Retiring soon? Here's how to handle your collectibles

Many Americans spend a lot of time and money building their collections, but fail to protect them and to plan ahead.

  • By Anne Tergesen,
  • The Wall Street Journal
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Many retirees put their money where their passions are—by collecting. But whether you are a neophyte or have been at it for years, it is important to avoid common pitfalls.

According to a recent UBS survey, 25% of Americans with $1 million or more to invest collect items including art, old movie posters and sports memorabilia. Most have spent 20 or more years amassing their collections, which they estimate represent 10% or more of their wealth, on average.

Still, many fail to protect and plan for their collections, said Michael Crook, head of ultrahigh net worth strategy at UBS. For example, 51% have never had their acquisitions appraised and 44% lack insurance. While 80% say they intend to leave their collections to heirs, only 35% of those who have inherited collections say they wanted them.

Here are three things collectors should keep in mind.

Don’t assume you will make money

Some financial advisers say investing a small percentage of a portfolio in collectibles can enhance returns or reduce risk. Other advisers and appraisers say this is a bad idea.

“I always cringe when I hear people say collectibles are a great investment,” said Laura Woolley, an appraiser who specializes in entertainment memorabilia.

Many types of collectibles cost more to own than stocks, bonds and mutual funds. Wine collectors, for instance, usually pay for storage, insurance, shipping and appraisals.

Transaction fees can be high. At vintage car auctions, commissions often total 10% to 25% of the purchase price and are divided between buyer and seller, said Jonathan Klinger, vice president of public relations at Hagerty Group LLC, which sells insurance for classic cars.

Changes in taste can quickly destroy a collection’s value. “Millennials don’t want the antiques people have been collecting for generations,” says Gayle Skluzacek, president of Abigail Hartmann Associates in New York and an appraiser of antiques, fine art and wine.

Ms. Skluzacek said she recently appraised a set of silver napkin-holders for $15 to $100 each, down from $500 to $5,000 in the 1990s.

“Buy the things you love. If they appreciate, fantastic. If not, you will still love having them,” said Ms. Woolley.

Collect smart

Before starting or resuming a collection, get educated. “That’s half the fun,” said Ms. Skluzacek. “Going to art shows, reading biographies of artists, talking to dealers—that’s the passion a good collector would have.”

Taking trips that mean something

Older Americans are opting for trips where they get a richer experience.

Thanks to the internet, there are more resources for collectors than in the past, said Ms. Skluzacek, who recommends websites including liveauctioneers.com, winespectator.com, artnet.com and bookpricescurrent.com.

When buying collectibles, “condition is paramount,” she added. “Buy the best condition you can possibly buy.”

Other qualities to consider include historical significance and rarity. With books, for example, “buy first editions, not second,” said Ms. Woolley.

Keep invoices, including receipts for framing and conserving art, to calculate the capital-gains tax you may owe if you sell for a profit, said Nancy Harrison, a senior fine art specialist at Fine Art Asset Management in New York.

You should also obtain and authenticate documents, including titles, that prove an object’s ownership history. (With art, a good resource is the Art Loss Register.)

“If an object was owned by an important collector or celebrity, it will probably enhance the value,” said Ms. Harrison.

Because fraud and theft can be problems, walk away if a seller balks at providing documentation, said Ms. Skluzacek. She estimates 10% to 20% of “investment level wine” is fake and teaches an online wine course with a segment on spotting wine forgeries at New York University.

Plan for the future

It is important to plan for your collection.

Quentara Costa, 32, a financial planner in North Andover, Mass., recommends having a conversation with heirs to ascertain their interest.

Ms. Costa said she recently had such a conversation with her aunt about the latter’s Christopher Radko Christmas ornaments. “They are gorgeous,” Ms. Costa said. “But I would have had enough for four Christmas trees.”

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The two agreed Ms. Costa would take one box and help her aunt sell the rest on eBay. “Now there is no guilt that if I get rid of some I would be insulting her.”

James Kyle, 69, a collector of colored gemstones, said he has “come to the realization that no one in my family has the same passion.”

The financial adviser at Savant Capital Management in Rockford, Ill. said he may sell some of his collection. But first, he plans to compile a computerized inventory with photographs and sales receipts.

To get a preliminary idea of the value of a collectible, you can use Google or eBay.

But for something more precise, hire an appraiser—typical costs range from $100 to $500 an hour—from one of three professional groups: the Appraisers Association of America, the International Society of Appraisers, and the American Society of Appraisers, said Leila Dunbar, an appraiser of wine and sports and entertainment memorabilia. Each requires members to have demonstrated competency in their field and to adhere to a code of ethics.

An appraisal can help a collector divide possessions fairly among heirs. It can also help sellers assess offers from dealers or auction houses.

If an item is valuable, the family may come out ahead if the heirs sell it—not the collector. That is because the collector will owe up to a 28% federal tax on net profits (plus a 3.8% surtax in some cases.)

But if the heirs sell after the collector dies, they can increase the item’s cost basis to fair market value on the date of death. This can eliminate much or all capital-gains tax due.

A “qualified” appraisal—that meets Internal Revenue Service requirements—can also establish the value of items you may wish to donate to a nonprofit in return for a tax deduction. (The institution must agree to accept the donation).

“Not everything can or should go to the Met,” said Ms. Harrison. For example, appraisers say, clients have donated postcard collections to local historical societies and Coca-Cola memorabilia to a regional food and beverage museum.

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