PORTFOLIO

Estate Planning for Authors and Artists (Portfolio 815)

Tax Management Portfolio, Estate Planning for Authors and Artists, No. 815-2nd, addresses the unique issues involved in planning for and administering estates that consist in part of assets that have been created by the decedent's personal literary or artistic efforts. 

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DESCRIPTION

Tax Management Portfolio, Estate Planning for Authors and Artists, No. 815-2nd, addresses the unique issues involved in planning for and administering estates that consist in part of assets that have been created by the decedent's personal literary or artistic efforts. These types of assets, which may comprise the bulk of an author's or artist's estate, present special business management, income tax, transfer tax, and estate planning issues.
This portfolio adopts what is essentially an interdisciplinary approach to the issues affecting authors, artists, and owners of collections of art objects as they plan to transfer their property to their intended beneficiaries, as well as the issues affecting their beneficiaries upon receipt of the creative work. On the assumption that the reader is familiar with estate planning concepts, this portfolio focuses on the issues and rules that are particularly relevant to authors and artists and directs the reader to other Tax Management Portfolios that discuss the concepts in detail. This portfolio first gives a broad overview of the Copyright Act of 1976, then discusses the income taxation of authors and artists during life and of their property in the hands of their beneficiaries after their deaths, and the gift and estate tax rules that are particularly relevant to estate planning for these clients. The valuation of works of art is discussed in detail. The portfolio concludes with a discussion of estate administration issues that the fiduciary of an author or artist may face and the role that may be played by a literary or artistic executor.
Relevant portions of the copyright law and Copyright Office forms are reproduced in the Worksheets. A comprehensive checklist for estate administration, including specific steps that should be taken when dealing with artistic or literary property, also is provided. Finally, sample clauses illustrate fractional interest gifts and provide suggestions for fiduciary powers and duties.
This portfolio may be cited as Crawford and Sare, 815-2nd T.M., Estate Planning for Authors and Artists.


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AUTHORS

PROFESSOR BRIDGET J. CRAWFORD
Bridget J. Crawford, Esq., Assistant Professor, Pace University School of Law (2003- ); Milbank, Tweed, Hadley & McCloy LLP (Associate, 1996-2003); Lecturer in Law, University of Pennsylvania School of Law (2001); University of Pennsylvania School of Law (J.D. 1996); Elected Member, Moot Court Board; Yale College (B.A. magna cum laude 1996); Member: American Bar Association, Sections on Real Property, Probate and Trust Law and Taxation; New York State Bar Association, Trusts and Estates Law Section; Association of the Bar of the City of New York, Non-Profit Organizations Committee (1997-2000); Publications include “Model Estate Planning Documents” in Appendix to David Westfall and George P. Mair, Estate Planning Law and Taxation (5th ed. 2003) (with James S. Sligar); “Grantor Trusts and Income Tax Reporting Requirements: A Primer,” Prob. Prac. Rep. (May 2001) (with Jonathan G. Blattmachr); “Wilderness No More: Alaska as the New ‘Offshore’ Trust Jurisdiction,” J. of Soc'y Advanced Legal Stud. (Nov. 1999) (with Jonathan G. Blattmachr); “Selected Estate Planning Strategies for Persons With Less than $3 Million,” Estate Planning (July 1999) (with Jonathan G. Blattmachr and Georgiana J. Slade).

JOHN SARE, ESQ.
John Sare, Esq., Partner, Patterson, Belknap, Webb & Tyler LLP (2004- ); Milbank, Tweed, Hadley & McCloy LLP (1991-2004, partner 2000-2004); Lecturer in Law (Seminar in Law and the Visual Arts), Columbia University School of Law (2001- ); Columbia University School of Law (J.D. 1990; Harlan Fiske Stone Scholar); Staff, Columbia-VLA J. L. & Arts; Southern Methodist University (B.A. summa cum laude 1986; Phi Beta Kappa); Member: Association of the Bar of the City of New York, Committee on Art Law (1995-98), Committee on Non-Profit Organizations (member, 1992-95; secretary, 1998-2001). Publications include: “A Primer on the Law of Cy Pres and Equitable Deviation” (American Law Institute — American Bar Association Conference on Legal Problems of Museum Administration) (2004); “Non-Profit Contracts: On a Budget, On a Mission & On a Tightrope,” Profitable Information for the Non-Profit (Association of the Bar of the City of New York) (2003); “Not ‘SO’ Fast: The Supporting Organization as a Vehicle for Charitable Giving” (Practising Law Institute) (2003); “Facing Important Legal Issues,” Splendid Legacy: The Guide to Creating Your Family Foundation (National Center for Family Philanthropy) (2002); “ ‘Transparency’ Means Greater Accountability for Non-Profits,” Trs. & Ests. (Sept. 2000) (with Carolyn C. Clark); “More Disqualified Persons Among Us: Living with Intermediate Sanctions,” NYU 26th Conference on Tax Planning for 501(c)(3) Organizations (1998); “Income-Producing Activities of U.S. Museums: Where Does Charity Stop and Commerce Begin?”, Int'l Legal Practitioner (Sept. 1996) (with Carolyn C. Clark); “Art for Whose Sake? An Analysis of Restricted Gifts to Art Museums,” Columbia-VLA J. L. & Arts (Spring 1989).

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

Introductory Material

A. Copyright Issues

B. Income Planning Issues

C. Estate Planning Issues

II. Copyright Basics

Introductory Material

A. Subject Matter of Copyright

B. Statutory Formalities

1. Registration

2. Deposit

3. Notice

C. Ownership and Divisibility of Exclusive Rights

D. Duration

E. Right to Renew

1. Under the 1976 Copyright Act

2. Under the 1909 Copyright Act and Copyrights Subsisting on January 1, 1978

F. Right of Termination

1. Under the 1976 Copyright Act

2. During Extended Renewal Period for Pre-1978 Copyrights

3. Operation of Termination Provisions

4. Open Questions

G. Works Made for Hire

III. Income Taxation of the Author or Artist

Introductory Material

A. Creative Individual Taxable as Engaged in a Trade or Business

1. Overview

2. Treatment of Developmental Expenditures

3. Nonapplication of § 263A Uniform Capitalization Rules to Qualified Creative Expenses

4. Depreciation of Capitalized Costs

B. Sale or Exchange of Copyrights and Works of Art

1. Overview: Nature of Transfer and Characterization of Income

2. Section 1221(a)(3) Property: Property Created by Taxpayer's Personal Efforts

3. Sale by a Third Party

4. Miscellaneous Characterization Issues

C. Sale Proceeds Treated as Earned Income Under the Code

1. Deferred Compensation Arrangements

2. Foreign and U.S.-Source Earned Income

D. Assignments

1. Overview

2. Assignment of Income

3. Assignment of Income-Producing Property

4. Developing a Gifting Plan to Avoid Anticipatory Assignments

IV. Income Taxation of the Author's or Artist's Estate and Beneficiaries

A. Income in Respect of a Decedent

1. Overview

2. Characterization as License or Sale Determines IRD Treatment

3. Summary of IRD Treatment

B. Basis of Assets Includible in the Creator's Estate

V. Estate and Gift Taxation of Artists and Authors

A. Inter Vivos Transfers and Transfers at Death

1. Character of Gain or Loss on Sale

2. Estate and Gift Tax Computations

3. The GST Tax

B. Factors Favoring Testamentary Transfers

C. Factors Favoring Inter Vivos Transfers

VI. Use of Corporations, Partnerships, and Limited Liability Companies

Introductory Material

A. Family Limited Partnerships

1. General Characteristics

2. Advantages of Using a Limited Partnership

3. Basis Issues

B. Limited Liability Companies

1. General Characteristics

2. Advantages of Using an LLC

3. Basis Issues

C. Corporations

1. C Corporations

2. S Corporations

3. Planning Issues

D. Maximizing Valuation Discounts Through the Use of Business Entities

1. Fractional Interests - In General

2. Discounts for Minority Interests and Lack of Marketability

3. Other Discounts

E. Chapter 14 Issues

1. Section 2701 - Transfers of Certain Partnership and Corporate Interests

2. Section 2703 - Certain Rights and Restrictions Disregarded

3. Section 2704 - Treatment of Certain Lapsing Rights and Restrictions

F. Estate Tax Relief for Closely Held Businesses

1. Qualified Family-Owned Business Interests

a. Qualification

b. Material Participation and Recapture

2. Estate Tax Deferral

a. Section 6166

b. Section 6161

VII. Use of Trusts

A. In General

1. Revocable Inter Vivos Trusts

2. Irrevocable Inter Vivos Trusts

B. Chapter 14 Issues - § 2702 - Inter Vivos Transfers of Interests in Trust

1. In General

2. Transfers of Interests in Trust

3. Property Treated as if Held in Trust

C. Life Insurance Trusts

VIII. Gift and Estate Tax Marital Deduction

Introductory Material

A. Marital Deduction for the Citizen Spouse

1. Qualifying Income Interest

2. No Power to Appoint to Beneficiaries Other than the Surviving Spouse

B. Marital Deduction for the Non-U.S. Citizen Spouse

C. Other Concerns Regarding the Marital Share

IX. Income, Gift, and Estate Tax Charitable Deduction

Introductory Material

A. The Income Tax Charitable Deduction

1. In General

2. Contributions of Appreciated Ordinary Income Property

3. Contributions of Appreciated Tangible Personal Property

4. Contributions of Partial Interests in Property

5. Special Concerns for Contributions of Copyrighted Property

6. Limitations on Deduction for Contributions of Intellectual Property.

B. Gift and Estate Tax Charitable Deductions

1. In General

2. Contributions of Partial Interests in Property

3. Special Rules for Contributions of Copyrighted Property

C. Split-Interest Charitable Trusts

1. Charitable Remainder Trusts

a. In General

b. Qualification Requirements and Planning Strategies

2. Charitable Lead Trusts

a. In General

b. Qualification Requirements and Planning Strategies

3. Private Foundation Rules Applicable to Split-Interest Trusts

D. Charitable Gift Annuities

E. Loans of Artworks

F. Formation of a Charitable Foundation

X. Disclaimers

XI. Valuation

Introductory Material

A. Valuation of Works of Art

1. Fair Market Value Equals the Gross Sales Price

2. Relevant Markets and Auction House Sales

3. Blockage

a. Estate Tax

b. Gift Tax

c. Income Tax

B. Valuation of Copyrights and Royalties

C. Miscellaneous Valuation Issues for Authors

D. Valuation Appraisals and Penalties

1. Rev. Proc. 96-15

2. Income Tax Charitable Contribution Deductions

3. Estate and Gift Tax Valuations

XII. Other Issues and Practical Concerns

Introductory Material

A. Inventory of Works

B. Planning for Incapacity or Disability

1. Durable Power of Attorney

2. Living Wills and Health Care Agents

C. Other Tax Issues

1. Tax Apportionment Clauses in the Will and Other Instruments

2. State and Foreign Death Taxes

D. Appointment of an Art or Literary Executor

E. Estate Administration

1. Administering the Estate of an Artist

a. Initial Steps

b. Dealing with the Artwork Itself

c. Stolen Art

d. Protecting the Artist's Name

2. Administering the Estate of an Author

a. Initial Steps

b. Local Law Issues


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Copyright Act of 1976, as Amended (Excerpts)

Worksheet 2 Copyright Office Information Circular 1: Copyright Basics

Worksheet 3 Copyright Office Information Circular 12: Recordations of Transfers and Other Documents (Excerpt)

Worksheet 4 Application Forms and Instructions for Registering Nondramatic Literary Works, Works of the Performing Arts, and Works of the Visual Arts

Worksheet 5 Application Form for Copy right Renewal

Worksheet 6 Document Cover Sheet for Recording Documents in U.S. Copyright Office

Worksheet 7 IRS Valuation Training for Appeals Officers Coursebook, Lesson 5 (Excerpt)

Worksheet 8 IRM 4.48.2 Valuation Assistance for Cases Involving Works of Art

Worksheet 9 IRM 8.18.1.3 Art Appraisal Services Assistance

Worksheet 10 Annual Summary Report for 2003 (Closed Meeting Activity) The Art Advisory Panel of the Commissioner of Internal Revenue

Worksheet 11 Rev. Proc. 96-15, 1996-1 C.B. 627

Worksheet 12 Checklist for a Decedent's Fiduciary

Worksheet 13 Sample Deed of Gift of a Fractional Share of an Artwork*

Worksheet 14 Sample Dispositive Provisions*

Worksheet 15 Sample Provisions Appointing Literary or Artistic Executor or Trustee*

Bibliography

OFFICIAL

Internal Revenue Code:

Treasury Rulings:

Cases:

UNOFFICIAL

Pamphlets:

Treatises:

Periodicals:

1962

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1977

1979

1980

1987

1989

1990

1992

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