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Be careful with art in your estate

Art is a volatile commodity. What one painting is worth today isn't the guaranteed value tomorrow, and that can make inheriting an art-heavy estate an adventure in valuation and taxation. According to reports, the Internal Revenue Service does look at estates that include art appraisals that come in above $50,000. When the IRS gets involved, it's not uncommon for them to request an adjustment in value that can result in higher tax liabilities.

One woman who had collected art for many years died during a trough in the art market in 2009. At the time, a Christie's appraisal deemed the value of a Picasso in her collection to be worth approximately $5 million. Approximately six months later, the work was auctioned for $12.9 million. Four years later, the IRS revised the original value to $10 million, which meant that 40 percent estate tax was now levied on $5 million of that value. The IRS also hit the estate with 20 percent penalties for not paying the tax sooner.

Tax auditors don't make willy-nilly decisions on art, though. A panel of experts, including art professors, museum curators and gallery directors, assists the IRS and provides recommendations regarding the value of works. Even with experts, though, the art valuation process can be flawed because people are trying to put a value on a one-of-a-kind item.

Estate valuation can be complex, which is why it's a good idea to seek third-party professional assistance with this task. This is especially true if you have volatile assets, because you not only need to know what they are worth today. You need a plan in place in case value changes in the future.

Source: Barron's, "How Art Can Blow Apart Your Estate," Karen Hube, June 18, 2016

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