Can you Trust your Art Trust?
When artists (or collectors) are planning their estate the issue of whether artwork should be placed in a trust should be considered. Like any strategy, art trusts have costs and benefits and it is ultimately up to the client to determine if they are worth it. I like to focus on what client’s goal is. Do you just not want the artwork to be thrown away? Donating it to a hospice or non-profit which will put artwork on display may be a more economical solution to having a trust pay to have it stored and never be seen.
If an artist (or collector) has determined that the benefits of an art trust outweigh the costs, there are several things that need to be considered in order to ensure a trust will actually serve its intended purpose.
Waiver of Trustee’s Duty to Diversify Investments
Most states have adopted some form of the Uniform Prudent Investor Act. This act requires trustees (absent a waiver in the trust) shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.
While it possible for a trustee of an art trust to argue holding the work better serves the purpose of the trust, not having a waiver of the requirement to diversify investments certainly puts them on a back foot. Presumably, the artist (or collector) chose the trustee because they trust them and want them to succeed. Waiving the requirement that investments are diversified and specify exactly what they want the trustee to do with their work (hold, sell, license, loan) will help them succeed.
Waiver of Trustee’s Duty to Monitor Investment Performance of Personal Property or Illiquid Assets
The Uniform Prudent Investor Act requires trustees to manage trust assets as a prudent investor would and requires them to consider, general economic conditions, and take reasonable steps to verify facts relevant to the investment and management of trust assets. Trustees can arguably violate these provisions if artwork is held in trust and they cannot substantiate how they monitored investment performance of the artwork. Artwork is not like a stock traded on an open exchange. It is close to impossible to substantiate it’s economic performance or a short length of time. Thus, it is important to excuse a trustee from any obligation of trying monitored investment performance of something that they will not be able to do.Allow the Trust to hold artwork and real property in an LLC
Most states have some form of the rule against perpetuities which limits the amount of time a trust can administer real or personal property. In some states the rule is the trust property must vest or the trust will terminate 90 years after its creation or within 21 years of the death of the youngest beneficiary alive when the trust was created. If an artist (or collector) wishes for the trust to control the artwork for the longest period of time, it might be in their interest to setup and LLC to hold the artwork and have the trust own shares in the LLC. Allowing the LLC to hold the property fits an exception to the rule against perpetuities most states have for non-donative transfers which essentially characterizes it as a business transaction.
Some states even have specific drafting requirements for these types of trusts which are referred to as “dynasty trusts”.