Estate Planning for the Visual Artist

Presented by Michael J. Feinfeld, Esq. & David Faux, Esq.

2

About the Speakers: Michael J. Feinfeld, Esq. is a Trusts and Estates Attorney at theVolkova Law Group PLLC, a Manhattan law firm serving the

legal needs of families and business owners. Michael concentrates

on trusts and estates and business succession for creative professionals

andclosely held family businesses.

Michael is a graduate of the Benjamin N. Cardozo School of Law

(2005) is admitted to the New York State Bar (2006) and to the U.S.

Tax Court (2009) He holds a Bachelor degree from theUniversity of Rochester (1995) and a Masters Degree from the

University of Chicago Divinity School (1998). He is a member

of theNew York State Bar Association’s Trusts and Estates Section

and is amember of the New York City Bar Association. Michael is a co-

editor and update author for Thomson Reuters’s 2014 treatise

Planning An Estate: A Guidebook of Principles and Techniques.

About the Speakers:

Dave Faux, Esq. practices Intellectual Property, Entertainment, Art, andBusiness/Commercial Law. His past and present clients include individualsand organizations involved in the fashion, sports & fitness, fine arts,photography, and graphic design industries.

Prior to becoming an attorney, Dave spent several years as a music journalistand, then, a publicist in the Northwest. He holds both a Master of Scienceand Master of Arts degree. He also spent a year in South Korea as a Fulbright Scholar. His years in the music and fine arts industries as an entrepreneur, scholar, and international traveler inform his approach to thelaw, giving him an insight not achieved by most other lawyers.

3

4

Goals for today:

- What do you own as a visual artist?

- How do you protect it?

- How do you transfer it either during your life or upon your death?

Ultimately, you are planning your artistic legacy.

What do you own as a Visual Artist?

The first and most important step in planning your artistic legacy is to determine what you own.

-Separate personal possessions from your artwork. -Create an inventory/catalogue of your artwork.

5

Inventory of your artwork?

• What do you own? This could be a complicated question.

Work created as an employee (work for hire) vs. independent contractor.

Who owns the work?

6

Inventory of ArtworkWhat should an inventory of art include?

• list all your works of art,

• location of art (in the studio, on exhibition, on loan, on consignment, in private collections),

• dimensions, date, title, medium, or other descriptive information

• specify which works are finished, which are works-in-progress, and which are preparatory studies or were never intended for public viewing or sale

Other important information to gather for inventory:

• information on installation and maintenance,

• ownership, and exhibition records,

• your writings (diaries, journals)

• intangible assets such as copyrights, trademarks, and other intellectual property

• all your contracts and any special business relationships

This list was adopted from the book “A Visual Artist’s Guide To Estate Planning.”

7

Valuation Why is Valuation important?

Taxes: for gift taxes and estate taxes (death taxes) and capital gains taxes you need to know the value of your artwork.

How does the IRS determine the value of artwork:

Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would

be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the

relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction.

Example 1

If you give used clothing to the Salvation Army, the FMV would be the price that typical buyers actually pay for clothing of this age,

condition, style, and use. Usually, such items are worth far less than what you paid for them.

Example 2

If you donate land and restrict its use to agricultural purposes, you must value the land at its value for agricultural purposes, even

though it would have a higher FMV if it were not restricted.

Example 3

Bill Brown bought a painting for $10,000. Thirteen months later he gave it to an art museum, claiming a charitable deduction of

$15,000 on his tax return. The appraisal of the painting should include information showing that there were unusual circumstances

that justify a 50% increase in value for the 13 months Bill held the property.

8

Valuation Cont’d• Additional minority or lack of marketability discounts may be

applied if your artwork is owned by more than one person, e.g., if you own 50% or less of a piece of art, then a certified appraiser may discount the value of the property because you do not own a controlling interest and cannot give a prospective buyer clear title.

• Similarly, a so called “Blockage Discount” may also be allowed artwork inherited by your heirs or beneficiaries if they inherit all or large amounts of your artwork, since if the heirs were to sell all of it, at once, the flooding of the market with your work would decrease its value at the date of your death. This type of a concern was recently the source of some media speculation when Picasso’s granddaughter proposed to sell a number of his works directly instead of going through an art auction house.

9

Valuation continued How Valuation impacts gift and estate taxes:

According to the Internal Revenue Code, each person has a credit - $ 5.43 million in 2015 - that they can use for gifting or for “dying.”

Gifting: If you make a gift that is over the annual exclusion amount, currently $14,000 ($28,000 per married couple) , then you have to file a gift tax return and the amount is applied towards your “credit.” If you make more than $5.43 million in gifts, you will have to pay a tax of 40% on the gift.

Estate Taxes: When you die, your estate will have to pay an estate tax of 40% if it is over 5.43 million as an individual or $10.86 million as a married couple. So you need to know the value of your estate to plan accordingly. Your “gross estate” consists of everything you own, including real estate, retirement accounts, life insurance policies, and your artwork (including all intellectual property rights associated with the artwork)!

When you gift artwork (or any property) the cost basis of the property is the basis the donor has. For artwork, if you are the creator of the artwork, the basis is the cost of materials (paint, canvas, etc.). If the donee then sells the art and the FMV is $10,000, the donee will have to pay capital gains on the appreciation from $200 --> $10k

When a person inherits artwork (or any property) at death they get a step-up in basis. The value of the artwork will be the FMV of the artwork at the date of your death. So now when the beneficiary of the artwork wants to sell it, they will have a much smaller capital gains tax.

10

What is Copyright? work and determine who has a right to produce or d

• Copyright = bundle of rights that allow an artist or author to disseminate their work and determine who has a right to produce or duplicate it.

What is Trademark?

• Trademark = is a commercial identifier which attaches to the work or goods of an artist or business to enable them to differentiate their merchandise from others' for sale.

How does it impact the value of your artwork?

• All of these rights can potentially increase the value of the work since through these rights the artist can control who can reproduce their work and make money off of it.

Intellectual Property

How do you create an artistic legacy?

Your artistic legacy is a chance for you to plan how your artwork will continue to live beyond you. If you don’t make a plan, then that decision will be decided by the courts in New York.

So what happens if you do nothing.

The laws of Intestacy in New York will govern how all your property is distributed.

13

Your property will be distributed according to the law of intestacy in New York.Examples:•You die and leave a spouse and descendants your spouse takes the first $50k and half of the balance of the property and your descendants share the rest.•You die and leave a spouse but no descendants spouse takes all. •You die and leave one descendant descendant takes all.•You die and leave no spouse, no parents and “unknown heirs” Surrogate Court will have to figure out who are your heirs under the law of intestacy and your heirs will have to prove their relationship to you (expect a lot of time and money to go to the fees of the various court appointed people). Bottom Line: Dying without a Will will cost your estate a lot of money in legal fees and it is unknown who will inherit your assets.

Laws of Intestacy

Artistic Legacy cont. What are your options:

-Leave artwork to friends & family

-Leave artwork to museums, schools or other charitable organizations

-Leave artwork to a personal foundation set up for the benefit of your artwork upon your death

Things to consider:

-Is there enough money to store and maintain the artwork.

-Does the person who will inherit the artwork know what your vision and goals are (places to be exhibited, licensing, coffee mugs and tee-shirts)

-Does the charitable organization accept your kind of work and is related to its charitable purpose (if you want it to be a charitable gift)

How to transfer property upon death

15

Will vs. Trust

Last Will and Testament (“Will”): A legal document that becomes operative at death setting forth the creator's (i.e., the Testator’s) wishes regarding who will receive their property upon death and appoints someone to manage the estate (the Executor).

Trust: A legal arrangement which establishes a relationship between an individual (the Trustee) who holds title to and manages property for the benefit of another, the beneficiary.

16

What Does a Basic Estate Plan Include?

• Last Will and Testament (“Will”)• Testamentary Trusts

• Power of Attorney

• Health Care Proxy

• Living Will

17

What is in a Will?

A legal document that sets out your wishes regarding who will get your property upon death.Key Terms: -Executor-Beneficiary -Guardian (if minor children)

18

What Happens After You Die?

Your original Will should be filed with the probate court (in NY, the Surrogate’s Court) in the county where the person lived and will go through a process called “probate.”

Probate is the legal process in which the court will decide whether a Will is valid or invalid. Only after going through probate can the property be distributed to the beneficiaries.

Trust Trusts may either be living or testamentary.

•Living trust (a/k/a as inter-vivos trust) are created while the creator or “grantor” is still alive.

•Testamentary trusts are established only when the grantor dies and are set-up through a Will

A revocable trust: allows for the grantor to easily change the terms of (or end) the trust and to maintain control of the assets transferred to the trust.

•An irrevocable trust: cannot be ended or changed without the permission of the beneficiaries and control of the assets will be given to the Trustee to be administered according to the terms of the instrument.

•The difference between revocable and irrevocable is significant.

19

Will vs. Trust Will: -Probate-Public process-more time & more money possibly -Does not provide any control over assets while alive in case of disability -Ancillary probate

Trust: -No probate-Private -No time delay for probate -Allows for more immediate control of assets if Grantor becomes disabled

20

21

Power of AttorneyA Power of Attorney is a legal document that allows an “agent” to conduct your financial affairs on your behalf.

It can be drafted to take effect upon signing, or it could be “springing” which means it goes into effect upon the occurrence of a future event, such as the principal’s disability or incapacity.

Who Needs a Power of Attorney?

Everyone.In the case of an accident that causes you to be disabled, a Power of Attorney allows for the person of your choosing to step in and manage your financial affairs. Otherwise, a court will have to appoint a Guardian to manage your financial affairs and that person can be anybody the Court wishes, including a stranger who is entitled to a high hourly fee for their work, which comes out of your assets.

22

Health Care Proxy

Allows for a person to choose a “proxy” (or agent) who can make decisions regarding the person’s medical care if the person lacks

capacity to make decisions on their own behalf.

Who Needs a Health Care Proxy?Everyone.

Especially individuals who are not married because otherwise intimate partners will not have standing under the law to step in and make decisions (unless a domestic partner).

23

Living Will

Allows for you to express your wishes regarding refusing certain end of life medical treatment.

Who Needs a Living Will?

Anyone who has specific wishes regarding end of life medical treatment. Otherwise, expect your loved ones to make decisions on your behalf that may not be in line with your wishes and beliefs.

24

Concluding Thoughts

• Having an estate plan in place brings peace of mind.• The time cost is minimal: about 3-4 hours if you are

working with an attorney.• If you have elderly people in your family, have them

create a Health Care Proxy and Power of Attorney because otherwise families could face huge expenses in getting guardians appointed.

• Don’t over think it, just get something together: you can always revise and revisit.

25

Questions?

Please feel free to call or email us with any questions about this presentation:

Michael J. Feinfeld917-582-2425

mfeinfeld@volkovalaw.comOur office is at 65 Broadway, Suite 718

New York, NY 10006

David H. Faux1180 Avenue of the Americas, 8th Floor

New York, NY 10036Toll Free: (855) 905-5031/Dir: (917) 391-9468/ Fax: (646) 664-1506

Email: davefaux@dhf-law.net Web: www.dhf-law.net