Estimated reading time: 2 minutes, 57 seconds

Collectors can be a funny breed. Some haul antique Buicks halfway across the country to meet with other car fans while others will spend hours hitting garage sales, antique shops, and art auctions with hopes of a rare find that will round out their existing collections.

For advisors, however, clients’ collections present a host of financial planning challenges, including legacy issues, taxation and risk management. Advisors typically take an inventory of clients’ assets to kick off the financial planning process. Clients may not initially think about discussing their collections as they may be more focused on managing retirement accounts or non-qualified but liquid assets.

With that in mind, advisors should ask their clients about collectables so that they can make appropriate provisions for the items. Making an inventory of the items, however, is just the start of the financial planning process.

Indeed, advisors should have collectables appraised, as the current market value of the items will play a central role in most financial planning decisions. For example, most homeowners insurance policies don’t cover collectables, so advisors will have to work with insurance agents to buy special coverage for rare and valuable items.

Insurance companies will want to know the value of the items, so appraisals will be necessary. At the same time, having appraisals done can be part of making a thorough inventory of the items. Knowing the value of items can also play an important role in estate planning.

s wealth when including the value of collectables may exceed the current estate tax exemption of $5.3 million. If so, advisors will need to recommend estate planning techniques, such as special trusts and gifting that will help limit estate taxation. s important to note that estate taxes can be as high 40%.

that are associated with maintaining an estate after the death of a client. Regardless of the reason for needing to raise cash, selling collectables can be problematic.

Taxes on capital gains on collectables are higher than the long-term capital gain rates of securities. In addition, assessing a cost basis for collectables passed down from multiple generations may be challenging.

For example, experts may need to be hired to estimate the value of the items at the time that the items were inherited to establish a cost basis. If the items are very rare, it may be difficult to find sales of comparable items needed to assess the prior value of the items.

Clients who are actively building a collection will also present special challenges. Some clients may plan on holding their collections for their entire lives. If a substantial portion of their wealth is tied up in their collectables, then they may have a hard time generating retirement income because unlike stocks and bonds, their rare and cherished items won’t generate income.

For such clients, advisors should run retirement planning calculations that don’t include the value of collectables. In some cases, the need for building a nest egg with liquid assets rather than collectables may cause clients to rethink how much they spend on buying collectables.

Either way, advisors will also have to work closely with their clients to determine budgets to ensure that their clients don’t go overboard when shopping for collectables. When considering the many challenges associated with owning rare and valuable items, advisors should be prepared to assemble a team of experts including accountants, insurance agents, appraisers, and auction houses that can assist with managing collectables. When used appropriately, such a team can help with managing collectable, while becoming another avenue for generating referrals.

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