Virginia State Bar

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Trusts and Estates

A Section of the Virginia State Bar.

Summer 1999 Newsletter

Newsletter - Trusts and Estates

Volume 16, No. 2

ESTATE PLANNING FOR COLLECTORS

By Nicholas Kalis

Your client, while not the sort of rich philanthropist featured in the media, has nevertheless amassed a sizeable collection of one sort or another. How do your counsel him? As an attorney who is also a model railroader I have had occasion to counsel my fellow enthusiasts about estate planning and their collections. Many of the pointers contained herein will also apply to other collectors - simply replace "model railroader" with the hobbyist designation applicable to your client. When you encounter "National Model Railroad Association (NMRA)" replace it with the organization your client knows is well organized in his hobby area. The nuts and bolts approach taken in these lines presumes that you undertake all the normal inquiries you normally take with any client who simply seeks a will and no more, or opts for your full gamut of estate planning services.

Perhaps first of all, I advise my clients to invest in a computer program that allows them to print out a detailed record of what they have acquired. This inventory program should feature fields for entering the acquisition price as well as a current market value estimate of each item in their collection. Your client should be able to find several competing programs offered for sale in the pages of his favorite hobby magazine. A program designed for his particular collection should make it easier to identify each item and reap a maximum sales price. He should make more than one copy of this record and leave a second copy with a friend or other trusted party. These inventory programs also make it easier to sell off items of the collection should your client tire of an item, need to raise cash for other needs or to acquire a different item for his collection. His own copy of the inventory should be kept in a location off-site from where the collection is kept. Of course every significant item in his collection should be clearly labeled and if possible given an identification number matching that assigned to it in his computerized or manual inventory. These tips will serve your client well in case of an insurable loss from fire or theft. Note the word "insurable" - have your client ascertain whether his collection is insured by his current homeowners policy. Some policies place limits on paying out for this type of loss. Should your client discover his current homeowners policy will not insure this sort of loss he will have two options finding an alternate satisfactory homeowners' policy or purchasing a policy of the sort advertised in the various publications of the hobbyist press.

What if your client has yet to make a list of his prized collection, need he put off drawing up his will until he has organized his collection? No, he can use a list as provided for in Va. Code 64.1-45.1.

If a will refers to a written statement or list to dispose of items of tangible personal property not otherwise specifically bequeathed, the statement or list shall be given effect to the extent that it describes items of tangible personal property and their intended recipients with reasonable certainty and is signed by the testator although it does not satisfy the requirements for a will. Va. Code § 64.1 - 45.1

Note the two requirements that the list first, be signed, and, second, that it specify the intended recipients. Computer inventory systems do not perform either of these functions so your client must be sure to perform both functions after his computer spits out his list. Although not required, I would strongly suggest that the list be dated. Effective, July 1, 1995, this code section provides that a will may refer to a list written either before or after the execution of this will.

The written statement or list may be referred to as one which is in existence at the time of the testator's death, may be prepared before or after the execution of the will, may be altered by the testator at any time and may be a writing that has no significance part from its effect on the dispositions made by the will. Va. Code § 64.1 - 45.1

A separate list may not be the best route for each client. A client who does not add and subtract much from his collection and who has only one intended beneficiary for his collection may wish to skip the reference to a list in his will. However, a list would be helpful in either case for purposes of inventorying and estate administration.

However, you should counsel your client that after his will is drafted and after the collection is properly inventoried should he find that his net worth exceeds $625,000 he may wish to consider further estate planning to avail himself of the various provisions of the tax code to reduce any possible estate tax burden.

Planned Giving for the Collector

If your collector client is a member of the NMRA1 he may wish to gift monies or tangible personal property to this organization as it is a 501(c)(3) organization so such gifts would be tax deductible while alive. Specifically, gifts of money are deductible up to 50 percent of the donor's adjusted gross income. IRC §170(b)(1)(A); Reg.§ 1.170A-8. A five-year carryover is allowed for any excess. As is likely with other organizations he may wish to direct which function or entity within the organization should receive his largess. Just for example within NMRA one could designate as beneficiary the Kalmbach Library and specify its Captain Robert Rowe Endowment - proceeds used to purchase books or magazines not available by donation; Charles Eckstein Narrow Gauge Endowment; Valley Forge/Colborn Memorial Publications Fund; or the Finch Operating Endowment. Other funds within the NMRA include: Howell Day Model Railroad Museum Fund; Memorial Fund - contributions in memory of our friends and fellow modelers -General Operations; Team 500 - formerly known as the building fund; Computer Acquisition Fund; and Pacesetters. While your client is unlikely to be a model railroader, the above list should illustrate the wide variety of choices available to one who seeks to benefit his organization(s). The NMR can create an annuity with five thousand dollars and up.

Donating to Others

Just as anyone else, your client may annually give free of federal gift tax $10,000 in monies or tangible personal property (read here "collectibles") to any individual. So if he and his spouse have, say, five grandchildren he can give $100,000/year for 10 years and transfer a collection worth up to $1 million with no federal tax and skip a generation to boot. This only is important if his estate would otherwise be subject to federal estate taxation.

Of course, donations in kind to other 501 (c)(3) organizations can qualify for favorable tax treatment in the form of income tax deductions. Bear in mind that gifts of tangible personal property held either long or short term are deducible at full present fair market value with no capital gain on appreciation if the use of the property is related to the donee's exempt function.2 Deductibility is, however, limited to thirty percent of your client's adjusted gross income. If the gift is unrelated to the donee's exempt function, the deductibility of your client's gift must be reduced by the amount of gain that your client would have realized as long term capital gain had the property been sold for its fair market value. IRC § 170(e)-(1)(B).

If your client plans on making a donation in kind (model trains, books, railroadiania) contact the institution(s) first to see if they are interested in accepting his gift. Also be sure that your client has accurately described the planned institutional beneficiary of his largess. Does he have the form of the entity correct? Does he have the correct address of the institution? An institution might turn out too late to be either uninterested in your client's collection or be otherwise unable to accept it due to space requirements or other reasons. Your client should educate himself about what sort of institutions might accept his collection. In the case of railroad-related collections, likely candidates would be local children's museums, transportation museums, and local history museums. Of course, each hobby would have its own particular museums with an interest in the subject matter of your client's collection.

You should assist your client with drafting an agreement delineating the conditions under which his collection will be accepted. Who pays for transportation and insurance? When and how will the collection be exhibited? How will the donor be memorialized by the donee institution? Does the institution intend to sell off all or part of the collection? These questions should be answered by the agreement signed by both donor and donee.

Assistance from Collector's Organization to help dispose of smaller collections

You should make yourself aware of exactly - and I cannot stress too much this point - what sort of collection we have in mind here. Just as an example, model trains fall into two very different categories.3 There are collectible toy trains - which are routinely sold at auction houses, both famous and not-so-famous - and then there are scale model trains which are only rarely handled in this previously mentioned fashion. The executor and you should know the difference. If you do not know the difference, the executor and you should take time to familiarize yourselves with these distinctions. Scale model trains often run on some type of layout. Selling the layout itself is an unlikely eventuality. In fact, there may be some expense involved in disassembling or demolishing the layout. Care should be taken to salvage anything that is salvageable. Although it is beyond the scope of this article, be aware that the value of toy trains, as with other collectibles, is very much influenced by their condition. In fact, original boxes can add significantly to the value of a collection or an individual piece. Be sure that post-death you take steps to insure the physical security of the collection. Also be sure that the collection remains in a dry temperature controlled environment.

Advise your client to prepare a letter telling his loved ones about the location of his will, the name of his attorney, and how to contact the National Model Railroad Association. While other collectors' groups may not be as sophisticated, in the case of the NMRA, an estate counseling committee exists. The NMRA has even gone so far as to produce a videotape - available for a five-dollar rental from its Kalmbach Memorial Library - discussing wills and estate planning in a general way.

Administration

When administering an estate in which a will refers to a list bear in mind,

When distribution is made pursuant to such a written statement or list, a copy thereof shall be furnished to the commissioner of accounts along with the legatee's receipt. Va. Code § 64.1 - 45.1

Also keep in mind that,

A personal representative shall not be liable for any distribution of tangible personal property to the apparent legatee under the testator's will made without actual knowledge of the existence of a written statement or list, nor shall he have any duty to recover property so distributed. However, a person named to receive certain tangible personal property in a written statement or list which is effective under this section, may re-cover that property, or its value if the property cannot be recovered, from an apparent legatee to whom it has been distributed in an action brought for that purpose within one year after the probate of the testator's will. Va. Code § 64.1 - 45.1

You should place a market value on each asset included in the collection. Remember that the market value of your client's collection is determined as of the date of death. Here is where the NMRA can be usefuL They can identify knowledgeable individuals to place a value on these items. The Estate Counseling Committee Job Description cautions "The Chairman shall direct the appraisers that they are not to offer to nor dispose of the estate they have appraised." A good source of information about individuals and firms selling or auctioning toy trains is Classic Toy Trains published ten times a year by Kalmbach Publishing in Milwaukee, Wisconsin and available at news stands. Kalmbach also publishes Model Railroader which covers scale model trains. Do not overlook the photographs and other printed materials the collector may have amassed - these have a value of their own and can often find a ready market. The National Model Railroad Association and its full-time professional staff can be reached at their headquarters at 4121 Cromwell Road, Chattanooga, Tennessee 37421 or 423 892-2846. Just as there are countless valuable web sites discussing model railroads and their real-life prototypes, their counterparts for other collecting interests must surely abound.

Although many practitioners will never have a model railroader walk into their offices seeking estate planning services, is quite likely that you will encounter in someone seeking to probate a will that seeks to dispose of a collection. The example of the model railroader provided in these pages should alert practitioners that there may be more than meets the eye with any collection.

All references herein to the male gender should be considered to include the female gender as well.

Nicholas Kalis is a member the Fairfax and McLean Bar Associations. Nicholas is also a member of the Planned Giving Study Group of Washington, DC. Additionally, the Virginia State Bar Trusts and Estates Section counts Nicholas as a member. Kalis is a member of the Potomac Division of the National Model Railroad Association. He has been professionally published in publications ranging from Rail Model Journal to Model Railroading.

1 Bob Charles "Checking Signals - Funds are tax deductible" NMRA Bulletin November 1998, page 5.
2 Conrad Teitell. Charitable Contribution Tax Strategies (1999).
3 It is beyond the scope of this article to discuss scale, gauge, or the vagaries of brass locomotives. A
word to the wise, many expensive brass locomotives have been painted and so their value may not be
apparent to the uninitiated.