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Report on a session at the IBA’s 25th International Private Client Conference, 2 March 2020

 

Renee Gabbard

Bryan Cave Leighton Paisner, California, US

renee.gabbard@bclplaw.com

 

Session Chairs

Daniel Simon  Collyer Bristow, UK

Nicholas M O’Donnell  Sullivan, US

Speakers:

Mathilde Heaton  Phillips, UK

Jenny L Longman  Patterson, Belknap, Webb & Tyler, US

Maria De Peverelli  Stonehage Fleming, UK

Wolf-Georg Freiherr Von Rechenberg  BRL Boege Rohde Luebbeheusen, Germany

Introductions, stories and thought-provoking questions

The panel – a spirited and enthusiastic panel of raconteurs – addressed the multiple crossover legal issues and passions involved in the acquiring, holding and disposing of art. The panel chair, Daniel Simon, started off with a story about the Migratory Bird Act in the United States. Simon explained the peculiar position of an estate holding a statue of great renown that contained a feather from an endangered bird. There was debate as to the value of the statue because it could not be resold due to the Migratory Bird Act, which prevented the sale of feathers of endangered birds. The family argued that the statue was therefore worthless as it could not be resold due to the endangered feather. The Internal Revenue Service in the US disputed the family’s position.

Mathilde Heaton, General Counsel for the auction house Phillips in the United Kingdom, explained that in her day-to-day counsel role she interacts with both patrons and artists. She watches carefully for both the increase and the decrease in art and artist’s work, and as she told us, ‘it is very hard to value art.’ Heaton then also stated that regarding the value of art, ‘Art summarises humanity.’  Heaton told us that there is an explosion of interest in art in Asia and in particular a large number of private museums being built in Asia.

Maria de Peverelli from Stonehage Fleming in the UK explained that art as an asset carries inherent risk. Some art will be compared to other art. Oftentimes, an artist’s work will be compared to other works produced by the same artist during their career.

De Peverelli posited to the audience, ‘Who will be the future art collectors?’ She questioned whether the children of a collector would have any passion or even any interest in the art collected by their parents. She mentioned that when the subject of planning for the sale of art after death or inheritance of the art at death is brought up – including questions around insurance, not flooding the market, the best auction houses to use, whether to sell under the family name or not – generally the answer from the family is a blank stare.

Nicholas M O’Donnell, from Sullivan’s in the US, stated that when he approaches his clients, he seeks to understand not only why his clients are asking for his services, but also to try to understand their passion for the art and the purpose for the art. Oftentimes for the family, the art represents their historical family line – their journey from their ancestors to being who they are today.

Jenny L Longman of Patterson, Belknap, Webb & Tyler, in the US, represents collectors, investors and art dealers. She mentioned that sometimes it makes sense for a person who buys and sells art privately to actually become a dealer under US income tax laws. 

Wolf-Georg Freiherr von Rechenberg of BRL Boege Rohde Lubbenheusen in Germany stated that a great risk related to art from a lawyer’s perspective is the pervasive lack of transparency in art and confusion in the market. Von Rechenberg brought up the issue that there is a list of German cultural property that Germany sees as being within the scope of having the title of German, nearly 30 per cent of which is not by German artists.

Acquisition: the acquisition team, risk and regulation

The holding of art begins with the acquisition of the art. The panel recommended that an interested purchaser begin with a transparent acquisition team of an art adviser, dealer, museum curator, conservator, lawyer, tax adviser, art adviser, independent wealth manager and authentication expert. Yet, multiple panel members stated that too often art is purchased by a person with no knowledge. One panellist called the uninformed purchase of art ‘a Bond Street’ purchase whereby someone might buy a piece of art on Bond Street in a gallery in London at nearly 30 or 40 per cent over its true value and purchase it on the spot without any advisers involved. The panel cautioned that pre-planning for an art purchase is essential.

Von Rechenberg mentioned that one of the risks of art is that it can moved, literally carried, throughout the world, which has legal and tax implications. Von Rechenberg described the case of the Spanish billionaire and member of the family that obtained its wealth from the Santander banking dynasty, Jaime Botin, who had on his yacht a Pablo Picasso painting from 1906 with a value of over $1m. Spanish officials boarded the yacht in Corsica and charged Botin with trying to smuggle such wealth out of Spain in order to avoid taxation on the same. Botin was sentenced to three years in prison and a fine of €91.7m. Botin asserted that when he was in Corsica on the yacht he was instead transporting the painting to Geneva for safekeeping and sought to appeal the verdict.

Von Rechenberg further mentioned the demise of the concepts of freeports. Freeports, which were storage facilities that claimed to be beyond the rule of law of any jurisdiction, have now become highly regulated by the countries and states in which they’re located, eroding the previous privacy and taxation protections.

Heaton stated that part of mitigating risk is to ensure that from an auction house perspective, you have extensive Know Your Client (KYC) provisions and conduct your own due diligence internally from a corporate perspective on your client. An auction house will be looking for as much historical documentation on the piece of art as possible. In addition, an auction house will ask for identification documents for the client, including a passport and other forms of identification.

O’Donnell informed the audience that in the US there is extensive regulation and full disclosure required for art and antiquities with a value in excess of $10,000. The panel further noted that such due diligence in the art market is also fairly new and that art dealers and auction houses were not so diligent in their documentation and risk mitigation only twenty or thirty years ago.

Holding structures and issues

Another part of the acquisition phase should be a discussion of the options for holding structures after the art is purchased. The panel noted that oftentimes this is not done by the client prior to the acquisition and that the speed at which the acquisition must take place to purchase something that is rare and goes to market quickly might not allow for the holding structure to be formed prior to the acquisition of the art.

Longman discussed the taxation issues with holding art in the US. In the US there is roughly a 40 per cent estate tax with a current exemption per couple of $23,160,000. Art is valued at the time of death or an alternative date of six months after the date of death. The Internal Revenue Service (IRS) is so concerned about the valuation of art and the taxation of the same that they have a separate Art Advisory Panel. 

Holding structures in the US often include a limited liability company (LLC) to hold the art and to pay for the insurance and costs related to the art. The limited liability units can then be held by a revocable trust to avoid probate administration in the state where the decedent resides. This causes problems as there is a required business purpose for a business entity such as a LLC. The IRS often attempts to disqualify LLCs as a hobby, lacking a business purpose, and thereby destroying the tax and creditor protection provisions of the LLC.

Longman noted that holding structures for foreign citizens residing in the US with art usually involve the formation of a foreign corporation to hold the art. This foreign corporate structure can cause heirship issues though when the foreign corporation passes to the next generation because most families have heirs living in multiple jurisdictions. The inheritance of a foreign corporation at death usually requires a team of cross-border attorneys in those jurisdictions advising on the legal and tax impact of those foreign corporation shares holding the art.

Simon stated that from the perspective of a resident UK citizen, the ability to form a charity to own the art has certain display requirements, which will be familiar to visitors of the grand houses of England. Some of the grand houses in England are open for visitation some months of the year to enable this display requirement. Simon also mentioned the case of Sir Lloyd Webber, the famous composer, who displays several pieces of musical instruments. Daniel added that import and export duties should be considered when moving art.

The panel then went on to discuss how trusts, corporations and charities are the most common forms of holding structures, but that the situs of the structures should be of great importance in the planning. The nationality, tax residency, and domicile of the person or entity owning the work should be carefully considered alongside the likely holding period for the art and the actual situs of the art. Monaco, Portugal and Russia were all mentioned as tax-advantaged countries due to their lack of certain capital gains tax, gift and estate taxes. Von Rechenberg mentioned that Germany taxes on holding versus trading, which is quite unusual.

Holding risks were also discussed, including insurance and receiving government indemnities with regard to displaying the art. Heaton told the story of a major exhibition of Russian art in London. Several owners were worried about seizure laws in the UK and lawsuits from creditors. In such instance, a government indemnity was sought to protect the owners and allow for the display of art. O’Donnell mentioned that in New York such seizure laws are material and should be considered. Owners should also seek out an indemnity before bringing such art to the US. Other holding and risk issues include changes in taste or fashion, which reduce the interest in the art or artists over time, security, storage, environment, conservation and record keeping during the holding period.

Selling or inheriting the art

The final subject of the panel concerned the period after acquisition and holding, where there will either be a sale or an inheritance of the art. Heaton suggested obtaining certain advice from auction houses, including regarding the timing for the auction, as certain auction houses only hold auctions at certain times throughout the year and might only hold one contemporary artists auction, one old masters auction and the like. Owners should understand the auction house fees, the reserve, the tax impacts and whether they should consider a tax deduction for some art by donating it to a charitable organisation, or not.

O’Donnell mentioned that selling or inheriting the art can produce the circumstances for litigation, of which each adviser should be wary. O’Donnell mentioned the case of billionaire Dimitry Rybolovlev’s lawsuits against the art dealer Yves Bouvier and other similar litigation. Rybolovlev claims he lost nearly a billion dollars of wealth because Bouvier sold him art with an inflated value, and sometimes in the range of 70 per cent above its true value.

De Peverelli also urged that in addition to an acquisition team, there should be disposition team and that there should be the utmost of transparency in the team. The selling owner needs to hire consultants. 

The panel then stated that this stage often involves the three Ds: debt, divorce and death. A gift of the art will often involve gift tax assessment and exemption issues, whether to donate the art or shares of a company – as such company formation can increase or decrease the value of the art – and/or a charitable deduction. The panel stated that we should ask clients whether a donation to a museum or charity is warranted rather than a sale or an inheritance.

A disposal on death can involve large egos, heirs or lack of heirs, valuation problems and disclaimers of art altogether. The panel mentioned that many art owners like to require several conditions precedent to receiving the art either from their heirs or from a museum, which can be burdensome and involve adverse tax effects.

The panel then called on a surprise addition to the panel, Mike Leeds of Duane Morris, to give a first-hand account of the disposition of a Monet in the US. Leeds had a client in her nineties, a holocaust survivor in possession of a Monet. The client had to move out of her New York apartment, but the Monet remained. Mike said the first rule of art is, ‘Don’t lose the asset!’ 

Leeds had to arrange for twenty-four hour security, but also access to the Monet so that it could be prepared for sale, including inspection and authentication. The client died and there was no probate proceeding as the Monet was in trust. The family decided to hire Sotheby’s as its auction house and discussed whether or not there would be an auction guarantee. Because the inspection required so much work, the Monet was eventually moved to a secured site in Queens, New York which had experience in holding art and allowed for a disposition team to be near the art. The art was eventually the centrepiece in a Sotheby’s action and was properly sold. Leeds’ account was a proper ending to a proper story and we were grateful to him for his eyewitness account.

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