The aesthetic allure of collectibles like artwork, fine wines and classic cars can be hard to resist. For high or ultra-high net worth investors, the ability to combine the pursuit of potential growth with their personal passions or hobbies holds a lot of appeal.

However, those who think they can invest in collectibles the same way they invest in stocks or bonds may encounter some unexpected challenges. With this in mind, here are some best practices for those interested in or currently holding significant collectible assets:

1

Buy What You Like and Hope for the Best

“From a financial safety perspective, it's generally best to view collectibles more as a hobby than as a way to make money," says Bill Johnston, Managing Director and Head of Private Banking Solutions. In essence, any potential monetary gains from collectibles are best viewed as a fringe benefit, a bonus that serves as a validation of the collector's keen eye and good taste.

2

Keep a Detailed Inventory of Your Collectibles

“Collectors should absolutely have an inventory or catalog that captures important details about their collectibles," says Jere Doyle, Senior Vice President and Estate Planning Specialist. “It should include where and from whom they bought them, for how much, and any other distinguishing features of the item."

3

Preserve the Value of Your Collection

Even if your primary motivation for building a collection is personal enjoyment, consider taking steps to preserve and safeguard your collectibles — such as purchasing specialized insurance, having your items appraised by a certified expert and making accommodations for proper, long-term storage, whether in your home or in a professional storage facility.

4

Don't Forget Your Collection When Planning

Failing to take collections into account when making decisions about your wealth and estate plans can have serious financial consequences. It's important to recognize and account for their value as you would any other financial asset.

5

Consider Donating your Collection

Donating valuable collectibles to a charitable organization is a great way to support a cause you care about and take advantage of a significant tax deduction. Additionally, gifting an entire collection to a charity or other non-profit can help to avoid potential liquidity issues around the estate tax and create a lasting legacy for your life's passion.

340%

How much the price of Bordeaux wine rose between 2005 and 20111

60%

The percentage of art sales estimated to be private transactions2

28%

The maximum federal tax rate for collectible items sold after being held for more than one year3

“The people in the best position to potentially benefit from the long-term appreciation of collectibles are those who inherit existing collections from family members, or those who have amassed a collection through the pursuit of a hobby they are passionate about.”

Luxury collectibles can fetch a pretty penny at auction. Here are some of the biggest sales in a few of the most notable classes of collectibles.

Use caution when investing in collectibles
Understand the unique risks

Collectibles expose investors to risks not commonly encountered when making traditional investments, including loss, theft, damage and counterfeiting. Collectible markets are also very volatile, and greatly influenced by pop culture trends, shifting personal tastes and even politics.

Consider the tax consequences

Profits on the sale of collectible items held for more than a year are subject to a maximum 28% federal tax rate; many taxpayers typically pay around 20% on long-term realized capital gains from traditional investments.4 There are also state-level and federal estate tax concerns associated with large, valuable collections.

Don't lose sight of what's important

While most investors seek financial returns, collectors reap benefits beyond their collection's monetary value. Collectibles enable investors to pursue personal interests and develop relationships around shared cultural or intellectual curiosities. Over time, this may be more rewarding than the possible financial gain.

  • Footnotes

    1 Adam Teeter. “How China Inflated a Global Bubble in Fine Wine & Spirits – And Then Popped It," Vinepair, April 15, 2015.

    2 Tanya Powley. “How to Invest in Art," Financial Times, February 1, 2013.

    3 IRS. "Topic 409 - Capital Gains and Losses," As of May 1, 2017.

    4 Ibid.

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