Morgan Stanley
  • Wealth Management
  • April 27, 2021

Art as a Passion Asset and the Economics of Taste

The economics of taste is a known factor in the art market, but it can also be a challenge within families as privately-owned art and collectibles pass between generations. Here are some key estate planning considerations for avid collectors and their families.

It is estimated that approximately 10% of the balance sheets of ultra high net worth individuals (defined here as having US$30 million or greater in total net worth) is composed of art and collectibles,1 which altogether represents approximately US$3 trillion globally in privately owned passion assets. The economics of taste is a known factor in the art market, but it can also be a challenge within families. One generation may have spent a lifetime building an art collection by selling and purchasing art as their budgets and tastes evolve over time. But what happens when the subsequent generation does not share the same passion for the artwork, or when a disproportionate segment of the collection’s total value lies in fewer pieces than there are heirs? While these conundrums aren’t much discussed in the context of the pending massive intergenerational asset transfer—estimated to amount to tens of trillions in U.S. dollars in the next couple decades—they present a substantive dilemma for families.

The ultimate challenge facing a collector may be what to do with the collection after their death. Does the collector intend to keep any, a portion or all of the collection together, and who will oversee the art? Creating a strategy will lessen undue financial or emotional pressure on the surviving family, but for the collector, having allocated so much time and so many resources over many years to the collection, settling on the eventual disposition and transfer of the art is often an involved and emotional process.

Should a collector choose to leave the collection to their heirs, not having a plan is the least desirable option. It is possible that the art will end up under the control of the collector’s executor or personal representative, and it may be distributed to family members who do not share the collector’s appreciation for and understanding of the art.

With a plan, the collector may establish legal structures to own and retain the art, appoint art specialists to advise on the art, alleviate the emotional association with the art, and mitigate the financial burden of maintaining the collection and paying imminent or future taxes. The collector may establish a structure that owns the art and affords the collector the flexibility to draft and customise the governing documents to memorialise the collector’s intention for the art, as well as address the needs of the family and the collection. Specifically, the specialists necessary to advise the family with regard to the art can be identified, appointed and instructed according to the specifications of the collector.

Should a collector choose to leave their collection to a charity, having a documented philanthropic plan can help avoid surprises. Approximately 90% of art in public museums comes from private collectors.3 However, collectors may mistakenly believe their donated art will become a permanent piece in the museum of their choice. They may assume that once accepted, their art will be displayed and highlighted, or that their art will become part of the museum’s permanent collection and not deaccessioned. These assumptions may prove false. Due to decreased funding, limited storage space and highly selective art acceptance committees, major museums have limited their acceptance of works of art.

It is important for the collector to understand the long-term plan for the art and create a realistic strategy. For example, it may be best not to focus on the largest and most famous museums. Less notable organisations may have more space and additional flexibility.  It is extremely important for the client to make the gift pursuant to a written agreement that builds in flexibility and provides clear terms that could be enforceable at a later date. An attorney or an independent art professional can help negotiate and document the transaction.

Should a collector choose to sell their collection, retaining an art advisor to help them understand the current market dynamics in their area of interest makes sense. Even collectors with extensive expertise in a specific genre or artist find that it often pays to have professional guidance regarding how works of a given artist in a given period and medium are trending. Like all asset classes, the overall art market is cyclical and may involve fluctuations. One artist, or one genre, may gain momentum for a time and then stagnate for decades. These dynamics can create considerable disparities in value. Art advisors will consider the benefits of public auction sales versus private dealer sales, which sales season is most beneficial and which international location is most suitable.

An art collector may also consider selling the collection during their lifetime—because they may benefit from special relationships within and knowledge about the art market—to realise the true market value of the art that their eventual executor or personal representative may not be able to accomplish. Additionally, the timeline of a sale may play a role in extracting value. As the art market evolves over time, so do art buyers’ tastes. It may be that what is valuable and coveted in the current art market may not be as substantively valued years or decades later.

The art market is not regulated, so participants must be vigilant. When planning for the transfer of art, it is prudent to work with a number of specialists. An art expert can help market the works and determine which could be sold for a reasonable price in the short term, which other ones should be held longer to generate interest and which pieces are less valuable. Similarly, an art attorney can impart legal advice as to how to value art for purposes such as tax and estate planning. An art attorney can also help navigate the legal issues that arise when executors, personal representatives and trustees are fulfilling their fiduciary responsibilities in safeguarding, holding and disposing of art.

It is critical that families have a strategy for all of the assets on their balance sheets. Families should take particular care with regard to those assets, like art, that are illiquid and valued more subjectively. Planning will alleviate stress on the next generation, who might attempt to maintain a collection out of respect for their parents or, alternatively, choose to dispose of a collection without the requisite knowledge of the art or an understanding of the art market. To preserve art valuations, there must be an orderly art market now and for future generations. This demands the discipline and fortitude of collectors and their advisors to plan for the disposition of art from one generation to the next through thoughtful transfers and sales.


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1 Credit Suisse Global Investment Returns Yearbook, 2018
2 Art Basel Report, 2019
3 Cohen, Patricia, “Art Collectors Gain Tax Benefits From Private Museums,” 2015