Estate Planning for
the Pen Collector

By David S. Lande
All rights reserved by author

To the pen collector, a collection of rare pens - or at the least, certain items in the collection - are more than just possessions. The pieces are loved and cherished, often like family heirlooms. The facts and circumstances under which they were acquired, perhaps after long periods of searching and waiting, provide warm memories, and the items themselves are a source of considerable pleasure.

A collection of rare pens might also represent a significant part of a collector's total assets. It just makes sense, then, that a collector's planning for the disposition of his assets upon his death should consider the special character of his rare pen collection holdings.

As we advance in age, most of us make some plans for, or at least think about, the disposition of our property after our demise. In the legal arena, much has been written to encourage the public to plan ahead to assure a safe, smooth transition of property and a minimization of burden (especially tax burden) for those who are involved in settling our affairs and inheriting our assets.

"Estate planning" is a broad term encompassing all considerations in the disposition of property after one's death. It includes such fundamental decisions as whether to have a will; whether to establish trusts (either in conjunction with a will or possibly instead of one); and, if one's assets reach a certain value, what steps should be taken to minimize taxes in the transfer of property.

Where There's No Will, There's a Way

As most people know, when there is no will or trust to direct the transfer of property (a situation known as "intestacy"), the law treats all property only in terms of its current market value. In other words, all property is valued and distributed based on that valuation to various legal heirs, depending upon which relatives survive.

The relatives considered to be legal heirs can vary from state to state, although spouses, children and parents generally take priority, followed by sisters and brothers, nieces and nephews, etc. Regardless, the principle remains that in an intestacy it usually is necessary to liquidate all property so that precise distribution, by dollar value, can be made to the legal heirs.

For the collector, this means that some or all collectibles may be liquidated, even though other substantial liquid assets may be available for distribution (such as bank accounts, certificates of deposit, bonds, stocks, etc.). Instead of passing to someone selected by the deceased, cherished items must be sold, perhaps hastily, perhaps in a bear market, and most likely by one or more people unfamiliar with the items and the nuances of the collectible pen marketplace.
Consider a very simple illustration. Suppose a collector in New York State is survived by three (3) grown children, but had no living parents or spouse. The collector was content to have all property pass equally to his children and, since that is what the law of intestacy would indicate in this case, decided it was of minimal value to have a will.

Of course, lacking specific knowledge of when we will die, we really cannot be sure which relatives will survive us. Even if we had such knowledge, most states require a costly bond to be posted for the administration of our affairs in the absence of a will that appoints an "executor" (or "executrix") and expressly waives the necessity of a surety bond.

Assume, however, our fictitious collector dies "intestate" (without a will), leaving approximately $85,000 in liquid or semi-liquid assets plus $15,000 in beloved vintage pens. After disbursing, for example, $5,000 for final debts and funeral expenses and $5,000 for administrative expenses, if there is anything less than total agreement among the children at the time of distribution, the "administrator" (or "administratrix"), the person legally appointed by the Court to settle the affairs of the deceased, must liquidate the vintage pens to accomplish the legally required distribution of $30,000 to each heir ([$100,000-$10,000] / by 3 heirs = $30,000 per heir).

Before liquidation, it may be necessary to first obtain an appraisal of the pens (perhaps at an expense disproportionate to the $15,000 total value) just to satisfy the state taxation department and settle the amount of state estate taxes (which in New York State would be zero). By the time the property is sold, its net proceeds may be substantially reduced. Even if the children agree at the time of distribution who should receive the vintage pens instead of an equivalent amount of cash, the administrator may wish to have that agreement legally recorded in a binding contract, and that could generate additional legal costs.

With a minimum of estate planning, this scenario might be avoided.

A collection can be bequeathed intact to one child or divided by specific items among two or more children, directing, if desired, that the cost of any appraisal necessary for tax purposes be charged to the receiving beneficiary. The law has no concern about the particular value received by each child because the collector is permitted to favor, to any extent, one child over another.

The Living Trust

Much has been written recently about the advantages of the so-called inter vivos or "living" trust as an alternative or adjunct to a will. Under the living trust, all or part of the collector's property is placed in the custody of a trustee, perhaps with the use and benefit of it granted to the collector for his lifetime and the direction that it be distributed upon his death to a named beneficiary or beneficiaries.

A prime purpose of this legal vehicle is to avoid the probate process at death for whatever property is placed in such a trust. This instrument also can provide more privacy and confidentiality -often of particular concern to the collector - in the transfer of certain property.

However, a living trust has its disadvantages. It is not inconceivable that in some circumstances the expense of maintaining the trust may exceed the savings, since the cost of creating such a trust must be considered, and any income-producing property included in the trust would necessitate the filing of income-tax returns for the trust, in addition to the collector's individual income-tax returns. It might be necessary to retain an "independent" trustee, who is neither a family member nor a close friend, to whom an annual commission is paid. Such commissions usually are set by law and are based on a sliding scale, which is applied to the total value of the property held in the trust. In total cost, these different items could exceed the cost of probate for a will.

When the purpose of the living trust is the complete avoidance of probate, all the collector's assets must then be included, and it may be impractical for the collector to relinquish complete control of all his assets during his lifetime. Moreover there is always the risk that some assets may be overlooked, so that upon the collector's death, an "intestacy" proceeding or a "back up" will is necessary, and then the purpose of the trust is defeated. In some circumstances, a living trust may be "legally fragile," that is, not recognized by law.

Death and Taxes

Estate Planning also can help minimize death taxes, that is, those taxes based totally on the transfer of property from one owner to another at death. The federal government taxes such transfers, but, since the Tax Reform Act of 1986, allows a substantial "unified" credit for federal taxes on an initial amount of property that passes at death. In 1999 that amount is $650,000, increasing, incrementally, to $1 million in 2006.

Additionally, the Act now allows an unlimited "marital deduction" for all property passing to a spouse. In the case of a mature collector with a mature spouse, property can be left in trust for the spouse during his or her lifetime, and may be directed to pass to one or more children or other named beneficiaries upon the death of the surviving spouse. This provides more flexibility in planning a "marital trust" which technically is known as a "Qualified Terminable-Interest Property Trust" (or "Q-TIP Trust").

Prior to the enactment of the Economic Recovery Tax Act (ERTA) in 1981, an estate planner could not designate in a marital trust who was to receive the property after the death of the surviving spouse. This designation was left to the surviving spouse, who received the benefits for life, a restriction that precluded many people from taking advantage of the marital deduction in the form of a trust. For example, in a case involving a second marriage, a collector might be concerned that his spouse would favor children from a prior marriage.

Valuable collectible pens can certainly be left in a marital trust so that the unlimited marital deduction for federal estate tax purposes is retained. This can be especially significant to the collector with substantial assets that might otherwise be subject to federal taxation at death. In such a situation, a common estate- planning scheme involves the use of both the marital Q-TIP Trust and another, separate trust - known as a "Credit-Shelter-Bypass Trust" - designed to take advantage of the unified credit explained above.

Consider the following example. A collector and spouse have combined assets in 1999 of $1,300,000 in property other than collectibles, and, under current market conditions, approximately $150,000 in rare and valuable vintage pens collected over the years. They have two children and contemplate that their income-producing, non-collectible property should provide sufficient means for the surviving spouse. Upon the death of the second spouse, they would like all property to be distributed to their children.

The individual ownership of the property may be re-distributed during the lives of both spouses (assuming a stable marital relationship, of course), and each may execute a will containing a Credit-Shelter-Bypass trust, consisting of, for example, $75,000 in collectible vintage pens from the total collection, plus a sufficient amount of other income-producing assets, so that the trust is funded with $650,000, the 1999 amount of the unified credit. In addition, a marital Q-TIP Trust, consisting of the remaining income-producing assets, is created in the will. Both trusts provide the income from the property to the other spouse for his or her lifetime, and the principal of each trust to the children after the death of the second spouse.

On the death of the first spouse, the property in the Credit-Shelter-Bypass Trust passes under the unified credit, and the collectible and non-collectible property remaining in the Marital Q-TIP Trust is shielded from federal taxation under the unlimited marital deduction, so that no taxes are necessarily payable.

When the second spouse dies, assuming that the value of the property is substantially the same as at the time of the first death, all of the property will pass to the children or other named beneficiaries. Since each spouse is entitled to at least a $650,000 unified credit, at least $1,300,000 in the property escapes taxation, leaving only the balance, $150,000 (or less, depending on what year the second death occurs) subject to tax.

Recent changes in the law also allow the executor to determine whether to pay part of the tax on the total property holdings upon the death of the first spouse or to defer payment until the death of the second spouse. This flexibility can enable the application of lower tax rates.

This scheme is of particular interest to the collector because, under the laws of federal estate taxation, some limits are placed on the right of the surviving spouse to "invade" or withdraw from, the principal of the Credit-Shelter-Bypass Trust (which, in this illustration, contains the collectible vintage pens). If these limits are exceeded, the tax advantage of the unified credit may be lost in the future. On the other hand, liberal privileges of invasion may be granted for the marital trust containing the "cash" assets. Thus, the collection of valuable vintage pens is preserved intact for the next generation.

It should be noted that if the ultimate beneficiaries of these trusts are grandchildren, and the combined assets are particularly large, additional planning is required to consider the effects of a special, separate federal tax, recently amended - and expanded and complicated - by the federal government, known as the "Generation Skipping Tax".

Depending on the collector's financial and personal circumstances - as well as the particular nature of his pen collection holdings and his wishes for their disbursement - the collection can be bequeathed, in whole or in part, to the marital trust, instead of a Credit-Shelter-Bypass Trust. This is helpful if the collector wants the surviving spouse to have total access to the property during his or her lifetime in order to liquidate some or all of it.

As long as the property values in these companion trusts are carefully planned and the legal limitations properly drawn before death and observed afterward, the tax advantages are retained.

Market Ups and Downs

Market fluctuations also are an important consideration in estate planning. Are the items in a collection likely to increase greatly in value prior to the death of the first spouse?

If so, perhaps the collector should be more conservative in including them in a Credit-Shelter-Bypass Trust, so that the total principal of that trust does not exceed the amount of the unified credit, and the remaining collectible-pen assets are shielded upon the death of the first spouse under the unlimited marital deduction applied to the assets of the Marital Q-TIP Trust. On the other hand, if the collector's holdings were acquired with greater concern for their collectible status, that is, their historic and/or aesthetic appeal rather than investment value, different considerations might apply.

Most states, as well as the federal government, impose a tax on the decedent's estate, but in most cases the state taxation rates are a fraction of those on the federal level. Therefore, collectors with assets subject to federal taxation should bear in mind the federal rates when planning for the disposition of their estates.

New York State, for example, follows the federal scheme to a great extent, providing an unlimited marital deduction and a unified credit of $300,000 of property, increasing, in the year 2000, to an amount equal to the federal credit. A New York collector, not subject to federal estate tax, with combined collectible and non-collectible assets of $500,000, might consider funding a trust with $300,000 in property, and a second, marital trust comprised of the remaining property, with the principal of both passing to his or her children, under a scheme akin to that discussed in connection with federal estate taxation.

For the average collector, these observations about estate planning no doubt raise more questions than they answer. Such planning, whether it involves tax planning or simply a scheme for the distribution of specific assets, is considered very complicated, even by lawyers. In any event, estate planning should be entrusted only to a skilled attorney practicing in this field. **

However, the disposition of a cherished and valuable pen collection often is a sensitive issue for the collector, one that frequently escapes the empathy of the attorney or other professional involved in the planning process. Both the law and the collector's wishes concerning his or her property can be made to work together. There is no reason why any dedicated collector who has invested time and money in the acquisition of such property should not have the advantages of this tandem consideration in planning the ultimate disposition of his or her collection.

*** Member of the New York Bar, and active collector of vintage pens, and member of PCA.

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