PNC Private Bank Hawthorn’s® Business

Max Barger, Senior Vice President and Managing Director, co-leading PNC Private Bank Hawthorn’s® Business
Owner Solutions team. Explores the benefits of including art in your investment portfolio and considerations for protecting your collection and passing it to the next generation.

Art is beautiful. It can evoke emotion and be a calming force in a stressful world. Art can be a creative outlet or a conversation starter. For some, it serves as home decor, while others collect it for a private gallery. Whatever the reason for enjoying art, it’s value as an investment should not be overlooked.

MONARCH: What are the primary reasons your clients in- vest in art?

MAX BERGER: There are a variety of reasons why an individual or family with significant wealth could consider investing in art, but one primary reason is simply because you have an interest in it. For many, art can serve a dual purpose – its value as décor, entertainment or as a collectible, coupled with its monetary value when sold.

When considering art as an investment, its important to consider what it can do for you vs. what it likely will not. Because it holds little correlation with investments like stocks and bonds, art can help diversify your portfolio. In most cases, it retains long-term value despite economic conditions. The value of art is largely dependent on factors like rarity, condition and popularity of the artist, which are factors that don’t change when the markets do.

When considering whether art is a good in- vestment for you, it’s important to think of it as a long-term prospect. While it holds value despite economic conditions, that value is unlikely to grow quickly. And though your art may not depreciate due to market forces, your ability to turn art into cash through sale certainly may. Selling art can be immensely profitable, but as with anything it is largely a matter of timing to maximize your ROI.

MONARCH: How can I get started building and funding an art collection?

MAX BERGER: Establishing an art collection starts with simple questions like, what kind of art do you like and how will you use it? From there, like many other collectibles, investing in art requires significant research to ensure that you’re finding investment-quality pieces from reputable sellers at fair prices. It is good practice to consult with legal, financial and certainly industry advisors to help guide decision-making as you explore investing in art. There is no doubt that investment-quality art can come at a significant cost – which is why you’ll count on it later for better returns. But how can you fund it?

Art is no different than other luxury investments in that there are a variety of ways to finance it. Aside from the obvious solution of purchasing art with cash on hand, there are several other ways you might consider funding your art collection:

• • Home equity – A home-equity line of credit (HELOC) can be an effective way of using the equity in your home to purchase collectibles. HELOCs can often have more competitive rates than other types of loans and have few restrictions on their use.
  • Borrowing from investments – A securities-backed line of credit (SBLOC) can be used to fund your hobby with little restriction. SBLOCs often have low- er interest rates than even the afore- mentioned HELOC with flexible repayment options. They’re collateralized based on your investment account.
  • Cash-Out Refi – This is another way to use the equity in your home to fund a large purchase. A cash-out refinance can be particularly attractive when mort- gage rates fall, as it can impart the double benefit of a lower mortgage payment with extra cash for a large purchase.
  • Sale of securities – If borrowing or re- financing feel like riskier propositions, selling assets in your portfolio can be an option. While there’s no way to be certain, it’s important to consider which asset will have the greater long- term value when considering whether to sell a security to purchase art.
  • Borrow against your existing collection – As you establish your private collection you can potentially use its value to purchase more art. Some lenders offer lending solutions based on a percentage of the appraised value of your collection.

  As with any major financial decision, it’s critical to consider the risks of borrowing or investing in art. Remember, art investments often mature gradually over longer periods of time and selling can be a long process. It’s important to evaluate the risks with your wealth advisor before collateralizing purchases with your home, investment portfolio or the other pieces of your collection.

  MONARCH: I’m considering adding art to my investment portfolio, but how can I protect that investment?

  MAX BERGER: There has been more than one newsworthy instance in recent years of priceless art being the target of vandals and criminals.

  While your private collection is unlikely to face the threat of individual activists, it stands as a highlight that art investing can be risky. Because the value of art is in its resale, it’s incredibly susceptible to damage, deterioration or disaster. Properly insuring your
  collectibles is vital to protecting this long-term investment and it’s likely something that will require a specialized solution.

  While many people assume that anything in their home will automatically be covered by homeowner’s insurance, that’s simply not the case. Collections are unique and can have values in the millions – certainly more than a standard home- owner’s insurance policy will cover. What’s more, your homeowner’s policy may not cover collectibles against all types of damage, theft or weathering. Depending on the value of your collection, you will need to determine whether insuring it can be achieved by endorsing your existing home coverage, or whether a custom insurance solution is required to make sure you are properly protected.

  Insuring your art collection will likely require significant documentation and protection for your valuables. It’s also important to consider how you plan to display, house or even loan your collection, as insurance may not cover pieces not currently in your possession.
  Your wealth advisor will be able to help identify a custom insurance solution provider that specializes in the art industry.

  MONARCH: What should I consider when including art in my estate plan?

  MAX BERGER: Those with high-value art or significant collections should most certainly include it as part of their estate plan. How you plan for it will largely depend on what role it will play in your family’s financial future and how you plan to enjoy it as you age.

  As with other assets, a primary challenge of passing art to future generations is how to achieve that in a tax efficient way. The first step is to start the conversation with beneficiaries early. If you plan to pass art down after your death, it could trigger significant tax liabilities for beneficiaries as it will likely be taxed based on its fair market value. Under current legislation, the exemption for federal estate taxes is $27 million for married couples and $13 million for an individual, which means many that are planning to pass on art or other forms of wealth under that threshold may avoid estate tax liability.

  However, the current exemptions – set to sunset at the end of 2025 – could significantly lower, increasing the assets subject to the tax. It is unclear if the current exemption threshold will be extended beyond the 2025 expiration, so if you’re considering passing down an existing collection, now may be the time to speak with your advisor and tax professional about that.

  There are of course other options for passing, holding or gifting art for the benefit of future generations. You could consider a leaseback, which allows you to sell your art and pay for the privilege of continuing to display it. You could place it in a trust, which would al- low beneficiaries to equally benefit from any leaseback agreements or future sales of the collection. Or, you may consider your collection a part of your family’s philanthropic giving.

  However you plan to use art to help secure your family’s financial future, it’s important that estate planning for your collection be a living process with the help of your wealth advisor.
  Art has the ability to bring beauty, joy and emotion to our lives. It also has the ability to bring significant wealth. How you purchase, protect and gift your art can bring enjoyment in the present with the opportunity to help secure a financial future for you and your future
  generations.

  To learn more about what PNC Private Bank can do for your wealth, visit: pnc.com/privatebank
  “PNC Private Bank,” “PNC Private Bank Hawthorn” and “Hawthorn Institute for Family Success” are registered marks of The PNC Financial Services Group, Inc. Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value.