Randy Fox interviews Laurence Zale

Randy Fox interviews Laurence Zale

Article posted in Tangible Personal Property on 5 July 2016| comments
audience: National Publication, Two Hawks Consulting, LLC | last updated: 7 July 2016


An interview on gifts of tangible personal property with art expert Laurence Zale.

Randy:    Good afternoon. This is Randy Fox, Editor in Chief of the Planned Giving Design Center, and today I am pleased to be with Larry Zale. Larry is the proprietor of Laurence Zale Associates, specialists in collectibles of tangible personal property. Hi, Larry, how are you? Good to be with you.

Larry:    A very good afternoon to you, Randy. Thank you.

Randy:    Larry's firm is based in Manhattan and does business mostly on the East Coast but really across the United States, with collectors of various objects. Why don't we start with some basic things, Larry, and then just work up to whatever we're going to get to? Why do people collect art and other tangible personal property? What's the driving force, do you think?

Larry:    Well, it's fundamentally a human phenomenon, Randy, and collectors generally fall into three categories. They're accumulators ... and we know who they are ... impulse buyers, who are of the moment, and then you have the collector who is a little bit more discerning, by doing his or her research into what they want to collect. We'll talk more about the different types of objects in a few minutes, but the collector is more sophisticated in that regard because there is a sense of planning that goes into the acquisition side. Then finally there is the connoisseur, who in many instances becomes an expert in the field. They are often called upon by other experts to give opinions, and they tend to be very, very systematic and analytical in their research and their acquisition.

Randy:    Who do you deal with mostly?

Larry:    I deal with all types, and I'm always reminded of this wonderful comment that the great Kenneth Clark ... he was the famous historian and broadcaster who did the "Civilization" program some years ago ... said, that collecting was analogous to asking why people fall in love. The reasons are various and irrational.

Randy:    What do people collect? It seems to me there's all manner of collectibles.

Larry:    Right. First and foremost is fine art, which would be paintings, drawings, prints, sculpture, even photography. Then you have collectibles, which can include such things as stamps and coins, and my goodness, it's just a growing universe, Randy. It's hard to keep up, but there are so many areas of collecting. Then you have the burgeoning area of luxury collectibles automobiles, jets, boats and the like. You also have jewelry, gems and watches, which are very portable, easily bought and sold, unlike fine art, which tends to be a little bit more difficult to transact. Then you have the sports memorabilia, just to name five or six of the major areas of collecting.

Randy:    Sports memorabilia, at least from my observation, runs the gamut from the very inexpensive packs of baseball cards all the way up to the very rare and very unusual higher-end collectibles.

Larry:    Precisely, like the Honus Wagner baseball card, which some years ago fetched into the middle six figures.

Randy:    Yeah, I remember reading about that.

Larry:    Sure.

Randy:    How is this property managed and sold generally?

Larry:    Well, I think first of all, in dealing with how it's managed, it's important to take care of the collection. You need to really catalog the objects, display some of them and store others. Collectors have the flexibility of selling their objects at auction to dealers, occasionally to public or to private collections or to collectors themselves, the very last of which is interesting, Randy, because if they're active in their collecting communities, they tend to know the other collectors and often will turn to them to either trade or to sell objects that they own, rather than going through the public marketplace, so to speak.

Randy:    Of course, all of the collections are tracked so that all of the taxes are paid when an object is exchanged for another object, or an object is exchanged for cash?

Larry:    I would think generally yes, but there is no way of stopping those who want to make private arrangements, and I don't want to suggest that they're not paying the tax but there is the greater likelihood that they won't. I did want to just get back for a second, if I may, Randy. There is a Cap Gemini World Bank of Canada North America Wealth Report which is published each year. The most recent one was 2015. They refer to this area as investments of passion, and interestingly enough, those who collect, what they do collect was somewhat surprising.

For example, jewelry, gems and watches comprise about 29 percent. The other collectibles which we talked about earlier is about 20 percent. The luxury goods and luxury collectibles is an additional 20-plus percent. Art, which I thought would be much higher on a percentage basis, is just under 17 percent. Then finally, the sports investments is about 12 percent, so the snapshot that we're getting here of North America ... because each continent is going to be slightly different ... is that fine art is not being collected as much as I thought and many other people, but in fact it is collectibles and luxury collectibles, as well as the jewelry, gems and watches, that are being collected.

Randy:    Any thoughts about why that is? Is it an anomaly? Is that by dollar amount or by count, or how is it calculated?

Larry:    I believe it's by the actual value.

Randy:    Well, maybe it's because so much of the fine art is already in museums and already in private collections that just not very much of it trades hands.

Larry:    Well, that's a good point. I think it's fair to say that only about 1 to 2 percent of all the art that exists is available or in private collections. Most everything else is in public collections, so if one wants to either build, manage or expand a collection, sure, they can find art in areas that are not as well represented or as popular or as valuable, but I think that if they want to make an impact, the urge, I think, Randy, is for them to then look for other types of collectibles to acquire and to hold onto them, so that they too can appreciate over time and they can buy the very best.

Because I think with quality and rarity, those are the two real key elements for collectors to consider. There are other things, of course, as well, but if it's rare and the quality is there, in due course it will appreciate in value at a much quicker pace than others.

Randy:    By rarity, I presume that also includes the word "provenance," which is the chain of ownership and who might have owned it along the way, adding to the value?

Larry:    Absolutely, and it can be a blessing but it could also be a curse, because if the provenance is uneven, it can affect the value and in some instances prevent the would-be seller from being able to find a buyer.

Randy:    Have you got an example of that?

Larry:    Well, I'm not happy about this, but I've had collectors coming to me after being told that it's by a master or a minor master, only to find out that it was just a copy. What would have sold for hundreds of thousands, in some instances even on the low end of a couple of million, is but a fraction. They're, needless to say, crestfallen upon learning the news, and invariably what happens is they tend not to sell it, because the amount that they would have received becomes more of an embarrassment. They tend to put it back on their wall and enjoy it, but shall we say, in reduced circumstances.

Randy:    A sore lesson learned, unfortunately.

Larry:    Quite so.

Randy:    Can we switch gears for a second and talk about how charity becomes involved in donations of tangible property, whether it's art or jewelry or something else?

Larry:    Sure. I think first and foremost we need to make sure that, if it's going to be considered for a charity, that that particular charity meets what the tax code refers to as the related use provision. In essence, it means that the object being donated can be put to a related use, meaning it's part of the purpose and function of that particular charity. For example, if you had a painting, obviously to a museum or to a university gallery, that's being put to a related use. In such instances, you would qualify for a full fair market value charitable deduction, which you could take over six years if you like, or you could take it sooner depending on your Adjusted Gross Income.

If on the other hand you had that same painting and you wanted to gift it, say, to the American Red Cross, since art is not part of its purpose and function, you would only be entitled to a cost-basis deduction. That would take away the allure of you wanting to make that gift to the American Red Cross, unless of course the cost basis and the fair market value are pretty close. Then you could make the gift to the American Red Cross.

Randy:    Or, to the extent that you couldn't absorb the income tax deduction over the six years, it might not make that much of a difference?

Larry:    Uh-huh.

Randy:    Okay. We were going the same direction.

Larry:    Sure, but it's picking the cherries carefully, that they're qualified, that they'll have an interest in receiving an object or a collection, and that it be put to a related use. Some of the charities that are interesting that would qualify besides museums, higher education, would include hospitals, long-term care facilities, children's hospitals, and select charities that have an educational component to their mission, which would enable the donor to get that full fair market value deduction.

Randy:    Right. How does that conversation start?

Larry:    Well, my recommendation would be to pose a couple of questions to the donor, and by doing so, it's my opinion the donor would be impressed that you've shown an interest and be more inclined to share more about their collection with you. It may even in some instances, Randy, improve the relationship. Those questions include what do you collect and what inspired you to collect it, when did your interest in collecting begin, has your vision of collecting remained the same, do you have advice to existing or new collectors, and very importantly, have you made arrangements for a lifetime or an estate transfer of your collection.

This I think potentially sparks interest in putting together a team of professionals to assist the planned giving professional, so he or she can back up some of these questions with the ability to perform what's needed to facilitate the gift. It's somewhat of a triangular relationship, Randy, comprised of an independent visual arts advisor, a financial advisor and legal counsel.

Randy:    Each of those, hopefully they're working with each other so that there's good communication back and forth, but each does fulfill a very specific role. Maybe you want to just explain a little bit how that team might function together, Larry.

Larry:    Sure. The visual arts advisor first spends time with the collector and talks about the collection itself, which is the type of question financial advisors and legal counsel would typically not ask, simply because it's not part of their training and experience. I find that when I spend time with a collector and hear about what they enjoy collecting and why it's important to them, they will reveal a great deal about their collecting strategy but also about themselves.

If I may digress for a second, recently I was called upon to visit a collector on the Upper West Side of New York City in a one-bedroom apartment. The gentleman taught piano and showed me his collection. Imagine, Randy, in a one-bedroom New York City apartment of I'd say 600 square feet, that there was no room for anything but the objects that were displayed literally cheek by jowl throughout the apartment. There was room for almost nothing except for his beloved piano. I was thinking of a good first question to ask, not the value or how many objects or how many years he's been collecting. I tried something offbeat, so I turned to him and I said, "Who does the cleaning?"

Randy:    That probably caught him off guard.

Larry:    Oh, it did indeed. He said, "I do the cleaning," and from there we built a relationship.

Randy:    The ultimate end of that conversation was what?

Larry:    Well, it led to a gift of some 1,500-plus objects to a major museum.

Randy:    There you go.

Larry:    To answer your question, what I did is I liaised with the financial advisor, who was familiar with his financial circumstances, so that we made the gift in such a way that he realized the greatest tax benefit. Legal counsel was also crucial in putting together some of those legal issues, the due diligence and so forth that needed to be done.

Randy:    When a collection of that size is given to a museum, are they also anxious to get funds to support that collection, or permission to sell off some of the collection to support it? This has been something that's come up for me a few times, and I'm just curious as to your experience.

Larry:    Sure. In the first instance, occasionally an endowment is provided, and that of course is magnificent if you can do it, not only to create ongoing costs for displaying the collection and providing publications and maybe providing even an endowment to include a professor teaching that area of collecting, but it becomes again something occurs from time to time. Usually the recipients, whether they be museums, higher education, charities, they do have some discretionary funds available that they can bring to bear to help with the collection.

As for selling some of these objects, what the museums and galleries refer to as deaccessioning needs to be done very carefully because they don't want to compromise the integrity of the collection, and they certainly don't want to sell anything before it's been put to a related use, which would mean a minimum of three years.

Randy:    Right, and that's really important. That's a rule that a lot of people don't understand. Along with the appraisal rules, the deaccessioning rules are very, very important for the advisor community that this publication goes to, to really wrap their arms around.

Larry:    That's right, and no recipient wants to run afoul of their sister organizations by gaining the reputation of taking in objects and then quickly selling them, without first putting them to a related use. Obviously that jeopardizes the tax deduction of the donor, but it also potentially compromises the integrity of the collection.

Randy:    Sure. What about those families ... and I know we were supposed to be talking about philanthropy, but this is something I've found, is that often the next generation is not nearly as interested in the collection as the collecting generation. Almost it feels to me a lot like a family business. Sometimes you have kids that want to be in the business, and sometimes you have kids that don't. I think sometimes you have kids that love the collection and sometimes you don't. How do you deal with those kind of family dynamics?

Larry:    Very carefully. I try to sit down with them and discuss the collection, whether the children do indeed share the enthusiasm and great passion that their parents do. When they don't, then we need to put in play a lifetime plan that takes into consideration the inevitable, and that is when a parent or both parents pass, what then is going to be done with the collection. If it can't be resolved during lag time, then you have potential problems because the value of the collection upon death will then be stepped up in value, and then the value will be subtracted from the overall estate.

Because there is no interest in keeping the collection, oftentimes attorneys or others will come in and just try to sell whatever is there at but a fraction of the full fair market value, simply to liquidate it to either pay state taxes or to use it for other purposes. My recommendation would be to deal with it during one's lifetime, and if the family is not interested ... the children's family ... in keeping the objects, an arrangement should be made to sell it during the lifetime.

Randy:    Yes. Every time I see "estate sale" or "from the estate of," I realize that it's usually a liquidity problem that the family just hasn't planned for, and they're selling things at fire sale prices. When a lot of any type of asset hits a very small market, it automatically is going to drive the prices down, and of course the estate tax is due nine month from the date of death, so you're really forced to sell on a very short time frame. It's not a good situation if collectors don't plan effectively.

Larry:    Precisely, and it cannibalizes the collection that their parents spent a lifetime accumulating.

Randy:    It never ceases to amaze me how often that happens.

Larry:    I'm afraid so.

Randy:    Larry, do you have anything to add as we wrap up, or any closing thoughts?

Larry:    I would just recommend that planned giving professionals think about that triangular team that can be brought to bear, so they can raise these questions with owners with confidence, knowing that they have the support.

Randy:    That is excellent advice. I'm going to say thank you, Larry, for your time today, and we will include your contact information. If any of our readers or listeners want to get in touch with you, we'll make sure they're able to do that.

Larry:    Thank you very much.

Laurence Zale has been an art collector, and has successfully managed the art collections of individuals, families, corporations and charities, for over twenty years. He is president of Laurence C. Zale Associates, an independent New York visual arts advisory firm for collectors, public charitable organizations, private foundations and corporations. His company’s services include strategic planning that result in the acquisition, ownership or disposition of works of art and other tangible personal property. Laurence is a member of the American Alliance of Museums, the Association of Healthcare Philanthropy and the American friends of The Courtauld Institute of Art. After completing his undergraduate work at Washington University in St. Louis, Laurence earned postgraduate degrees from New York University, and The Courtauld Institute of Art, University of London. A frequent speaker and writer on connoisseurship, philanthropy and estate planning, Laurence has taught at the Sotheby’s Art Business program. In addition to being a visual arts advisor, he was a vice-chairman of the board at the Brookdale University Hospital and Medical Center, Brooklyn, New York from 1994 to 2013.

Laurence C. Zale

Laurence C. Zale Associates, Inc.
Visual Arts Advisory Services
340 East 80th Street, #18H
New York, NY 10075
Tel: 212 772 2673
Email: lczale@visualartsadvisory.com
Website: www.visualartsadvisory.com

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