Art As an Asset in Divorce

Death, divorce and debt” are the bread and butter of the art and antiques market, as every art world professional knows. Through good times and bad, these life cycle events frequently trigger sales and other transactions. With divorce, however, if emotions are not already present prior to filing papers, the process itself tends to intensify anger and mistrust between opposing sides.

Divorcing spouses often have competing interests, and neither party may be in a frame of mind to compromise. If divorcing New Yorkers, for instance, are forced to choose between the Fifth Avenue apartment and the house in the Hamptons, not to mention the box at the U.S. Open or courtside seats at the Knicks, and if told they must share the Microsoft stock and the 401(k), by the time they get around to dealing with art and antiques, they may not find themselves in the mood to be practical. If the parties behave as if there needs to be a winner and a loser, there is a great risk that instead of preserving the full value of their collections, they may erode the worth of the marital estate. Like the baby in the Judgment of Solomon, the painting cannot be cut in half. Spouses may have a special attachment to certain pieces, especially when collecting is a shared activity within the marriage.

A 'Collecting Unit'

For example, a Christie's press release about the May 11, 2005, auction of Edward Hopper's “Chair Car” described the owners, Helen and David B. Pall, as a couple who “decided to collect art as a way to spend quality time together.” When collecting becomes a mutual decision-making endeavor, personal attachment adds a dimension other than dollar value in the mind of the collector.

The idea of the couple as a “collecting unit” may be best defined in the landmark divorce case, Scull v. Scull, (94 App.Div. 2d 29, 462 N.Y.S. 2d 890 (1st Dept. 1983)), in which the very different but complementary roles of the famous Pop Art collectors in relation to the collecting process are detailed. While Christie's called the Palls' collecting “a labor of love,” valuing art in a divorce may be compared to the “Labors of Hercules.” Moreover, there is likely to be a keen awareness of how much the other spouse treasures the Monet painting over the fireplace or the garage full of vintage sports cars. This knowledge can be alluring if one party hopes to exact retribution. Is there an opportunity to deny the other spouse the prospect of future enjoyment or provoke a sense of loss if the cherished item is gone? All the better! Art and antiques become a tempting proxy to play out the power struggle between the parties. From whisking the art away to playing hardball over the value during negotiations, the appraisal and settlement processes offer many opportunities for contention.

Enter the Adviser

Understanding the subtext is a first step in an effort to preserve the value of a collection, facilitate equitable distribution or dispose of works profitably. An appraiser is hired to determine what things are worth. If single items are worth $100,000 or more or if the value of a collection is $500,000 or more, clients and their counsel should consider consulting an art adviser who specializes in strategic planning. In the first place, the adviser represents another pair of eyes to review and help interpret the appraisal. A well-written and researched appraisal report can help bring clarity to the division of property by establishing current market values.

Seeing the numbers in black and white will help dispel any unfounded or unreasonable expectations. A couple who bought a Picasso print should not expect a windfall because an unrelated Picasso painting brings a world record price at auction. The appraiser will tell you what the Picasso print is worth. The adviser will tell you what your options are, with advantages and disadvantages of each. If it is agreed to sell valuable works to finance a settlement, or if one has to decide which items are to be retained, an art adviser can help clients exploit positive market timing and select the best venue and sales approach for the property.

Such strategies can be imperative in divorces that take place in the public eye. Precautions are necessary to shield a collection from being “burnt,” either from media exposure or from being indiscriminately “flogged,” in art world parlance, to unsuitable buyers all over town. Additional negotiating opportunities can be highlighted by structuring transactions to assure one party a minimum return as well as a percentage of any unexpected windfall. Further, when asset sales are contemplated, tax planning should not be ignored. Unlike retail replacement value appraisals for insurance purposes, or fair market value appraisals for estate or donation purposes, which would be read by clients and attorneys in any state of the United States in the same way, divorce situations are governed by relevant but jurisdiction-specific legal issues at the state level. Separate property, matrimonial property, community property and equitable distribution depend upon state rules and — for issues of title — depending upon the state, the date and manner of acquisition of property may be interpreted differently.

The Role of the Appraiser

While attorneys are advocates, appraisers have a different role. The fair market value will be the same, no matter on whose behalf the valuation has been done or who is paying for the report, noted one New York expert. Convincing both parties of the valuer's objectivity and working to reduce the “perception gap” are key to gaining a comfort level with both parties. Unfortunately, matrimonial situations carry a sense of frustration — a fear of “being short-changed” or that shortcuts will be used to disadvantage one side. A good appraisal can be especially helpful when there is a marked imbalance between the parties' degree of knowledge and expertise about the property being valued. A close reading of an appraisal can help to level the playing field so that informed decisions can be made by both spouses.

Besides placing a dollar value on illiquid assets, appraisals can highlight key topics, such as the current state of the art market as well as market trends that might affect the value of the subject property. Instead of racing through the document to get to the itemized schedule with its dollar values, the front matter, particularly the “market analysis” section, should be read very carefully and not regarded as “boilerplate.”

Matrimonial appraisals typically have an immediate transactional impact, with property being bought, sold and divided. A good market analysis will assist attorneys in advising their clients to avoid obvious pitfalls, such as poorly timed sales or asset transfers of highly illiquid assets. A description of the status of the market for the subject works and a discussion of factors that would influence where the market is going are crucial.

Appraisal experts note the parallels between the methodology used to appraise real estate and that used in art appraisals, and agree on the application of the same principles, especially cycle analysis, to matrimonial situations. Highlighting market stages, such as recession, recovery, expansion or contraction, provides a useful series of benchmarks. An analysis might refer to demand factors, such as the entry of new buyers (as in wealthy Russian oligarchs seeking to buy and repatriate Faberge pieces) or similarly, the exit of deep-pocketed purchasers (when a museum under new leadership shifts its priorities from old masters to contemporary artists). On the supply side, an upcoming major auction might be watched as a bellwether, or a one-artist retrospective touring the world might lure new property onto the market.

Within the Couple

The opposite of a “collecting unit” approach occurs when ownership and title issues are crystal clear within the marriage. The vice president of a renowned art gallery noted how clients often ask their wives to join them when they come in to preview new purchases and how seldom the wives appear. These women have confided that they have pre-nuptial agreements precluding them from sharing ownership or receiving art as part of a settlement in the event of a divorce, so they couldn't care less about their husbands' choices, unless it upsets their decor. In the absence of prior arrangements, observed one matrimonial attorney, gifts of art, antiques and collectibles are the kinds of personal property for which title is not typically specified at the time the gift is bestowed, which complicates determination of title. Apart from hoping that the recipient saved a gift card, other indicators may be utilized to establish or refute title claims.

Nevertheless, parties may utilize tactics after the fact to alter information. Additionally, if one party is contemplating the removal of property to protect personal interests, attorneys advise clients to avoid acting surreptitiously and deceptively because such stratagem can backfire. A laundry list of tactics to disprove title and dispel a spouse's opportunity to claim ownership are detailed in Scull v. Scull. Additionally, in that case one party asserted sole title by excluding the spouse's name from an auction consignment, which resulted in the proceeds being paid to that party alone.

Insurance companies typically issue schedules and policies in the name of the owner of the apartment or dwelling. If the title of the residence is not jointly held, the schedule will reflect that. If one is concerned about title issues, one remedy would be to instruct the insurance broker to have the policy issued in both names or add both names to the top of the schedule identifying the items as belonging to “Mr. and Mrs. J.P. Client.”

If one party believes a spouse is contemplating a divorce or has it in mind him- or herself, obtaining insurance for the party's collection and commissioning an appraisal to substantiate values will provide an innocuous method to get up to speed. A good appraisal will identify and describe the items and may discuss quality and condition as well as their worth. Although an insurance appraisal will be written with retail replacement value as the standard — a standard that is higher than fair market value or marketable cash value — having an itemized list of one's valuables in hand will provide the added benefit of establishing a paper trail and a record in case items begin to disappear. From a risk management point of view, the protection of scheduled fine arts coverage is advisable and worthwhile.

Getting Down to the Process

Whether the parties have agreed to rely upon a single appraisal or each has retained the services of an appraiser, the attorneys should come to an agreement in advance upon which valuation standard and definition of value are to be employed, be it marketable cash value or fair market value. Then, attorneys should instruct the appraiser(s) to follow the same standard. After the services of an appraiser or appraisers have been engaged, the next step in managing the appraisal process in an efficient and cost-effective manner is to provide them with access to the subject property and any relevant information available, such as receipts or letters of authentication, invoices, loan papers and letters from scholars. It is to be expected that a difference of professional opinion may arise over the value of a particular item, but the aim is to avoid unnecessary disagreement over the appraisal's approach and conclusions.

An appraiser engaged to perform an appraisal for matrimonial purposes would typically utilize the marketable cash value standard for valuation purposes. Marketable cash value represents the amount of money one would receive from the sale of a work of art, after subtracting all of the expenses connected with the sale. Typical expenses would include a buyer's premium, payable by purchasers on top of the hammer price for a work sold at auction; seller's commission, the fee charged by an auction house or gallery to be paid by the consignor of the property to be sold; cataloging, handling and buying expenses; photography, transportation, advertising, marketing, and insurance costs; and any other necessary expense, such as conservation or framing.

In short, marketable cash value represents the amount of money that would end up in someone's pocket after a sale, as well as the value of a work that is retained when treated as if it had been sold. As a rule of thumb, marketable cash value represents about 70% to 80% of fair market value, the valuation standard appraisers employ for Internal Revenue Service-related appraisals, for purposes of estate tax, donation to a qualifying charitable institution or gift tax. At auction, this represents the hammer price plus any applicable buyer's premium. Sotheby's and Christie's currently charge 20% of the successful bid price, up to and including $200,000, and 12% on any amount in excess of $200,000. Subtracting buyer's premiums and seller's commissions from the equation accounts for the difference in value level. Understanding this difference will avoid a situation that causes unnecessary confusion and contention over relative advantage and disadvantage of retaining, buying or selling the subject works as well as additional expense in sorting the matter out.

Reaching the Final Resolution

How do couples value and divide the marital estate without paying too high a price? Ideally, they should avoid litigation over valuation. Matrimonial attorneys recommend that even spouses who cannot stand being in the same room together — but especially high-net worth couples with valuable art and antiques collections — should each engage an experienced appraiser and negotiate the division of assets. The benefits of this approach are simple: it's private and it's over.

Each party can bring in its own appraisal, compare the values, and mediate the differences. Or, the couple can decide to agree to hire one appraiser and rely upon a single report. Litigation is not only costly but can drag on for years, and it must be recognized that an appraisal is only a snapshot in time. If litigation is prolonged, the values may become outdated and market trends may reverse, with adverse consequences. Careful consideration should be given to choosing the right expert. This person has an enormous amount of clout. If the task is done in a thorough and professional manner, the appraisal will be the basis of settlement decisions.

Resolving the power struggle over the art requires a systematic and objective approach to determining value. A successful division of property is not only defined by who gets what, but also by the understanding that “winning” means preserving the value in what one has chosen to sell or retain, rather than allowing value to be sacrificed needlessly.

Death, divorce and debt” are the bread and butter of the art and antiques market, as every art world professional knows. Through good times and bad, these life cycle events frequently trigger sales and other transactions. With divorce, however, if emotions are not already present prior to filing papers, the process itself tends to intensify anger and mistrust between opposing sides.

Divorcing spouses often have competing interests, and neither party may be in a frame of mind to compromise. If divorcing New Yorkers, for instance, are forced to choose between the Fifth Avenue apartment and the house in the Hamptons, not to mention the box at the U.S. Open or courtside seats at the Knicks, and if told they must share the Microsoft stock and the 401(k), by the time they get around to dealing with art and antiques, they may not find themselves in the mood to be practical. If the parties behave as if there needs to be a winner and a loser, there is a great risk that instead of preserving the full value of their collections, they may erode the worth of the marital estate. Like the baby in the Judgment of Solomon, the painting cannot be cut in half. Spouses may have a special attachment to certain pieces, especially when collecting is a shared activity within the marriage.

A 'Collecting Unit'

For example, a Christie's press release about the May 11, 2005, auction of Edward Hopper's “Chair Car” described the owners, Helen and David B. Pall, as a couple who “decided to collect art as a way to spend quality time together.” When collecting becomes a mutual decision-making endeavor, personal attachment adds a dimension other than dollar value in the mind of the collector.

The idea of the couple as a “collecting unit” may be best defined in the landmark divorce case, Scull v. Scull, (94 App.Div. 2d 29, 462 N.Y.S. 2d 890 (1st Dept. 1983)), in which the very different but complementary roles of the famous Pop Art collectors in relation to the collecting process are detailed. While Christie's called the Palls' collecting “a labor of love,” valuing art in a divorce may be compared to the “Labors of Hercules.” Moreover, there is likely to be a keen awareness of how much the other spouse treasures the Monet painting over the fireplace or the garage full of vintage sports cars. This knowledge can be alluring if one party hopes to exact retribution. Is there an opportunity to deny the other spouse the prospect of future enjoyment or provoke a sense of loss if the cherished item is gone? All the better! Art and antiques become a tempting proxy to play out the power struggle between the parties. From whisking the art away to playing hardball over the value during negotiations, the appraisal and settlement processes offer many opportunities for contention.

Enter the Adviser

Understanding the subtext is a first step in an effort to preserve the value of a collection, facilitate equitable distribution or dispose of works profitably. An appraiser is hired to determine what things are worth. If single items are worth $100,000 or more or if the value of a collection is $500,000 or more, clients and their counsel should consider consulting an art adviser who specializes in strategic planning. In the first place, the adviser represents another pair of eyes to review and help interpret the appraisal. A well-written and researched appraisal report can help bring clarity to the division of property by establishing current market values.

Seeing the numbers in black and white will help dispel any unfounded or unreasonable expectations. A couple who bought a Picasso print should not expect a windfall because an unrelated Picasso painting brings a world record price at auction. The appraiser will tell you what the Picasso print is worth. The adviser will tell you what your options are, with advantages and disadvantages of each. If it is agreed to sell valuable works to finance a settlement, or if one has to decide which items are to be retained, an art adviser can help clients exploit positive market timing and select the best venue and sales approach for the property.

Such strategies can be imperative in divorces that take place in the public eye. Precautions are necessary to shield a collection from being “burnt,” either from media exposure or from being indiscriminately “flogged,” in art world parlance, to unsuitable buyers all over town. Additional negotiating opportunities can be highlighted by structuring transactions to assure one party a minimum return as well as a percentage of any unexpected windfall. Further, when asset sales are contemplated, tax planning should not be ignored. Unlike retail replacement value appraisals for insurance purposes, or fair market value appraisals for estate or donation purposes, which would be read by clients and attorneys in any state of the United States in the same way, divorce situations are governed by relevant but jurisdiction-specific legal issues at the state level. Separate property, matrimonial property, community property and equitable distribution depend upon state rules and — for issues of title — depending upon the state, the date and manner of acquisition of property may be interpreted differently.

The Role of the Appraiser

While attorneys are advocates, appraisers have a different role. The fair market value will be the same, no matter on whose behalf the valuation has been done or who is paying for the report, noted one New York expert. Convincing both parties of the valuer's objectivity and working to reduce the “perception gap” are key to gaining a comfort level with both parties. Unfortunately, matrimonial situations carry a sense of frustration — a fear of “being short-changed” or that shortcuts will be used to disadvantage one side. A good appraisal can be especially helpful when there is a marked imbalance between the parties' degree of knowledge and expertise about the property being valued. A close reading of an appraisal can help to level the playing field so that informed decisions can be made by both spouses.

Besides placing a dollar value on illiquid assets, appraisals can highlight key topics, such as the current state of the art market as well as market trends that might affect the value of the subject property. Instead of racing through the document to get to the itemized schedule with its dollar values, the front matter, particularly the “market analysis” section, should be read very carefully and not regarded as “boilerplate.”

Matrimonial appraisals typically have an immediate transactional impact, with property being bought, sold and divided. A good market analysis will assist attorneys in advising their clients to avoid obvious pitfalls, such as poorly timed sales or asset transfers of highly illiquid assets. A description of the status of the market for the subject works and a discussion of factors that would influence where the market is going are crucial.

Appraisal experts note the parallels between the methodology used to appraise real estate and that used in art appraisals, and agree on the application of the same principles, especially cycle analysis, to matrimonial situations. Highlighting market stages, such as recession, recovery, expansion or contraction, provides a useful series of benchmarks. An analysis might refer to demand factors, such as the entry of new buyers (as in wealthy Russian oligarchs seeking to buy and repatriate Faberge pieces) or similarly, the exit of deep-pocketed purchasers (when a museum under new leadership shifts its priorities from old masters to contemporary artists). On the supply side, an upcoming major auction might be watched as a bellwether, or a one-artist retrospective touring the world might lure new property onto the market.

Within the Couple

The opposite of a “collecting unit” approach occurs when ownership and title issues are crystal clear within the marriage. The vice president of a renowned art gallery noted how clients often ask their wives to join them when they come in to preview new purchases and how seldom the wives appear. These women have confided that they have pre-nuptial agreements precluding them from sharing ownership or receiving art as part of a settlement in the event of a divorce, so they couldn't care less about their husbands' choices, unless it upsets their decor. In the absence of prior arrangements, observed one matrimonial attorney, gifts of art, antiques and collectibles are the kinds of personal property for which title is not typically specified at the time the gift is bestowed, which complicates determination of title. Apart from hoping that the recipient saved a gift card, other indicators may be utilized to establish or refute title claims.

Nevertheless, parties may utilize tactics after the fact to alter information. Additionally, if one party is contemplating the removal of property to protect personal interests, attorneys advise clients to avoid acting surreptitiously and deceptively because such stratagem can backfire. A laundry list of tactics to disprove title and dispel a spouse's opportunity to claim ownership are detailed in Scull v. Scull. Additionally, in that case one party asserted sole title by excluding the spouse's name from an auction consignment, which resulted in the proceeds being paid to that party alone.

Insurance companies typically issue schedules and policies in the name of the owner of the apartment or dwelling. If the title of the residence is not jointly held, the schedule will reflect that. If one is concerned about title issues, one remedy would be to instruct the insurance broker to have the policy issued in both names or add both names to the top of the schedule identifying the items as belonging to “Mr. and Mrs. J.P. Client.”

If one party believes a spouse is contemplating a divorce or has it in mind him- or herself, obtaining insurance for the party's collection and commissioning an appraisal to substantiate values will provide an innocuous method to get up to speed. A good appraisal will identify and describe the items and may discuss quality and condition as well as their worth. Although an insurance appraisal will be written with retail replacement value as the standard — a standard that is higher than fair market value or marketable cash value — having an itemized list of one's valuables in hand will provide the added benefit of establishing a paper trail and a record in case items begin to disappear. From a risk management point of view, the protection of scheduled fine arts coverage is advisable and worthwhile.

Getting Down to the Process

Whether the parties have agreed to rely upon a single appraisal or each has retained the services of an appraiser, the attorneys should come to an agreement in advance upon which valuation standard and definition of value are to be employed, be it marketable cash value or fair market value. Then, attorneys should instruct the appraiser(s) to follow the same standard. After the services of an appraiser or appraisers have been engaged, the next step in managing the appraisal process in an efficient and cost-effective manner is to provide them with access to the subject property and any relevant information available, such as receipts or letters of authentication, invoices, loan papers and letters from scholars. It is to be expected that a difference of professional opinion may arise over the value of a particular item, but the aim is to avoid unnecessary disagreement over the appraisal's approach and conclusions.

An appraiser engaged to perform an appraisal for matrimonial purposes would typically utilize the marketable cash value standard for valuation purposes. Marketable cash value represents the amount of money one would receive from the sale of a work of art, after subtracting all of the expenses connected with the sale. Typical expenses would include a buyer's premium, payable by purchasers on top of the hammer price for a work sold at auction; seller's commission, the fee charged by an auction house or gallery to be paid by the consignor of the property to be sold; cataloging, handling and buying expenses; photography, transportation, advertising, marketing, and insurance costs; and any other necessary expense, such as conservation or framing.

In short, marketable cash value represents the amount of money that would end up in someone's pocket after a sale, as well as the value of a work that is retained when treated as if it had been sold. As a rule of thumb, marketable cash value represents about 70% to 80% of fair market value, the valuation standard appraisers employ for Internal Revenue Service-related appraisals, for purposes of estate tax, donation to a qualifying charitable institution or gift tax. At auction, this represents the hammer price plus any applicable buyer's premium. Sotheby's and Christie's currently charge 20% of the successful bid price, up to and including $200,000, and 12% on any amount in excess of $200,000. Subtracting buyer's premiums and seller's commissions from the equation accounts for the difference in value level. Understanding this difference will avoid a situation that causes unnecessary confusion and contention over relative advantage and disadvantage of retaining, buying or selling the subject works as well as additional expense in sorting the matter out.

Reaching the Final Resolution

How do couples value and divide the marital estate without paying too high a price? Ideally, they should avoid litigation over valuation. Matrimonial attorneys recommend that even spouses who cannot stand being in the same room together — but especially high-net worth couples with valuable art and antiques collections — should each engage an experienced appraiser and negotiate the division of assets. The benefits of this approach are simple: it's private and it's over.

Each party can bring in its own appraisal, compare the values, and mediate the differences. Or, the couple can decide to agree to hire one appraiser and rely upon a single report. Litigation is not only costly but can drag on for years, and it must be recognized that an appraisal is only a snapshot in time. If litigation is prolonged, the values may become outdated and market trends may reverse, with adverse consequences. Careful consideration should be given to choosing the right expert. This person has an enormous amount of clout. If the task is done in a thorough and professional manner, the appraisal will be the basis of settlement decisions.

Resolving the power struggle over the art requires a systematic and objective approach to determining value. A successful division of property is not only defined by who gets what, but also by the understanding that “winning” means preserving the value in what one has chosen to sell or retain, rather than allowing value to be sacrificed needlessly.