Two key provisions in President Trump’s plan to overhaul the tax code could diminish art museums’ ability to acquire new work.
On Thursday, Congress unveiled a tax reform bill following President Trump’s recommendations to slash the corporate tax rate, lower taxes on profits of pass-through businesses, and curtailing a tax on the assets of multimillionaires in its first significant rewrite since 1986. That latter measure, which has already become a sticking point in negotiations, is a proposal to repeal the estate tax — a 40% levy on the accumulated property of the super-rich whose assets total above $5.49 million per person or $10.8 million per couple upon their death. For context: that only applies to about one half of one percent of U.S taxpayers.
President Trump pitched its removal in a speech in Indianapolis in September, claiming it would “protect millions of small businesses and the American farmer,” although his Treasury secretary Steve Mnuchin conceded its elimination would “disproportionately help rich people.” In the first draft of the bill, congressional Republicans want to double the estate tax exemption to about $11 million per person before phasing it out entirely in six years.
Administration officials have not addressed who its disappearance might hurt — philanthropic and cultural institutions who receive valuable treasures from wealthy benefactors. The families of prosperous patrons may not be forced to give away or sell their prized Picassos to museums and auction houses if they didn’t have to pay a steep tax on their inheritance, experts say.
“There is a tremendous burden on an estate where some of its assets are art, therefore people look to alleviate that burden by donating art to charitable institutions or creating trusts and foundations to carry on their legacy after their death without paying a tax,” said Malcolm Taub, an art law expert and partner at Davidoff Hutcher & Citron.“I’m not saying it’s eliminating all donations but it is eliminating one motivating force that might prompt the donation of art to museums and nonprofits.”
Unlike real estate and even other heirlooms, artwork is a liquid asset whose value is tremendously volatile and can change depending on how other works sell on the market. That means it can be sold quickly — at a price sometimes far lower than its actual value — or bequeathed to museums that wouldn’t otherwise have the means to obtain a super-expensive work.
“Every piece of artwork is a unique piece of work, even those in a series,” Taub said. “The value of photograph, or print in a series changes, as the series goes higher in the series, as the series is outstanding.”
Families with large collections of priceless works often set up trusts during estate planning that can be converted into a foundation to avoid the grubby hands of the IRS. Collectors also enhance the value of their work over time by loaning them to museums and creating literature references to each pieces.
All of Robert Rauschenberg’s works, for example (his estate is valued at $800 million), were put into trusts, which became the Robert Rauschenberg Foundation after his death, according to Taub, who advised his family.
“It eliminated the estate tax, which would have been an enormous burden,” Taub said. “Anything remaining in the estate would have been totally wiped out.”
A spokesperson for the Robert Rauschenberg Foundation offered a different take, telling Hyperallergic, “Mr. Rauschenberg left an estate valued for Federal tax purposes at approximately $605 million. Furthermore, the trusts used by Mr. Rauschenberg in his estate planning did not ‘become’ the Foundation. Rather, the artist formed the Foundation in 1990 and left the Foundation the bulk of the assets held in the Robert Rauschenberg Revocable Trust at his death in 2008.”
The heirs of art dealer Leana Sonnabend weren’t as fortunate. The family had to sell $600 million worth of her $1 billion collection that included works by Jeff Koons, Roy Lichtenstein, Andy Warhol, and Cy Twombly, to pay down a $471 million state and federal tax bill after she died in 2007.
One practice that patrons use to upgrade their collections could be ending soon with the proposed elimination of a tax loophole called the like-kind exchange. Investors had used the tactic to put off or avoid paying capital gains taxes on sales on works by trading in their Rodin for a Koons, but Congress may only limit the tax break to apply to property.
Another provision in the tax code that art institutions are following closely is the charitable tax deduction — a substantial write-off taxpayers claim for making donations to nonprofit groups. Congress also proposed doubling the standard deduction — which could have a side effect of reducing charitable giving by up to $13 billion or 4.6 percent according to one estimate.
That could have wide-ranging effects on the bottom lines of not only museums, but the entire nonprofit sector. Arts and culture charities received $18.21 billion in charitable donations last year, and charitable giving represents between 30 and 60 percent of a typical arts group’s budget, according to Americans for the Arts.
The group is opposing any provision that “remove incentives for charitable giving or limit the full scope and value of the tax deduction” and is advocating for a universal charitable tax deduction for all U.S. taxpayers.
The art world, like everyone else, is waiting to see what Congress does.