the history of ownership for a particular work, has become increasingly important. Provenance can help determine the authenticity of a work, establish the work’s historical importance, and trace the work’s legitimacy. Dealing professionally with art requires time and extensive knowledge. Establishing ownership of artworks is essential. There is no central registry of art ownership, but there are various stolen art databases. Failure by a trustee to register stolen art may in some circumstances be negligent.

Drivers of complexity with family art collections include:
Skills required:

a. Art due-diligence
b. Art market research
c. Collection management
d. Tax & estate planning
e. Moving art across borders
f. Dispute resolution
g. Art philanthropy
 
Drivers of complexity:
a. Diversity of collection
b. Number of experts advising the family
c. Art ownership structure
d. Legacy
e. Tax
f. Family harmony
 
Obtaining recognition as an art expert generally requires intense study, whether theoretical, academic or practical. Information relating to origin, which is often several hundred years old, does not always prove as reliable as one would wish. Since the artist who created the work of art may no longer be available, the expert must make an assessment as to the extent to which he believes the piece of work can be attributed to one or other artist on the basis of years of study and experience. Equally important, the proper documentation or an illustration in a book can decide whether a painting has a lower or higher value.

Undertaking comprehensive art due-diligence can also help the chosen fiduciary prevent or diminish family disputes. If the assets are not appraised and reviewed for proper title and provenance, distribution of individual items can result in a highly inequitable allocation at time of distribution. Where there is no published catalogue raisonné, the word of a renowned art historian expert can decide attribution. Such opinions need to be sought out. Conservators are also able to carry out scientific dating of artworks by analysing the age of the paint or the canvas. Prior sales at public auction alone do not, however, determine attribution.

Creating the right financial plan for an art collection requires a personal touch, taking into account the unique financial needs, interest in providing for heirs and other beneficiaries and the nature of the assets involved to chart a creative and sound financial course that serves the family effectively over time.

Here are a few suggestions for family offices in developing a well-designed plan:
Maintain a complete inventory of the collection When creating and updating a wealth transfer plan, proper documentation of the art assets is vital - both for the donor and recipient fiduciary company. Along with an up-to-date inventory, authentication documents and the provenance (origins or source of the art and collectibles and histories of subsequent owners) should be also included. If not, obtain written
opinions from one or more recognized experts in the field as to the work’s authenticity and dating.

In addition, complex collections may benefit from specifically-designed software. There are several collection management systems on the market to facilitate detailed documentation of a collection from basic home systems to advance art databases for museums. A good collection management system integrates contracts, object, transactions and financial information. It automates as many information tasks as possible such as recording and tracking works; managing contacts and correspondence; generating reports; creating documents in ways particular to the industry’s accepted best practices. A quality system also successfully integrates other useful software and website design packages in order that the collector may enjoy the entire collection all at once, at any time, and from anywhere.

Know the collection’s value
For art and collectibles of any significant worth, an appraisal or valuation of each item in the collection from a qualified professional (e.g. one which meets industry standards of “best practice”) is needed. This will also help meet requirements set by any tax authorities – to reduce the possibility of any challenge on valuation.

Plan in advance
With some forethought and expert art advice, careful planning now could yield significant benefits in the future including financial security for the family, an opportunity to minimise potential tax liability on the art and the chance to for the owner to leave a lasting legacy through proper preservation.

Consider charitable gifts
When philanthropy is one of the goals, consider beginning discussions early and establish formal agreements with the recipient charities. Identify early on the charities the owner would like to benefit through gifts from the collection and what if any, restrictions they wish to place on the gift. Keep in mind, however, that as a result of significant changes in the art world, it is no longer as easy to give a collection to charity and many museums have become more selective in accepting art works.

Develop an orderly disposal strategy
Disposing of an art collection is easier said than done. There are a relatively limited number of buyers for particular works of art and achieving the appropriate price is not guaranteed. As such, if it is intended by the donor that the trustee should implement a future sale strategy, then the appointment of an expert advisor to develop the best execution strategy is critical.

Avoiding forced sales - the importance of liquidity
When establishing a fiduciary structure, it is essential to consider how ongoing costs will be met - including art insurance, restoration and professional fees such as trustee, advisors. The worst scenario to avoid is a forced sale of certain works, to fund the ongoing costs of the rest of the collection.

Ideally, liquid assets will also be placed into the fiduciary structure to provide long-term cover for fees and expenses. Should these funds ever become seriously depleted, then the fiduciary will need to consider the following ways to raise funds, in discussion with the family:

• Loans of artwork to galleries, museums and individuals/corporates.
• Potentially borrowing against the artwork - as a temporary measure.
• If no liquidity can be generated, then as a last resort considering the sale of certain pieces of artwork. The specific pieces which can be sold in such circumstances should be identified in advance with the donor.

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Transferring a collection into a trust (or other structure)
Once a collector has decided that a fiduciary structure will assist them with their long-term objectives, then taking appropriate professional advice and appropriately project-managing the transfer of artwork into the chosen fiduciary structure is extremely important.

Appropriate tax advice is essential, firstly in terms of the clients own tax position vis-à-vis the creation and any potential benefits to be received by them from the trust, and secondly around where the artwork is situated and any cross-border or local taxes that may apply when re-registering the artwork into the name of the trust / entity. In some countries (e.g. UK), it may be advisable to inform the local tax authorities of the value of the artwork being transferred, to give them the opportunity to challenge the valuation at the point of transfer, to avoid any future difficulties. Legal advice may also be needed around import/export licences, cultural licences, resale rights of artists etc. Owners may also need to take additional legal advice to confirm they have the ability to transfer assets e.g. potential “community of property” issues with spouses in certain civil law countries, or possible forced heirship restrictions.

In addition to the trustee’s client take-on procedures and client due diligence, it will be important for a full inventory of the artwork to be supplied - to include provenance, authenticity and valuation, which may necessitate the use of professional art consultants to ensure everything is up-to-date, prior to acceptance into the trust. Such detailed cataloguing at outset will also be useful for insurance purposes, and should the trustee wish to exhibit or loan out the artwork in the future.

Insurance must be ready for activation at the date of transfer, and cover any shipping. It may be advisable to consider the currency of insurance (e.g. dollar, euro, yen) relevant to the market in which artwork might be sold in future To formally change the ownership of the artwork, then a legal agreement or gift documentation will need to be drawn up for signature between the donor and the trustee. If the artwork is currently displayed at a gallery or museum, or will be kept at the donor’s residence, then appropriate loan documentation will also need to be in place. Any fees or rental income will need to be redirected to the fiduciary structure. Tax advice may be needed should any of the beneficiaries enjoy a “benefit in kind” through enjoyment of the artwork, unless they are paying a market rate rental back to the fiduciary structure.

As noted above, liquidity is a very important issue - will there be enough liquid funds in the structure to cover all fees and expenses? These may include art insurance, trustee fees, specialist fees, storage costs and restoration etc. Funding should be considered at the outset, where the donor might also contribute cash funds or an investment portfolio into the trust. Or, the intention may be for the art to be lent to museums, galleries or individuals to cover costs.

Family governance of a collection
The concept of family governance for an art collection has to be rooted in the notion that there is something worth governing, perpetuating and developing. A sound family Governance system for a collection often comprises both structures and documents. Because each family’s needs are different, there is no real standard or template to follow. To be most effective, however, whatever system that is ultimately developed should facilitate three essential functions:

Essential Functions of Family Art Governance:
a. Agreeing shared values for the collection.
b. Creating a framework for decision making
c. Setting expectations for the family collection

Agreeing Shared Values for a Family Collection:
In order to agree shared values for a family collection the process of creating governance-related documents such as a family collection policy or a mission statement can be truly valuable. If a family can come together and engage in the collaborative process necessary to produce such a document, there is a good chance it will emerge with a set of principles that reflect what is important to the family, what kind of legacy it would like to achieve for the collection, and how to accomplish it. This will also be an invaluable document for any fiduciary entrusted by the family to hold the collection for the long term. Revisiting these principles on a regular basis and holding the family to them at all times can help family members stay connected to each other and to their collective goals for the collection.

Creating a Framework for Decision-Making:
While agreeing shared values is a necessary step in establishing a robust family collection governance system, it does not create a framework within which a family can actually make decisions. This requires the formation of a family art council, a structure that is typically the chief decision-making body for selecting the art to be held and is bolstered by a well thought out collection policy and set of bylaws. As noted above, this body can be integrated into the chosen fiduciary structure, subject to advice.

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Family Collection Decision Framework:

Family Art Council
An entity composed of family members created to manage the family collection.

Curatorial Board
Usually composed of some non-family representatives to identify and prioritise issues objectively and make recommendations.

Mission Statement
An aspirational document that reflects the family’s articulation of its shared values for the collection.

Collection Policy
More administrative and operational in nature, this document expresses guidelines and standards of best practice for art due-diligence.

Setting Expectations for the Collection:
A common complaint within families that fail to have a rule-guided, transparent system in place for their collection is that most decisions are made, or appear to be made, ad hoc. The problem with such a decision is that it is susceptible to challenge on one or several grounds including: it was not consultative; it was not deliberative; or it was too emotionally driven.

By contrast, if a decision is made pursuant to a rule directed and transparent process, it will be - by definition - deliberative and consultative. Moreover, it is much more difficult to attack a decision that results from such a process as being motivated by personal emotion.

Families that have created a collection policy often find that each time the family art council issues a decision that the family ultimately accepts, the respect for the decision making process itself grows. And with each favourable outcome, the system acquires increasing moral and persuasive force. If the family can get to this point, the authoritative impact of a decision rendered by the family art council becomes almost unquestioned.

Ongoing administration of art held in trust
It is very important for the fiduciary to establish a good “housekeeping” programme for the artwork, working with appropriate specialists and art advisors. A trustee’s role may include buying, selling, exhibiting, maintaining, moving or loaning art. In each case, different considerations arise that require detailed and separate examination. The use of carefully drafted agreements for the sale and purchase, storage and shipping, and loaning of art ought to limit trustees’ exposure. Such agreements cover, for example, liability for tax, compliance with import and export regulations, payment of artists’ resale rights, copyright, risk and insurance as well as much more. The art market does not always embrace such agreements. With or without them, particular attention must be paid to those issues that most often affect the value of art.

Complex Network of Professionals:

Art Market Professionals
a. Purchase & sale
b. Collection management
c. Authentication
d. Insurance
e. Transport/storage
f. Conservation & restoration
Wealth Managers
a. Trusted advisor
b. Art financing
c. Art investment
d. Structure art solutions
e. Family governance
Legal & Tax Specialists
a. Art holding structures
b. Dispute resolution
c. Moving art across borders
d. Contracts
e. Tax planning
Trust & Estate Practitioners
a. Fiduciary
b. Art succession planning
c. Legacy

Authentication bodies exist around the world that confirm (or deny) attribution and authentication of artworks. They are usually set up after an artist has died. They are not without controversy as well. Fakes and forgeries abound in the art market. Careful checks ought to reveal any problem areas but even the specialists are fooled sometimes. This suggests that it is worth obtaining two opinions where there is any room for doubt. It is not surprising that a new generation of technical experts sometimes come to a different perspective than their predecessors. It takes a tremendous commitment to actively manage an art collection which is why partnership with an established art specialist can be an appealing and viable alternative for fiduciaries / a collector’s family office. At the same time, there are inexperienced investors who allow themselves to be advised without being capable of assessing whether the experts are providing a good or bad service.

Potential image rights issues – for notable artworks
Depending on the reputation of the artist and the possibility that the artwork images could be reproduced for commercial gain (e.g. Warhol posters, t-shirts), it may be of interest to consider protecting these images, including the possible use of the innovative new Guernsey Image Rights register.

Young Artists
For young artists, they can be registered as a “personality” under the Guernsey legislation, with each of their artwork images registered separately. Ownership of these rights can be assigned to a fiduciary structure with separate licences being issued to exploit each individual image right. Portfolios of image rights can be easily managed and dealt with like other property in this way.

Established/Deceased Artists
Either the artist themselves or their estate/foundation can register as a personality right. Image rights associated with the artist can then be registered around this core right. Where art is due to go out of copyright, as in the case of an artist who has been dead for nearly 70 years, then there is the ability to still gain protection for the rights from the Guernsey image rights register. As above, work can be licensed / assigned in any way and easily managed going forward.

In both of the above cases, licences can deal with the ability to reproduce a piece of art for a specific purpose i.e. clothing, posters etc. These licences can be granted on an ad-hoc basis or as a blanket licence covering a multitude of works, and can be easily split into separate territories if required.

Conclusion
Having created or inherited a collection, many HNWs will wish to ensure it is preserved both during their lifetime and for future generations - either for their family or of art lovers more generally. Ownership through a trust structure can offer significant advantages over direct ownership, in terms of preservation of wealth generally and in particular in relation to art collections. The very wide range of fiduciary structures available and the huge flexibility which careful drafting can incorporate into trusts and foundations allows structures to be tailored to the needs of the particular client and collection. The main areas in which fiduciary structures can offer advantages over direct ownership are in succession; asset protection, tax planning; and flexibility – where subject to relevant advice, the donor and/or his family office can be integrated into the structure with powers to select and manage the collection.

The potential problems and pitfalls facing collectors and owners of art are numerous and need careful consideration in order to ensure the best results for the collection, the collector and potential beneficiaries of the art. Obviously, this internal order is easier to create when starting from scratch, and it is certainly well worth anyone planning to put their collection into some kind of fiduciary structure – spending some time and money to ensure that all issues are addressed at the outset.

Planning for your art assets can also help prevent or diminish family disputes. If the assets are not appraised and reviewed for proper title and provenance, distribution of individual items can result in a highly inequitable allocation. Executors and trustees would be wise to seek advice from an art succession planner who has no vested interests in art and can draw on the expertise from both the academic and commercial art worlds. There are a variety of experts within the art market from art historians and dealers to valuers and restorers. Ideal credentials should include membership of officially approved associations and/or vetting committees for major international art fairs. Equally, experts should be recognised leaders in their field or consultants to major museums and collectors.

It may also be important to consider if iconic works by famous artists need additional image rights protection, which may also facilitate commercial exploitation of the images. Just as trustees and executors must undertake proper due diligence with regard to financial investments, the same holds true for art. Specifically, this is needed to mitigate risks resulting from authenticity disputes, title claims, restitution and holocaust claims, art fraud and even theft. However, independent and objective advice on art is not always easy to obtain. Unlike most other investments, the art market lacks professional regulation and there are few industry standards of best practice. It is important for the donor to select an appropriate trustee/fiduciary, trust jurisdiction and art specialists who can put in place proper art governance and collection care policies, to ensure the collection is held together and managed successfully in the long term interests of the donor and other family members.

This note is a summary of the subject and is provided for information only. It does not purport to give specific trust advice, and before acting, further advice should always be sought. Whilst every care has been taken in producing this note neither the author nor Collas Crill Trust Limited or Fine Wealth Management shall be liable for any errors, misprint or misinterpretation of any of the matters set out in it.