Now and Forever: Making Your Life’s Work Sustainable
In the first of a series, Stropheus trusts and estates member Peter Arcese looks at the increasingly important question of how to guarantee that an artist's accomplishments remain viable and sustainable for the life of the work itself.
You have the art object, which will have an extended life, and its length will be determined by a range of variables, such as conservation measures. Let’s say that the lifespan of the art object itself is indefinite. The copyright is another aspect of the artwork that is going to outlive the artist, and that's a bit more definite—generally, seventy years. So we have this timeline going forward, and the timeline is an opportunity to plan.
Now, the will, as an estate planning tool, is the key. The will serves as the foundation of all planning, and it must be addressed. The trusts that are created under a will (testamentary trusts) and lifetime trusts—can extend the range of planning, or you might say the reach of the artist and the art, well into the future.
There’s an arcane rule, called the “rule against perpetuities,” which dictates that a trust has to have at least a conceivable endpoint. Some states and jurisdictions have done away with that rule and it is possible to have trusts go on for 300 years or more, or perhaps indefinitely, in perpetuity. Now, planning in perpetuity actually is an opportunity by setting up a trust in the form of a foundation or creating a corporation. At least in New York, state law does allow for such a trust to continue its mission in relation to the art. Of course, that mission is going to be defined by the artist, hopefully during their lifetime. There may also be directions in the will that the mission can continue for the life of the art, and even if the art object, for whatever reason, is no longer physically present. Such as, if part of the artist’s goal is to support other artists, as was Adolph and Esther Gottlieb’s wish, and whose foundation is one of those we’ll talk about, that mission can be carried on, and can be set up, to continue in perpetuity. That’s, I would say, a rather unique feature of the artist’s work.
Now, planning, doing your will, and setting up trusts can seem off-putting. Picasso, who died without a will, is probably the most dramatic example of an artist avoiding that crucial task. But I’d like to point out that this kind of planning is full of opportunities. The path toward discussing trusts can look ominous, but it’s a road with plenty of resources along the way, and my job is to help pinpoint certain landmarks. There’s a good deal of complexity. The route can begin to look a little murky and menacing, but all of this is workable with good advice and counsel. That's what we do every day at Stropheus.
Types of Trusts
Trusts are a brilliant Anglo-American innovation (I’m going to be clearly partisan on this). The roots of trust law reach well back to the pre-Elizabethan period, and now they’re governed by our state laws.
When it comes to trusts, you have choices. Living trusts, also called inter vivos trusts, using the Latin term, are trusts that can be set up now: today. They don’t necessarily have to be fully funded and used, but they can be made available. This is something that can be done and that can be effective during one’s lifetime. A will, by contrast, is not going to take effect until death. If you want to actively start the planning, besides just laying out the framework, a trust can serve that immediate goal.
A trust can be revocable or irrevocable. If it’s revocable, just as the term implies, it can be amended, it can be changed, and it can be modified as seen fit. Ultimately, the formalities of executing a trust are a bit less than in executing a will, and in terms of litigation, a trust can be a bit harder to challenge. Now, irrevocable trusts can also be set up during one’s lifetime. You can set them up with the intent that they cannot be changed. There are ways to get a second bite at the apple, but that’s a topic for another time. Just be aware that an irrevocable trust can be set up, it’s terms can be fixed, but under certain circumstances, some changes can still be made.
Testamentary trusts are created by a will and only come into existence under a will. Charitable trusts are set up to benefit, as the name implies, a charity. They may benefit a single charity exclusively, or may benefit multiple charities, and these trusts may begin to look like and be treated as tax-exempt entities. There are also trusts that can benefit both private individuals and charities, so-called “split-interest” trusts. The split-interest trust is often called a charitable remainder trust. With a charitable remainder trust, assets are placed into the trust, and an annuity is paid out, often to a family member for a lifetime, or maybe a term of years, ten or twenty years. On the death of that private beneficiary, the assets go to the benefit of a charity. Now, if art is going to be used in this context, some special considerations have to be made, because usually the art is not producing the income required for the annuity. You may have to put some cash in the trust, as well.
The New York State statute governing the creation and validity of trusts is called the Estates, Powers and Trusts Law. The Internal Revenue Code is going to be the significant body of law determining the taxation of trusts. It’s a complex area, and also offers lots of opportunity.
Some trusts are transparent for tax purposes, though it’s not their primary goal. The primary goal is may be to protect assets, to protect beneficiaries, or to perhaps even avoid probate. There’s a wide range of tax consequences that can be sought after. A trust can save thousands, even millions of dollars of taxes by legally avoiding estate, gift, and generation-skipping transfer taxes. Planning involves a combination of state law governing the validity and the substance of trusts, and federal tax law.
Foundations for Artists’ Work
Foundations may be the artist’s ultimate planning tool, both in opportunity and, at times, in complexity as well. I want to stay with the theme that it’s all workable with good planning, advice, and counsel. Foundations, like trusts, can be set up either during an artist’s lifetime or can be created under directions contained in a will. Most often, the artist has created a body of work and some of it is placed and some of it will be sold by the estate. Whatever is still held in the estate may then be given to the executors or to trustees with a direction for a foundation to be created. Or the work may be given to the beneficiaries, who may then take it upon themselves to first create a foundation, and donate their inherited work to the newly formed foundation.
Adolph Gottlieb, for example, left directions that half of his estate be used to create a foundation. Two years later, Esther Gottlieb, his surviving spouse, created that foundation. Something similar occurred with Roy Lichtenstein’s estate, where Dorothy Lichtenstein took selected works from the estate and donated them to the foundation that had yet to be created. The Roy Lichtenstein Foundation was established two years after the artist’s death. Two years is the average amount of time to elapse before these foundations are established and funded with art. Then that art typically is sold, and those proceeds can form the basis of an endowment to get the foundation up and running and, perhaps, to begin making grants.
Forming an Artist’s Foundation
A foundation can be formed in New York as a trust or a corporation. Trusts generally allow for more centralized management and more privacy. Let’s say you have siblings, for example, who really want to control and be very active in managing the foundation—a trust might then be preferable. If you’re going to have a more varied board with a more public profile, then perhaps a corporation is more efficient in that case. Now, the trust or the nonprofit corporation has to apply for recognition of its tax-exempt status—that’s the coveted 501(c)(3) status. Using our example of a sibling-run foundation, we might find that it’s not supported generally by the public, but by sales of the artist’s assets, and perhaps even by some of the beneficiaries of the estate contributing property. That's why we’re not looking at these entities as public charities, which derive their support primarily from the public, but are supported by private sources: that is, from the family and from the estate itself.
The distinction between non-operating and operating foundations can get complex. The simple point to keep in mind is that a foundation whose primary purpose is to give money away to other foundations or individuals, who in turn make grants to educate the public, to provide arts education in general, or to promote the artist’s work, are primarily non-operating foundations; they’re not running a program, but they’re giving money to fund programs that might be run by others.
Operating foundations, by contrast, run their own programs. There are different compliance requirements for them—vastly different requirements. It’s more challenging to run an operating foundation, but it’s very doable with good planning. Just beware of multiple restrictions and prohibitions. Again, the relevant body of state law—the not-for-profit corporation law and often the Estates, Powers and Trusts Law that governs trusts—also governs foundations. The Internal Revenue Code for tax purposes also applies.
In the case of a foundation, you’re also going to have a partner, and that partner is the Attorney General of whatever state you’re operating in. In New York State, we have a wonderful Attorney General’s Charities Bureau that will actively try to be helpful to keep you in compliance and to help you further your mission.
Fiduciaries for Artists
I can’t emphasize strongly enough the importance of choosing good fiduciaries. If you’re an artist, you’ll be picking your initial fiduciaries, your executors and trustees, directly. You may or may not be able to pick the board members of your foundation. I encourage you to take as much care in selecting your fiduciaries as you would in naming guardians for your children. These are the people who need to demonstrate the commitment, the loyalty, the willingness, and the fortitude, to realize the artist’s intent. They need to deal with the realities of the global art market, to deal with the lawyers and the accountants, and to propel the artist’s vision along that extended timeline which we evoked earlier.
Most of the rules governing fiduciaries and foundations are geared toward preventing self-dealing or private benefit. The Rothko estate dispute is the key case to keep in mind regarding self-dealing and the issue of duplicitous fiduciaries. If you want to look at a horror story, it’s the Rothko estate.
In choosing the roles for your fiduciaries, think of what family members know and do best in relation to the art—is there a role for them? Is there a role for friends? Or are you better off with a combination of insiders and professional advisors? Usually you want to try for a healthy mix.
Valuation is going to tell you not only how much the art is worth, but how much you’re going to have to pay in taxes. Art is not generally a liquid asset, so whereas it might be nice for the artist to see a high value and feel a resulting sense of prestige, accomplishment, and recognition, very often it’s important to achieve valuation discounts for tax purposes.
A major legal principle regarding valuation began with the David Smith estate, after his death in 1965. This principle holds that if all the art had to be sold at once, the market couldn’t absorb it at what would be the full fair market value. The art, therefore, is divided into three categories. First among these: the “ best” work. In fact, we may not sell that work, or we’ll sell it very slowly to generate cash for an endowment, at full fair market value, with no discount. The next category is, and I’m paraphrasing, the “not-as-good” art. That’s the bulk of the work. And this category will get maybe a 30 percent, or 30-plus percent, discount. For the last category, there’s “everything else”, which may even include the archives, and that might get a 60 percent discount. It’s important to do this kind of discounting so you don’t run out of cash. The full valuations at fair market value will otherwise be established by qualified appraisal or by auction—that’s unavoidable. The valuation discount is where the action happens.
Artist’s Foundation Success Stories
Adolph and Esther Gottlieb established one of the first foundations to make grants to individuals alongside the NEA and NYSCA, providing general support and emergency funds. As Sanford Hirsch, the executive director of the Gottlieb Foundation, has said, “The artist’s foundation is an extension of the artist’s personality.” That’s what you want to achieve.
Esther Gottlieb spearheaded the effort, along with Sanford Hirsch, so it was really a combined family and third-party effort. They started with zero cash. They borrowed $10,000 just to make their first grants. Their endowment is in the double-digit millions now. A big success story.
Roy Lichtenstein’s foundation, another notable success, has benefitted from very careful planning. The creation of the foundation was contemplated during his lifetime with a mission to preserve and promote his body of work, to preserve the studio space, and to educate the public. They have a catalogue raisonné on their website, so they’re doing well. As with the Gottlieb estate, we find the notion that Lichtenstein’s personality through the foundation, that the timeline continues. Jack Cowart says that he still feels like the artist is right in the studio. He can experience that because the foundation in preserving his studio is preserving his presence. This foundation, too, was initially funded with next to nothing, then made sales of select works, just a handful of works, yielding $10 million to generate the endowment. An important point here: the foundation also holds all the copyrights. You can keep some of the objects with the family and in the estate, but you can have the foundation manage the rights.
I’m going to wrap up here with Robert Rauschenberg’s estate. While serving as Rauschenberg Foundation CEO, Christy MacLear made some wonderful statements about how important and how valuable it is for the artist to leave directions. Rauschenberg was an exemplar in that regard. He did create a revocable trust. The trust was in existence during his lifetime, then became irrevocable on his death and received assets under his will. Here, we see how the full picture begins to play out. It took four years to fund the trust, but that amount of time was taken deliberately to make sure everything was done properly—that Rauschenberg’s vision was maintained, that they gathered the right relationships with the right entities, that the placements were appropriate, the right sales were made, and that those sales created the endowment to operate the programs. Today it’s become a very strong, active operating foundation that believes art can change the world.