Planning for Authors, Musicians, Artists, and Collectors (Portfolio 815)

Tax Management Portfolio, Planning for Authors, Musicians, Artists, and Collectors, No. 815-3rd, 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 creative efforts or the creative efforts of others. To view this Portfolio, take a free trial to Bloomberg Tax.

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Tax Management Portfolio, Planning for Authors, Musicians, Artists, and Collectors, No. 815-3rd, 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 creative efforts or the creative efforts of others. Particularly in the estates of creators, where these assets may comprise the bulk thereof, creative assets present special business management, income tax, transfer tax, and estate planning issues.

This Portfolio adopts an interdisciplinary approach to the issues affecting authors, musicians, artists, and collectors as they manage their portfolio of creative assets and plan to transfer these assets to their intended beneficiaries, both charitable and noncharitable, as well as the issues affecting their beneficiaries upon receipt of the creative work. On the assumption that the reader is familiar with basic estate planning concepts, this Portfolio focuses on the issues and rules that are particularly relevant to creators and collectors and directs the reader to other Portfolios that discuss more basic concepts in detail. Moreover, because of the breadth of the topics covered in this Portfolio, no individual topic is covered in an exhaustive manner; however, the Portfolio directs readers interested in a deeper understanding of any particular topic to additional resources.

This Portfolio first gives a broad overview of the Copyright Act of 1976, and then discusses the income taxation of creators 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 and intellectual property is discussed in detail. Additionally, the Portfolio discusses tax and certain key considerations relevant to collectors and investors in buying, selling, and managing their art and other collectibles. The Portfolio concludes with a discussion of estate administration and other practical issues that the fiduciary of a creator or collector may face.

This Portfolio may be cited as Minnigh and Stutzman, 815-3rd T.M., Planning for Authors, Musicians, Artists, and Collectors.


Elizabeth Carrott Minnigh, Esq.

Elizabeth Carrott Minnigh, B.A., Kenyon College (cum laude and with highest honors, 1997); J.D., University of Pennsylvania (2001); LL.M. (Taxation), New York University (2007); admitted to practice in the District of Columbia, New York, and Pennsylvania; officer and director, Washington Estate Planning Council; member, Bloomberg Tax Estates, Gifts and Trusts Advisory Board; co-author 489 T.M., Social Enterprise by Non-Profits and Hybrid Organizations; frequent speaker and writer on estate planning, art law, nonprofit organizations, and social enterprise. Elizabeth would like to thank Niraj Rath, an associate with Roetzel & Andress, for his research assistance and Bryce Maynard, counsel with Buchanan Ingersoll & Rooney PC, for his copyright law insights.

David E. Stutzman, Esq.

David E. Stutzman, B.A., University of Virginia (with distinction, 1985); J.D., University of Virginia School of Law (1988); admitted to practice in New York, Connecticut, the District of Columbia, and the United States Tax Court; member: New York City Bar Association (Estate & Gift Taxation Committee, multiple terms), STEP (Society of Trust and Estate Practitioners), and Estate Planning Council of New York City; director, The Historic House Trust of New York City; member, Professional Advisory Council of The Metropolitan Museum of Art; speaker and writer on and gift tax and planning issues. David would like to thank Samuel F. Thomas, an associate with Seward & Kissel LLP, for his research assistance.

Table of Contents

Detailed Analysis
I. Introduction
II. Copyright Basics
A. Introduction to Copyright
B. Copyrightable Works
C. Ownership, Exclusivity, and Divisibility of Copyright Interests
D. Statutory Formalities
1. Registration
2. Deposit
3. Notice
E. Works Made for Hire
F. Copyright Duration and Renewal and Termination Rights
1. Duration
2. Renewal Rights
a. Under the 1976 Copyright Act
b. Under the 1909 Copyright Act and Copyrights Subsisting on January 1, 1978
3. Termination Rights
a. When Transfers May Be Terminated
b. Which Transfers May Be Terminated
c. Who May Terminate Transfers
d. Possible 35-Year Minimum Term for Copyright Licenses of Unspecified Duration
4. “Estate-Bumping”
5. Open Questions
III. Valuation Basics
Introductory Material
A. Valuation of Works of Art
1. Determination of Fair Market Value
2. Relevant Markets and Auction House Sales
3. Fractional Ownership
4. Works of Art with Problematic Provenance or Characteristics; the “Illicit Market”
B. Blockage Discounts
1. Estate Tax
2. Gift Tax
3. Income Tax
C. Valuation of Copyright and Royalties
D. Valuation of Publicity Rights
E. Appraisal Requirements and the IRS Art Advisory Panel
1. Unbiased Appraisal
2. Requirement to Submit to IRS Art Advisory Panel
3. Rev. Proc. 96-15
4. Income Tax Charitable Contribution Deductions
a. Qualified Appraiser
b. Qualified Appraisal
5. Estate and Gift Tax Valuations
IV. Income Taxation of Creators and Their Estates
Introductory Material
A. Creator 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. Royalty Income
1. Classifying as Royalties vs. Compensation for Services
2. Classifying as Business Income vs. Non-Business Income
3. Advance Payments
C. 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. Section 1249 Sales to Controlled Foreign Corporations
5. Section 453 Installment Sales
D. Sale Proceeds Treated as Earned Income
1. Deferred Compensation Arrangements
2. Foreign and U.S.-Source Earned Income
E. Assignment of Income
1. Anticipatory Assignment of Income
2. Assignment of Income-Producing Property
3. Developing a Gifting Plan to Avoid Anticipatory Assignments
F. Income Taxation of the Creator's Estate and Beneficiaries
1. Income in Respect of a Decedent
a. Characterization as License or Sale Determines IRD Treatment
b. Summary of IRD Treatment
2. Basis of Assets Includible in the Creator's Estate
V. Charitable Deduction
Introductory Material
A. The Income Tax Charitable Deduction
1. General Rules Regarding Income Tax Charitable Deduction
2. Contributions of Appreciated Ordinary Income Property
3. Contributions of Appreciated Tangible Personal Property
4. Contributions of Partial Interests in Property Not Made by Transfer in Trust
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. General Rules Regarding Gift and Estate Tax Charitable Deduction
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. CRTs Generally
b. Qualification Requirements and Planning Strategies
c. Funding CRTs with Tangible Personal Property
2. Charitable Lead Trusts
a. CLTs Generally
b. Qualification Requirements and Planning Strategies
3. Private Foundation Rules Applicable to Split-Interest Trusts
D. Charitable Gift Annuities
E. Loans of Artworks to Public Charities
F. Formation of a Charitable Foundation
VI. Planning for Authors and Musicians
A. Works Made for Hire
B. Contractual Considerations
C. Gratuitous Transfers
1. Transfers by Gift
a. Character of Gain or Loss on Sale of Gifted Property
b. Special Considerations
2. Transfer at Death
a. Character of Gain or Loss on Sale of Bequeathed Property
b. Special Copyright Considerations
c. Special Valuation Considerations
d. Local Law Considerations
e. Planning for Liquidity
f. Privacy
D. Planning for Post-Mortem Artist Control
E. Literary or Musical Executor
F. Charitable Planning
VII. Planning for Artists
Introductory Material
A. Retained Rights
1. Moral Rights (Droits Moraux)
a. What Are Moral Rights?
(1) Right of Disclosure (Droit de Divulgation)
(2) Right of Withdrawal or Modification (Droit de Retrait ou de Repentir)
(3) Right of Attribution (Droit à la Paternité)
(4) Right of Integrity (Droit au Respect de L’Œuvre)
b. Characteristics of Moral Rights Abroad
c. U.S. State Moral Rights Legislation
(1) California Statute
(2) New York Statute
(3) Other States
d. U.S. Federal Moral Rights Legislation: Visual Artists Rights Act (VARA)
(1) Covered Works
(2) Unfinished Works
(3) Site-Specific Art
(4) Moral Rights Granted
(a) Right of Attribution Protection
(i) In General
(ii) Exceptions to Right of Attribution Protection
(b) Right of Integrity Protection
(i) In General
(ii) General Exceptions to Right of Integrity Protection
(c) Exception to Right of Attribution and Right of Integrity Protections for Works Incorporated in or Made Part of a Building
(5) Duration
(6) Registration
(7) Remedies
(8) Preemption
(9) Waiver and Transfer of Rights
2. Resale Rights (Droits de Suite)
a. What Are Resale Rights?
b. Resale Rights in the United States
(1) California Statute
(a) Seller's Duties
(b) Artists’ Enforcement Rights
(c) Waiver and Transfer of Rights
(d) Postmortem Rights
(e) Exceptions
(f) Preemption and Constitutionality
(2) Georgia Statute
c. Harmonization of Resale Rights in European Union
B. Works Made for Hire (Commissioned Works)
1. Private Commissions
2. Public Commissions
C. Sales
1. Relationships with Dealers
a. Outright Sales
b. Consignments
(1) Consignment Agreements
(2) Artist-Dealer Representation Agreements
2. Taxation of Sales Proceeds
D. Transfer by Gift
E. Transfer at Death
VIII. Planning for Collectors and Investors
Introductory Material
A. Definitions
1. Dealer
a. Frequency and Continuity of Sales
b. Solicitation and Marking Activities
c. Nature and Purpose for Holding Property
2. Collector
3. Investor
B. Purchases
1. Warranties
a. Express Warranties
b. Implied Warranties
c. Warranty of Title
2. Provenance: Establishing Authenticity and Ownership
3. Rights of First Refusal and Other Pre-Emptive Rights
a. Rights Held by Gallery
b. Rights Held by the Collector
4. Buyer's Premium
5. State Sales Tax and Use Consideration
a. States Sales Taxes
(1) New York Sales Tax
(2) California Sales Tax
b. State Use Tax
(1) New York Use Tax
(2) California Use Tax
c. Value Added Tax
d. Effect of Tax Payment on Basis
6. Resale Rights (Droit de Suite) Considerations
7. Pitfalls of Art Market Secrecy
C. Loans Collateralized with Art
D. Sales
1. Sales at Auctions
2. Consignment Sales
a. Commissions
b. Consignment Agreements
3. Sales During Life
a. Income Tax Considerations
b. Sale-Leaseback Transactions
4. Sales at Death
a. Tax Considerations
b. Planning for Basis Step-Up
c. Special Valuation Considerations
E. Gifts and Bequests
1. Outright Disposition
2. Use of Trusts
3. Special Valuation Considerations
F. Charitable Planning
IX. General Planning and Practical Considerations
Introductory Material
A. Inventory
B. Storage
C. Insurance
D. Planning for Incapacity or Disability
1. Durable Powers of Attorney
2. Living Wills and Health Care Agents
E. Factors for Considerations in Evaluating Lifetime Gift vs. Transfer at Death by Creator
1. Factors Favoring Transfers by Lifetime Gift
2. Factors Favoring Transfers at Death
3. Special Chapter 14 Considerations Concerning Inter Vivos Transfers of Creative Property in Trust
a. In General
b. Transfers of Interests in Trust
c. Property Treated as if Held in Trust
F. Other Tax Issues
1. Tax Apportionment Clauses in the Will and Other Instruments
2. State and Foreign Death Taxes
G. Appointment of an Art, Literary or Music Executor, Trustee, or Advisor
H. 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 or Musician
a. Initial Steps
b. Protecting the Author's or Musician's Name and Image


Working Papers

Table of Worksheets
Worksheet 1 Sample Work for Hire/Assignment of Rights Agreement
Worksheet 2 Sample Loan Agreement
Worksheet 3 Sample Private Sale Agreement (Non-Consignment)
Worksheet 4 Sample Assignment and Bill of Sale of Artwork
Worksheet 5 Sample Art Lease Agreement
Worksheet 6 Sample Gratuitous Assignment of Artwork