RESTORATION WORK ON GIFTS OF ART: SENATE BILL TO BRING BACK INCENTIVES FOR DONATIONS
Donating art to museums could soon become attractive again for wealthy collectors.
Reacting to museums' complaints of sharp declines in art donations, a bill announced Friday by Sen. Charles Schumer, a New York Democrat, could revive the practice of so-called fractional gifts by making the process easier and more tax-advantageous.
Before the 2006 Pension Protection Act, collectors were allowed a tax break when they donated a work of art incrementally, giving away a certain percentage of rights to the work each year. Pieces like the Hope Diamond, given to Washington's Smithsonian Institution, and New York's Metropolitan Museum of Art's Annenberg Collection can be attributed to fractional giving.
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Restrictions in the act prevented donors from realizing tax benefits on the appreciation of the art's value and limited the time allotted to complete the donation to 10 years. Wealth advisers and estate lawyers soon stopped recommending the practice and "these gifts virtually dried up," said Michael Conforti, president of the Association of Art Museum Directors. Now Sen. Schumer hopes to "restore the incentive for collectors to share these works of art with the public," he said.
Among other things, the proposed change allows donors 20 years to complete the donation of the gift and lets them take a tax deduction on some of the appreciation. Here is how it would work: In the first year, if a donor who owns a $10 million painting contributes 10% to a museum, he would receive a $1 million deduction. If the donor gives another 10% the next year and the fair-market value of the artwork has increased to $12 million, the donor receives a deduction on the appreciated value, although it is limited to his 90% stake in the artwork, and thus would amount to $1.08 million.
However, if the art declines in value the same rules apply and the donor's tax break could shrink.
Critics point out that the proposed bill comes at a time when, overall, artwork is declining in value. The art market has dropped 30% so far this year and is on track to return to 2004 values, according to Mei Moses Art Indexes, which tracks 14,000 repeat-auction sales of the same works.
Other new rules require museums to report contributions on yearly tax forms and exhibit the artwork in proportion to its ownership interest over every five-year period, keeping the art from remaining in the donor's private home during the gifting period. The gift also is subject to a binding written contract, to protect against challenges by heirs after the donor's death. Donations valued at more than $1 million would require a review by the Internal Revenue Service's art advisory panel.
"This bill remedies some of the problems with respect to the current law, but it doesn't go far enough," said Neil Kawashima, a partner with McDermott Will & Emery LLP in Chicago who represents wealthy families with respect to estate and gift planning. Sen. Charles Grassley, an Iowa Republican who spearheaded the initial changes, said the proposed bill is already a compromise.
"Some museum officials thought Congress went too far to shut down abuse. I agreed to look at a compromise that would preserve accountability from donors and museums to taxpayers," Sen. Grassley said. "I still think partial donations of art are of questionable value to taxpayers, but museum officials and their champions feel strongly otherwise, so I'm willing to continue to listen."
"This bill remedies some of the problems with respect to the current law, but it doesn't go far enough," said Neil Kawashima, a partner with McDermott Will & Emery LLP in Chicago who represents wealthy families with respect to estate and gift planning. Sen. Charles Grassley, an Iowa Republican who spearheaded the initial changes, said the proposed bill is already a compromise.
"Some museum officials thought Congress went too far to shut down abuse. I agreed to look at a compromise that would preserve accountability from donors and museums to taxpayers," Sen. Grassley said. "I still think partial donations of art are of questionable value to taxpayers, but museum officials and their champions feel strongly otherwise, so I'm willing to continue to listen."
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