Collectibles and Your Portfolio
Oxford, England is an important place to my family. At some point over the last 30 years, every member of my immediate family has visited, and all but one has lived there. My parents developed a strong affection for the place and so it was natural that they were interested in acquiring Oxford mementos.
A drawing of Oxford University landmark, the Bodleian Library, a place where many members of my family spent long hours studying, now hangs in my parents’ home. It’s a sentimental piece, regardless of its value, and it’s not unusual for collections to start this way – out of passion more than out of an effort to fulfill investment objectives.
Sometimes these pieces appreciate and can become quite valuable, but treating collectibles as investments can be very risky. Here are some financial planning points to keep in mind if you’ve accumulated collectibles of your own or are beginning to build a collection.
1. How Does the Collectible Fit into Your Financial Picture?
As tangible items, collectibles have an appeal that savings accounts, stocks and bonds do not. For most people, a lovely vase with an impressive history provides more pleasure than owning something as abstract as shares in a company. And in some portfolios, collectibles can support the aim of diversification and serve as a hedge against inflation. Gold and silver is commonly purchased as a security, and if you own coins, rings or watches in these metals, they may appreciate during periods when inflation is increasing.
But as an investment, collectibles can be precarious. They’re more subject to swings in supply and demand, and short-term trends can vary substantially. The market for collectibles is more volatile than for equities, and the items themselves can be difficult – and expensive – to sell. All of this means their true value is usually challenging to quantify.
And the more esoteric an item, the smaller the market is likely to be and therefore the wider price differential you’ll have. For example, many people know and appreciate the painter Pablo Picasso, but there may be many fewer who are willing to pay a high price for a lesser known artist whose contribution is appreciated only among a smaller group of aficionados. Depending on how many of these people are in the market, the going price could range widely.
Also bear in mind that collectibles do not provide income, and because their value is subject to so many uncertainties, investors are ill-advised to count on any collectible for their retirement.
2. What Are the Tax Implications?
If you do invest in collectibles, and hold an item longer than a year, you’ll pay capital gains tax of 28% when you sell, and depending on your income, you may pay more. In addition, there’s state tax on any proceeds, plus a 3.8% surcharge as part of the Affordable Care Act.
If you buy and sell on a regular basis, the IRS will view it as a business. You can usually deduct expenses like inventory, studio rent, employee wages, etc. But if the business operates at a loss, after several years, the IRS will begin to look more closely to determine if you have something more like a hobby than a business. Based on this “hobby loss rule,” you cannot deduct a loss or expenses on activities the IRS views as an avocation.
3. How Do Collectibles Figure into Your Estate Plans?
Collection owners should also address in their will where they want their collectible assets to go. A collectible’s value is sometimes in the eye of the beholder and the collector’s family may not share her view. It may be helpful to make sure potential heirs understand the value of what they will inherit. Some people with large collections may be leaving them to family who know nothing of the true value.
If the owner has a friend or family member who does want the collection, she will need to bequeath that in her will or in a side letter that outlines exactly which assets go to whom. If no one in the family is interested, a museum or other charity may be. For estate planning purposes, the donor can get an income tax deduction during life or an estate tax deduction at death and pass those assets on to an organization that would want them and could perhaps keep the collection together.
4. What Insurance Will You Need?
It’s not unusual for someone to learn after something tragically happens to his collection that he’s mistakenly assumed his homeowner’s policy would cover the loss. Homeowner policies normally have coverage limitations on personal property (collectibles). For that reason, clients with valuable collections like jewelry, stamps, coins, etc., may elect to cover valuable property by adding a scheduled personal property floater to their standard homeowner’s insurance policy. Adding a floater assures the homeowner that the full value will be replaced in the event of damage, theft or loss.
One important note: a floater is necessary for each individual item and you have to schedule the value if it’s over a certain amount. With larger and more valuable collections, you may want to use an experienced appraiser to maintain an accurate value of your collectibles. This should also help smooth the claims process.
In addition to protecting the full value of your collection, holding a separate collectibles floater has the added benefit that making a claim won’t affect your homeowner’s policy.
Be sure to periodically re-appraise the items’ value, which can fluctuate significantly from year to year. Without insuring for the correct value, a significant percentage can evaporate if the collection is lost or damaged.
It’s also important to maintain accurate inventory. Wine collectors, for example, are often adding to their collection or enjoying a select bottle on a special occasion.
How Can Smith & Howard Wealth Management Help?
For most investors, collecting is usually an activity best approached as a labor of love, something done for the enjoyment it brings or for the thrill of the hunt: finding and negotiating for the item you want. Even so, these items can come to represent significant value – sentimental and otherwise.
Smith & Howard Wealth Management is available to offer objective advice on how to protect that value and make sure your family’s collectibles are secure. One of the country’s top 100 wealth management firms, we’ve helped hundreds of families navigate the challenges of protecting their financial future.
I’d be happy to answer your questions. Please call me at 404.879.3128 or email me.