Estate Planning for Valuable Cars or Car Collections
August 1, 2022
Estate Planning for Valuable Cars or Car Collections
August 1, 2022
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You love it. You know you do. Why else would you spend so much time with it? I’m talking about your favorite car or, if you’re fortunate, car collection.
The truth is, when you die, decisions will have to be made about your precious collection that you may or may not agree with. Why leave that to chance?
If you have a will or trust, realize that may not be enough when it comes to your cars. Cars, particularly valuable ones, present a special set of problems. If not dealt with effectively, they can consume a fair share of effort, angst, and expense for loved ones left behind. However, with a little bit of foreplanning, that doesn’t have to be the case. I can’t cover every wrinkle here, and your experience may vary. But think of the following as a basic framework of what to consider and a gentle nudge to begin planning sooner rather than later.
ARE YOUR LOVES THEIR LOVES?
You may have a spouse, child, grandchild, or another family member who shares the same passion for your car as you do, but more often than not, none of your heirs feels as strongly about it as you do. Even those who do appreciate and admire your car might not feel that they have the knowledge or finances to properly care for it or the space to keep it.
Cars usually attract a negative cash flow. They cost money—sometimes, real money. They may be worth two or three times what you paid for them, but you’re constantly putting money into them: You’ve got to store them, maintain them, repair them, insure them. It takes money to own your cars. So, if you leave them to somebody, whoever you leave them to is going to have to bear those costs. With all this in mind, it’s important to have a frank conversation with your family about whether they would—or could—become the new steward for your cars or whether they’d likely just sell them off when the time came.
MAKE YOUR INTENTIONS KNOWN
Whatever you decide, make your intentions known. That’s even more important if a car is going to someone outside your immediate family. Have you promised to sell your car to a friend? At a specific price? Make sure those instructions are written down in your handwriting, signed and dated so that your heirs know your wishes.
I saw a case recently with a distraught widow whose late husband’s friends had been hounding, asking what was going to happen to his beloved Porsche. One brazen individual actually stated that her husband had supposedly promised the car to him and at a specific price that was severely discounted to the car’s actual value. She was so upset that she was considering a deal at his price just to stop the harassment.
AT LEAST MAKE A WILL
A will should name an executor. The executor will oversee disposing of your assets, including your car. But how knowledgeable are they about your car? If the answer is “not very,” then you could additionally name an executor for specific assets. For example, you could name your oldest son or daughter as the executor of the overall estate but could name a buddy who’s a car enthusiast as a special executor with the authority to deal only with your automobiles. Or, you can say that the executor of your estate must consult with your buddy or somebody else who’s versed in the ins and outs of owning collectible automobiles regarding the sale of those vehicles. Having someone knowledgeable handling the sale of the vehicles increases the likelihood that your beneficiaries will get the full market value for your cars and that they will be properly taken care of until the time of sale.
You should talk with your executor now and make sure they understand what’s involved in selling the car and that they are agreeable to doing it. In addition, the role of an executor is time-consuming, and you should offer to compensate them reasonably. Make sure you are organized. Make sure there’s someone who knows where all your cars are. You laugh, but you may have a car at the shop or with a team and your spouse or family has no idea where to find it. Then, there are all the spare parts and records, such as purchase paperwork, receipts for parts and restoration work, and paperwork for storage rental. All of these records should be part of your estate plan, either digitally or in paper format, and saved in a safe place.
PROBATE: AVOID IT IF YOU CAN
If your car is worth more than $150,000, then think probate. When you die, a car becomes part of your personal estate and must go through a court process called probate to distribute it to your proper heir. Even if you have a will, the car will still have to go through probate. Probate is expensive, time-consuming (in my California county, it can take up to three years to go through the process), subject to challenge, prone to administrative burdens that no one in their right mind would appreciate, and, beyond all else, stressful. But there are two easy solutions: joint ownership or a trust.
A collector can title the vehicle or vehicles in joint name with their spouse. A car that is jointly titled avoids probate because the surviving spouse is already a named owner of the vehicle. One important stipulation is that they must title the car in joint name with their spouse as joint tenants with rights of survivorship, as opposed to tenancy in common. Holding a vehicle as tenancy in common subjects it to probate when one of the parties dies. But if a vehicle is owned in joint tenancy with rights of survivorship, when one person dies, it automatically goes to the joint owner by operation of law and does not have to go through probate.
IN TRUSTS WE TRUST
Another fairly simple way to avoid the hassles of probate is to set up a revocable trust, and then transfer the cars into that trust. That way, the vehicles are no longer in your name; they’re in your name as trustee. That avoids probate. But what does your trust say specifically about your cars? Remember the discussion above about the hassle and documentation that follow a car’s ownership when you are gone.
Additionally, consider the issue of liability while you are still around. Realize that a car in your name or in a revocable living trust is subject to creditors and accidents that the car is involved in. This could open your other assets up to a lawsuit. While you’re still alive, owning vehicles in a trust is not much different from owning them outright. You have the same rights and responsibilities if you own it in your name as if you own it in a trust that can be revoked. On the certificate of title or ownership document, instead of your name, it shows your name “as trustee.” As the trustee, you still have the power to buy new cars and add them to the trust, borrow against the trust, or sell any cars that are in the trust. When selling a car out of the trust, the bill of sale or transfer document is signed by the trustee as the vehicle’s owner.
Nor does putting your cars into a trust change any income tax owed if a vehicle is sold. The assets are treated as your own for income tax purposes, so you pay the tax on the sale. And since the trust is revocable, you can tear up the trust any time you want and have the property re-titled in your individual name if you want later on. You also have the right to alter, amend, revoke, or terminate that trust. Trusts are not complicated to draw up, but when it comes to your special car, some thought needs to be injected into the document.
Some collectors, as they get on in years, begin to wind down their vehicle holdings. The advantage of selling while you’re still around is that you usually have a lot of built-up knowledge about the cars—the vehicles’ history and restoration specifics—that often are lost when the owner passes on. Others do not and die while owning their favorite car(s) that brought them so much joy.
For cars that have appreciated significantly, there are capital gains tax considerations that may make it advantageous to pass them on as part of an estate and let the heirs do the selling. If you sell a car that has appreciated, the difference between the selling price and the price paid (less any restoration costs) is subject to a federal capital gains tax of 20 percent, whereas the State of California could add a further 10 percent. So, a collector who wisely purchased a Lamborghini Miura 30 years ago for $100,000 and sells it for $950,000 would owe tax on the $850,000 gain. But if that same Miura passes through the estate to a fortunate heir of that collector, the heir’s cost basis is not the original price paid but is instead the appraised value of the car when he or she inherits it. If the Miura appraises for $950,000, and the heir sells it at auction, they will owe capital gains tax only if the car is sold for more than that $950,000. In other words, the $850,000 capital gain is stepped up and not taxed to the beneficiary.
ARRANGE NOW, SELL LATER
There is a middle ground between selling your cars while you’re still around and leaving everything for your heirs to sort out. A collector with significant holdings that are going to be liquidated after their passing may want to make arrangements with an auction house or other venue ahead of time to handle the eventual sale. The process for pre-selecting an auction company to liquidate a collection would look something like this: The auction company would need to familiarize themselves with the collection’s contents. They can assist with putting together appraisals. Usually, the appraisal cost is only applied if the collection doesn’t come to the company for sale. The collector also negotiates the seller’s commission. Setting this up ahead of time can save your heirs a major headache.
THE TAX MAN COMETH
As of this writing, most collectors do not have to worry about their holdings being subject to the estate tax. Under current law, estates valued at $12.06 million or less are not subject to the estate tax (that figure is doubled if you are married and indexed to inflation). In 2025, however, the exemption sunsets and drops down to what it was before the Trump tax law of 2018.
The exemption figure also could change, as this part of the estate tax is under active review. Those figures all concern the federal estate tax. Some states also levy their own estate tax, and their exemptions can be much lower. The lowest exemption currently is Massachusetts, where the estate tax kicks in at $1 million.
Note also that the $12.3 million estate tax exemption and the gift tax exemption are unified. If all or some of the gift tax exemption is used during a lifetime, that subtracts from the amount of estate tax exemption available at death. So, that’s another way the estate tax threshold is effectively lower for some taxpayers. Gifts from one spouse to another or estate transfers to a spouse are tax-free, however. They are not subject to the estate or gift tax. For estates subject to the tax at either the state or federal level, the estate’s assets—including classic cars—have to be appraised, and the tax is due nine months after the date of death. For those with substantial collections—or other holdings—who will be subject to the estate tax, there are strategies that can be employed. A very small percentage of taxpayers fall into this category, and if you do, you are probably already monitoring your options.
CHARITABLE DONATION OF VEHICLES
If their heirs are not interested in the collection, a collector might decide to donate their vehicles to a charitable organization rather than sell them. The rules surrounding charitable donations are different for vehicles donated during one’s lifetime versus after death.
If you donate during your lifetime, and you want to take an income tax charitable deduction, the rules are complicated. To get a federal income tax deduction for the vehicles’ fair market value, a collector has to: 1) hold the cars for more than a year; 2) donate them to a public charity as opposed to a private foundation; and 3) most importantly, the donated automobiles have to be put to a use that’s related to the charity’s tax-exempt function—a car museum, for example. That use would be related to their exempt function, and the collector would get a charitable tax deduction for the vehicles’ fair market value.
On the other hand, if the automobiles are donated to a homeless shelter or some other charity where the cars are not related to the organization’s tax-exempt function, the donor can only deduct what they paid for the cars (the cost basis). The donor can’t deduct the fair market value of the automobiles.
Donations made to a charitable organization at death will result in a federal estate tax deduction. There is no related-use rule for charitable donations made at death, so an individual can bequeath a vintage car collection to any charity and receive a deduction from their estate tax equal to the cars’ fair market value.
IF YOU WANT THE COLLECTION TO STAY TOGETHER, YOU CAN SET UP YOUR OWN CHARITY
This is advanced-level stuff, but one way to be certain that your collection will not be broken up is to set up your own charity or private operating foundation. You can be on the foundation’s board of directors along with other people, like your kids. That way, you still retain control over the collection.
There are two types of foundations: a private non-operating foundation and a private operating foundation. The difference between the two is crucial. A private non-operating foundation is one where the foundation merely writes checks to other charities. It does not itself engage in any type of charitable activity. If you set up a non-operating charitable foundation, the income tax deduction is limited to the cost basis of the automobiles, not their fair market value. An operating foundation is one that actually engages in charitable activity. With classic cars, that would typically be a museum. For example, Henry Ford set up the Henry Ford Museum in 1929. If it’s a private operating foundation that operates their own charity, the collector can get an tax deduction equal to the donated cars’ fair market value. Note that the private operating foundation can begin during your lifetime, or it can be part of an estate plan. If you wanted to, you could set the private operating foundation up during your lifetime, donate the cars, watch how it works, and tweak it. Alternatively, you could have it set up as part of your estate plan so, at death, all these cars that you own would dump into the private operating foundation. Maybe your family, your kids, or somebody else with an interest in the collection runs that operating foundation for however long they want to run it. And you’ll get an estate tax charitable deduction for that.
Planning for the future, even the unpleasant future, is a task for today. Most of us want the best for those who live on once we’re gone, and we may also want the best for the cars we’re so attached to. Take the time now to set up a plan for a smooth transition for that eventuality. Doing so does not mean you have one foot in the grave; it means you have your eyes focused down the road.
—David Hollander, Esq. – firstname.lastname@example.org
The Law Offices of Hollander & Hollander, P.C. specialize in estate and succession planning. Visit the website here to schedule an appointment. Hollander and Hollander, P.C. and Liberty Group are affiliated entities. Persons engaging the services of one affiliated LG company should be aware that each company is operated separately. Engaging the services of one entity does not entitle any client to the rights and protections of another, some of whom are regulated entities subject to different governing regimes. Clients should be aware that services provided by one regulated entity will only be provided concerning that entity, not for another. Further, the protections afforded when doing business with one affiliated entity may not necessarily exist with another.
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