This two-part article examines the ways of transferring art without actually selling it, in order to reduce issues around tax and also to retain art within a family or some kind of structure enduring beyond the owner's death. The article is part of a series around fine art being published this month.
Donating to one’s own private foundation
For an artist or collector who wishes to transfer ownership of a collection, a private foundation (either operating or non-operating) offers yet another option. Unlike a publicly supported charity, such as an art museum that depends on fundraising for its operations, a private foundation is funded and controlled by an individual, family, or corporation. It therefore offers some of the benefits associated with donating to a publicly supported charity, but with a greater level of control. There are many reasons why an artist or collector might want to create a private foundation:
* The donor can retain a level of control over the foundation, including holding the collection within it. He or she can make sure the pieces stay together, determine where, how often, and how they are displayed, and ensure that they’re on exhibit instead of languishing in storage.
* The art can remain a permanent holding of the foundation: Because a private foundation can own and hold any type of asset (unlike donor-advised funds, which typically require the donor to sell the asset first and then donate the proceeds), the collection can remain in the permanent possession of the foundation.
* A foundation may hold collectibles and other tangible property strictly as an investment (with no intention to display it publicly). Alternatively, if the tangible property is publicly displayed or actively used by the foundation in carrying out its mission, the donation may be classified as a charitable use asset. As we will explain, there are a number of advantages to designating the contribution as a charitable use asset.
* If created during his or her or lifetime, the donor can personally experience the joy of directly sharing the collection with the public.
* Unlike donor-advised funds and other charitable vehicles that typically liquidate donations of tangible property immediately upon receipt, a private foundation can accept and hold them indefinitely. The artist or collector therefore avoids having to sell the collection quickly and, potentially, at distressed prices.
* If contributed during the collector’s lifetime, the collector receives an income tax deduction for the donation’s fair market value, provided the foundation is an operating foundation and that the donated tangible property is put to a related use. For a non-operating (or grantmaking) foundation, or where the donor is also the creator of the donated collection, the deduction is limited to cost basis (or the lower of fair market value and basis if the property is depreciated at the time of donation).
* The donor can involve his or her family members in the foundation. Not only will family members have hands-on experience of philanthropy, but if their work is helpful and appropriate, they can also be paid a salary that is commensurate with the foundation’s size and the individual’s experience, time, commitment, and responsibilities.
* Whereas a museum might want to sell off lesser examples of a collection or even part with the collection altogether if its curatorial priorities change, a private foundation can preserve all options for the donor and future foundation directors. The collection can be sustained in perpetuity, grow over time, or be sold in part or in whole.
* Private foundations can employ a wide variety of IRS-sanctioned philanthropic capabilities related to its mission. These might include awarding music school scholarships to talented street buskers, making loans to cash-strapped museums to mount new exhibitions, or running programs that help artists inspire and beautify their communities with public murals.
If the donor decides that setting up his or her own charitable organization is the way to go, there are two distinct categories of private foundations to consider: (1) non-operating foundations and (2) operating foundations. Stay tuned for Part Two in which we discuss these options and highlight the benefits of donating to a private foundation.
1. For a definition of tangible personal property for charitable purposes, see IRS Pub. 526.
2. The IRS recognizes this fact and provides a “blockage discount” in valuing collections for estate tax purposes.
3. Consult a tax advisor prior to making a donation of art or other valuable collectible.
4. The donor would include in his or her income the deduction originally claimed minus the basis in the property when the contribution was made.
Jeffrey Haskell, J.D., LL.M., is chief legal officer for Foundation Source, which provides comprehensive support services for private foundations. Contact him at firstname.lastname@example.org. Stephen Pappaterra, attorney at law, serves as Counsel for the law firm of Earp Cohn, P.C.