The stock market's sustained running of the bulls may be giving the rich the confidence to use some of their money for fun. Fine art, wines, rare coins and high-performance cars are attracting wealthy collectors who are seeking to enjoy their possessions rather than realize an investment return, according to a new survey by U.S. Trust.
Six in 10 of the respondents in the Insights on Wealth and Worth survey say they dedicate a portion of their wealth to collectibles. But, perhaps as an indication of their desire to enjoy them rather than preserve them, only 19 percent of them have plans to pass on the collection to heirs and about half have adequate insurance.
As an investment, collectibles add diversity to a financial portfolio, but they should be only considered for the long term. Most are illiquid and prices are subject to what a willing buyer will pay. It can be difficult to determine what's "hot" in a particular type of collectible at any given time and owners can suffer a big loss if they are forced to sell at the wrong time.
Insurance, maintenance, storage costs and taxes are also considerations. Collectibles held long term are generally taxed at a 28 percent capital gains rate. The tax could be even higher if items are sold within a year because gains will be taxed as ordinary income in that case.
Estate planning is also essential if you want to leave your collection to heirs; otherwise, you might also be leaving them a huge tax bill and a difficult asset to manage and sell. Potential for appreciation could put an owner over the federal estate tax exemption of $5.25 million per individual, so advance planning is a good idea.
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