Originally published on Forbes.com on July 24th, 2012
Whenever I have a problem involving artwork, I will turn to attorney Matt Erskine, who has a boutique firm in Worcester, Mass. So of course, I asked him to weigh in on the “Canyon” controversy. Here is what he has to say:
The Art Advisory Panel is not to Blame in the Sonnabend Fiasco
Matthew F. Erskine, JD
Janet Novack’s 7/22/2012 Forbes Magazine post “The Art Advisory Panel has Its Head in the Clouds” is an excellent articulation of many of the comments I have seen and heard from the art, estate planning and appraisal industries since the Sunday New York Times article. It is not the Advisory Board, but the Sonnabend’s professional advisers that have their heads in the clouds. The ownership and control of artwork is usually a trigger for an audit, especially if the object is subject to a welter of conflicting laws, such as “Canyon” is. The fact that “Canyon” could not be sold was apparent well before Mrs. Sonnabend’s death, as she could keep “Canyon” only so long as it was on public display at the MET, where it hangs today. Taking the position that “Canyon” is valueless is on its face ridiculous. The MET obviously values it enough to give it some of its very limited wall space for display. People now pay $25 per person per day to see it at the MET. How much do you think they would pay for a “Canyon” after this battle? So, what is the “real” lesson of the one track planning in the Sonnabend case?
The lesson is that Scenario Planning, in the face of possible reactions by the IRS, is necessary to give owners of art and collectibles options. Scenario Planning is apt for planning for artwork and collectibles because it allows the owner, and their advisers, to answer the feed-forward question “what could possibly happen?” and then take steps to avoid risks and seize opportunities. The owners, and their families, have alternative plans when the primary plan fails to cope with negative situations. (For a more in depth discussion of using Scenario Planning see “Scenario Planning Option For Clients’ Estates“. Here is a simplistic example:
1. Prior to her death, Mrs. Sonnabend revises her estate planning documents so that the piece “Canyon” goes to her heirs, but if they disclaim, “Canyon” is donated to the MET. The Personal Representative is also given authority to abandon, modify or destroy “Canyon” in the settlement of the estate.
2. The Estate applies for a valuation of “Canyon” to the art Advisory Board. The Board comes back with a decision that “Canyon” ’s fair market value is $65 Million, the family now has the following options:
a. Keep “Canyon”, and pay the taxes, because ownership of this (now very famous) artwork is worth it to them,
b. Disclaim their interest in “Canyon” in favor of the MET, and takes the full $65 Million as a charitable deduction in the estate ,
c. Have the Personal Representative go to the MET, saw the eagle off the painting, leave the eagle on the floor, and get a new appraisal for the modified artwork, or
d. Have the Personal Representative takes “Canyon” out into the front steps of the MET and burn it in protest of estate taxes, and show it as a loss incurred in the administration of the estate.
Although the last two suggestions seem outlandish, they are no more outlandish than the plan to get the IRS, and the Courts, to accept that the ownership of such a major work by a renowned artist is worthless just because you cannot sell it. Also, there is a lot of chutzpah to argue in this day and age of the 99% that that the “rich” can inherit something for free!
For many owners of artwork or decorative collectibles, scenario planning works well for individual or a small number of items. In the Sonnabend estate, where there is over $1 billion in artwork alone, there is a need to simplify the complexity of the many different items (and their tax, provenance and valuation issues) by aggregating them both on the basis of the tax status of the owner and the item, and also by the needs and goals of the owner. So, do not blame the Art Advisory Board for valuing “Canyon” at $65 million, blame the Sonnabend advisers, who have baited the Panel by claiming the work is valueless, and not given the family options to avoid this tax in the first place.
–Matthew F. Erskine is principal of The Erskine Company LLC, a strategic advisory firm located in Worcester, Massachusetts, that offers expertise in the management of unique family assets, including multi-million dollar family businesses, numismatics collections, fine art and Americana collections, commercial and residential real estate holdings, and family compounds. Be sure to check out their blog.
Given time Matt would have come up with a much better plan then burning the artwork, satisfying as that might be. It was Matt who came up with the best suggestion when I was wrestling with the “midmill dilemma”.
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