Legal considerations for trust offices/banks involved with art collection issues for clients
There has been an increase in legally related activity as art becomes more of a business with ever growing monetary valuations and popularity of star artists among wealthy clients and the populace at large. This blog posting will identify some of the key considerations that trust offices and banks involved with art collections might encounter. There are potentially complicated tax issues which will not be commented on at length in this posting and there are potentially complicated IP issues which likewise will not be commented on at length in this posting. Instead, this posting will focus on the collector's plan and intent, and some unique issues that arise under transport and insurance laws, lending/collateral matters, and custody arrangements. As is often noted by practicing attorneys and scholars in this area, many aspects of art law are specialized in nature but, in many other instances, the traditional doctrines of law such as contract apply and "art" is treated no differently than any other thing of value subject to a legally binding purchase or sale, or other disposition.
1. First Consideration--Maintain the art piece's value.
The trust officer (which I will refer to as the person representing a trust office, bank trust office or family office) must understand the nature of the art collection involved. It seems like an obvious point but the nature of the materials used may be a critical element related to the value of the work and if there is deterioration due to, for example, pigment fading in a canvas or movie reel disintegration or parchment decomposition due to sunlight exposure, the trust officer may need to work with the client and other experts such as a historic preservation conservator or art conservator to stabilize the art work's condition. The obligation and legal risk is considerably higher if the trust officer is representing an institution which has taken the art item into custody but then fails to properly maintain its condition or anticipate deterioration while the item is in storage including at an off-site vendor location. A custody arrangement is typically not the same level of care as is needed in an investment fiduciary relationship, but certain legal duties do attach once the role as a custodian is entered into by an institution. And, with valuable art assets involved as custody items, the amount of liability exposure to an institution could quickly amount to a significant financial loss. On a different pragmatic point: there may be difficult decisions to be made if the artwork needs to be preserved by transferring it into another medium/format without damage; for example, film may need to be transformed into a digital format without damaging an original deteriorating work. The effort to preserve must carefully consider the possible effect on the authenticity of the art work whether in film, painting, sculpture or works of art embedded as part of a larger building as murals or other decorative arts. Or else, there may be concerns about significant alterations to the art work which might raise concerns about the integrity of the work. France and other jurisdictions recognize a moral right of the artist and, if contracted for a certain period of additional time, of the heirs of the artist, to have an art work maintain its artistic integrity. There are additional complicated valuation and artistic integrity/scholarship issues to consider with respect to the impact on an overall collection or series work if one of the underlying pieces, for example, one of the 4 seasons of the year, is potentially at risk for damage. There may be significant collateral effects on the remaining 3 pieces in such a 4 part series if the series is disrupted to one critical missing element.
2. Second Consideration--Make sure that the art is real.
Again, this seems elementary but it is important to confirm that the artwork is not a forgery, for obvious reasons. More complicated is to also confirm that the artwork is the work of the attributed artist and not the work done by a lesser known "protege" of the attributed artist or work done by a school/consortium organized/led by the attributed artist. In short, the art work needs to be confirmed as original art work by the attributed artist.
3. Third Consideration--Make sure that the owner of the art is the rightful owner of the work.
Yet, again another blaringly simple point but sadly one that is often overlooked. The trust officer needs to make sure that the client did not procure the art work through any improper means or more likely unknowingly acquired an art work without understanding the full chain of title. In the latter case, there may be a rightful owner claim elsewhere, for example, due to wartime looting by WWII or other armies, or other antiquities looting, or the art work might belong to family members who contend that a prior private sale or other donation of the art work was impermissible.
4. Fourth Consideration--Make sure that the client has the appropriate level of insurance for the art work.
This likely involves obtaining an expert appraiser to provide valuation not just for a single work of art but for the whole collection involved. In most instances, the collector will not have insurance to completely cover loss of the art collection due to fire or other perils. So, either the trust officer needs to work with the collector to increase the amount of insurance especially in a catastrophic case or to fall back on a personal guarantee from the collector to self insure especially if the collector is using the collection as collateral with the trust officer's institution. Additional insurance needs to be considered as riders to existing insurance policies if available through the collector's carrier and separate insurance from a carrier needs to be obtained when/if the art collection pieces are transported.
5. Fifth Consideration--Inspect the collateral but it will be held in a private home, most likely.
The usual principles of contract law and secured lending come into play except the collateral is not fixed in place, in most instances. It often can be moved at the whim of a client's fancy and exposed to risk of damage in, for example, an auto accident when moving art work from a city residence to a vacation house. The trust officer is going to obtain an overcollateral position in terms of the value of the complete or larger portion of a client's art collection so that the collateral position related to the client's financial borrowing is not limited to one piece of art in the collection which can be moved or possibly damaged due to accident. The collateral will not be taken into possession of the trust officer unless the client wants the institution to serve as a custodian and use some type of vault arrangement for protection. Additionally, the trust officer will put other safeguard mechanisms in place with other client assets held at the institution in the event that the institution is unable, for whatever reason, to obtain the art work collateral in the event of an emergency or other distress situation. In those cases, as an alternative, the institution by contract can use "set off" rights to obtain financial payments due from other financial accounts of the collector held at the institution. There needs to be significant diplomacy and discretion exercised by trust officers to protect the financial interests of the institution while understanding that at times there may be complex family dynamics or other emotional decisions being made about a collector's art work within a family which disrupt the usual course of business in terms of meeting the terms of the agreed upon financing arrangements. It is critical for the trust officer to maintain a current inventory of the collector's art collection and that inventory needs to be accurate and updated to show new pieces added and any pieces sold or donated and no longer in the collection. The trust officer must also include restrictions in the lending documents for the collector which restrict the collector from "double pledging" any of the collection as collateral elsewhere unless notice and consent has been given by the trust officer's institution.
6. Sixth Consideration--Perhaps the hardest point of all, what to do with the collection if the heirs do not want it, or if an intended museum or university recipient also does not want it.
Heirs may share the enthusiasm of the collector of the art collection about the collection but they are unable to afford the insurance, security costs and the transport costs to acquire part of the collection through inheritance. The heirs also may not have the physical space needed to display the art work nor the funds or inclination to pay for the installation of certain works such as outdoor sculptures. More typically, an heir may wish to select one or two of their "favorite pieces" from the collection and be satisfied with that outcome and not wish to feel burdened to carry on the legacy of the collection. The trust officer must probe the likely plans of the collector to determine if the plan matches up with the expectations of the heirs and other recipients.
That also includes museums or university/college and other scholarly institutes. Again, there may be great interest in connection with a potential gift of a collection but the intended recipient may not have the funding necessary to establish the collection on site and to pay for the insurance, related security costs and transport costs including the transport costs of lending out pieces of the collection to other museums or to other scholarly institutions if the borrowing institutions will not pay such all risk insurance costs or if they exclude any liability related to all risk scenarios including losses due to terrorism events. The intended recipient also might not have the space available to display the collection so even if the recipient takes the gift, there is no assurance that the collection will be displayed in the manner anticipated by the collector.
The collector is also faced with the challenge of deciding whether the whole collection is greater than the sum of the parts of the collection. So, if the collection is maintained and donated in totality, that outcome might have more scholarly importance and artistic merit than breaking up the collection into smaller sized units to be donated to multiple institutions or to multiple heirs. It is also sometimes financially possible for the collector to establish a new museum and to use the collection as the core founding theme for the endeavor which is endowed by the collector to grow and acquire additional similarly themed art works in the future. The trust officer may be involved with lending in connection with the construction of such a new museum on behalf of the client Or, there may be new physical space constructed at an existing museum or university to house the collection and the trust officer is involved with those real estate financing and construction acquisition financing issues on behalf of the collector. Importantly, the collector would be expected by the museum or university to also leave an endowment amount to support the operations of the physical expansion and the related future expenses to maintain the collection.
There also may be instances when the collector concludes that some reasonably significant amount of the collection needs to be sold to obtain the necessary resources to support a donation to a museum, university and to heirs. Assuming that the collector is not the artist who created the collection, there can be tax benefits for art works owned for more than one year donated to U.S. based non profit entities with a related use involving art collections as part of their organizational mission provided that they hold the donation for at least three years, and the trust officer will be involved in working through those matters on behalf of the client. Some combination of sales and donations might be an outcome that the collector wishes to pursue, with assistance of the trust officer. However, in some instances, a client may be willing to forego a potential charitable deduction which may have some economic value in order to get an art work placed in a museum or university collection which would have a great impact on that institution in terms of overall reputation not measured strictly in economic terms.
7. Seventh (and final) consideration--Appraisers can be expensive but still necessary.
Trust officers may need to incur the cost of expert art appraisers in various scenarios involving a client with an art collection. Usually these will be transactional costs to be borne by the client in connection with a valuation exercise or similar activity. In other instances, the trust officer may need to consult with an art appraiser to determine the value of miscellaneous items that, for example, remain in a safe deposit box because sometimes unexpectedly such discarded items turn out to have a significant value. One such item may be a personal keepsake to the collector from an artist who made, for example, an impromptu sketch as a dinner party favor for the collector or some other whimsical original art autographed creation or abstract "doodle" which has scholarly interest once it becomes known. In short, the trust officer is compelled to use an expert to make sure that all of the items of potential artistic merit under his control are identified for the estate purposes and that the items of solely sentimental value are inventoried for the possible personal disposition by the executor.
By: Tim McTaggart, December 6, 2019.
Mr. McTaggart previously served as the Chair and Vice Chair of the Trust and Fiduciary subcommittee of the American Bar Association's Banking Law Committee and in those roles, he organized committee meeting programming and led discussions on topics involving the trust law obligations of financial institutions, and art work issues. More recently, Mr. McTaggart has been involved in reviewing art law issues for his son, Christopher in connection with his burgeoning photography portfolio at Carleton College, juried art law competitions, with self publications and other related art law contracts as a self employed photographer/cinema arts artist. Mr. McTaggart also provides counsel to trust companies, private family offices and banks with potential disputes involving art law financing and related issues.