• Fractional Interest Gifts of Art to Museums and Other Charities
  • August 25, 2005 | Author: W. Birch Douglass
  • Law Firm: McGuireWoods LLP - Richmond Office
    1. Reasons for Giving. For various tax and nontax reasons a collector or owner of a work of art may prefer to give a fractional interest in the collection or in a particular work to charity instead of giving 100 percent ownership to charity at one time. Some of these reasons may relate to the collector's desire to implement a long-range plan for the ultimate disposition of a collection while retaining a portion of the ownership, use, and enjoyment. In other situations the motivating factor may be the desire to develop a program of partial gifts over several years designed to match the donor's income tax charitable deduction limitations. See A Guide to Charitable Giving and Charitable Giving Alternatives for more information on charitable giving and a discussion of the income, gift, and estate tax charitable deduction rules.

    2. Attitude of Charities. Museums and other charities encourage fractional giving as a means of cultivating certain potential donors and building collections. Fractional giving can be an incentive for other donors who wish to support a museum and enhance the cultural offerings of the locality. Art dealers may encourage fractional giving as part of the original sale as a means of identifying an ultimate repository for the artist's work.

    3. Increase in Value. Once a fractional interest has been given to a museum, the work of art may increase in value, thereby entitling the donor to a greater deduction the next time a fractional gift is made. The result could be that by the time the donor has given away the entire item, the aggregate charitable deductions may substantially exceed the value of the work of art at the time of the first gift. The tax savings produced by the charitable deductions may generate sufficient cash flow for the donor to make cash gifts to the charity to cover its costs of the fractional ownership arrangement and to fund other worthwhile activities of the charity.

    4. Steps to Take. A fractional interest gift of art entails the following steps, frequently with the assistance of an art strategy advisor in addition to the donor's attorney, the donor's other wealth planning advisors, and the charity's development and curatorial staff:
      • Selection of an appropriate museum, university, or other charity to be the recipient of the gift.
      • Confirmation of a related use by the charity.
      • Determination of the desired income tax charitable deduction and coordination with the donor's income tax planning for the current and succeeding years.
      • Discussion of the details of the co-ownership arrangement with the charity.
      • Consideration of a cash gift to provide funding for the charity's ownership and use.
      • Verification of continued insurance coverage and security arrangements.
      • Execution and delivery of a deed of gift or other gift agreement assigning legal ownership of an undivided fractional interest in the work of art to the charity.
      • Completion of the qualified appraisal for the gifted interest and completion of all required tax forms.
      • Review of the donor's estate plan and updating of art bequests for consistency with the gift agreement.
      • Development of a calendar for sharing possession and use of the work of art.

    5. Ownership Relationship. The gift creates a tenant-in-common ownership arrangement between the charity and the collector.
      • Each is entitled to possess and use the work of art based on the party's proportionate ownership.
      • More than one charity may own a fractional interest in one or more items in the collection.
      • An agreement between the parties details the terms of the co-ownership arrangement.
      • Expenses such as insurance and shipping require special attention.
      • Sales proceeds are shared proportionately based on the actual ownership at the time the work of art is sold.

    6. Terms of Gift. Generally, the following subjects should be addressed in the deed of gift or gift agreement.
      • Responsibility for insurance, security, packing and shipping, condition reports, and curatorial work.
      • Consequences if damage occurs to the collection or item.
      • Nature of any copyright and permission to make and sell copies of the work.
      • Conditions of the gift such as inclusion in special exhibitions.
      • Collaboration over use and exhibitions if two or more charities own an interest or if the donor's remaining interest is to be loaned to another charity.
      • Editorial control over publicity concerning the gift and catalogs that include references to the gifted item or collection.
      • Loans by the donee institution to other institutions.
      • Binding nature of the ultimate gift of the donor's remaining ownership percentage.
      • Gift-over provisions when appropriate.

    7. Tax Rules. To avoid a reduction in the allowable income tax charitable deduction, gifts of tangibles must be for a related use by the charitable organization. Special substantiation, reporting, and appraisal rules apply to gifts of art and collectibles. Contrary to the valuation discount rules that apply to noncharitable gifts, the amount of the charitable deduction for the gift of an undivided fractional interest in a work of art generally equals a corresponding percentage of the full fair market value of the entire property.

    8. Conclusion. Although the art legacy and other nontax reasons for a fractional gift may far outweigh the tax reasons, the process usually begins with a focus on lifetime income tax planning and ends with an estate tax charitable deduction at death.