Acquiring artworks, antiques, and other collectibles is a common pastime of private clients, for reasons that can vary greatly from profit-making to maintaining cultural ties, or simply as a general reflection of their interests. It is also a pastime that has become incredibly popular over the past few years with the industry now valued at over US$70 billion.

Having weathered the global financial crisis and more recently the Covid-19 pandemic, many private clients are increasingly looking to invest in “real assets” that are known to maintain or increase in value in the long term. Art very much fits that profile, and with trusts being a favoured vehicle in which to hold such assets, trustees are often asked to acquire and manage artworks as part of their trusteeship. However, in an unregulated and saturated market and with art forgeries on the rise, it is more important than ever to ensure trustees do their research when looking to purchase art.

The value of art

Beyond headline auction sales and aesthetics, determining the value of art presents important challenges. Unlike publicly traded securities, art has no public, regulated, transparent or real-time marketplace. There are a variety of factors that have an impact on the value of art, as well as uncertainty and associated risk. Determining a work’s value may be difficult, especially if the piece is rare, unique or does not have an established retail market. Valuation may be especially difficult if a work is commissioned, part of a larger collection or by a lesser-known artist.

Generally, supply and demand determine price in markets. However, other forces unique to the art market will have a material influence on a particular work or collection’s value and the price obtainable in the market. Authenticity, condition, rarity, title, condition, provenance and cultural considerations are all factors that play a role in determining the value of a particular piece and are likely to influence its investment value or future saleability. Digital art, such as Non-Fungible Tokens (NFTs), has also emerged over the past few years and has been particularly attractive to buyers. This type of art brings further challenges when determining the value of an art piece.

In the current climate, demand for high-end art may be waning. Where an art piece may have usually taken between six to nine months to sell, it is now taking between 12 to 48 months. Even then, pieces are not selling for their expected values, and most of the time are selling for lower than their estimates. The sale of the late Microsoft co-founder Paul Allen’s collection in early 2022 sold for a total of US$1.5 billion whereas the sale of the private collection of the late Gerald Fineberg in mid-2023, which was estimated to bring in close to US$250 million, only managed to achieve sales of US$150 million, with most lots achieving hammer prices below or near their low estimates and several works going unsold. Trustees need to take this into consideration when determining whether the purchase of a particular piece of art is the right financial deal or when looking at future succession planning.

Factors trustees need to consider when purchasing art

Authenticity

A major risk of investing in art is that a work could turn out to be fake, forged, stolen or questionably obtained. For a trustee, it is critical to establish an artwork’s authenticity. A reputable, unbiased independent expert serves as a verification for trustees who want to feel confident that they are bidding on an authentic auction or private sale item. Because of the risk a major acquisition could turn out to be worthless, trustees should conduct their own due diligence whenever possible. When Sotheby’s sells a piece of art, it offers a five-year guarantee of refund if the object proves to be a counterfeit. Trustees should also be wary of accepting a piece as authentic simply because of supporting documentation as documents can be forged too. It is crucial for trustees to work with the right people and have the right advisors to determine the authenticity of any art.

Condition

Trustees need to maintain a work’s condition so that it holds its value. Trustees should consider where artwork is located and stored to ensure proper preservation. If a piece of art is on display in a beneficiary’s house or even in a museum, trustees should ensure it is not displayed in direct sunlight or other environmental conditions that may cause deterioration of or damage to the art and therefore impact its value.

Rarity

Where a piece of art has a limited volume, it usually translates into a higher value for either purchase or sale. However, the art market can be fickle and a rare piece of art may not reflect the current market taste. In this instance, it could mean that the particular piece of art is less desirable. Trustees need to consider this when looking to purchase art.

Transfer of Title

Issues often arise as to ownership of artworks, and in transferring a piece of artwork, whether by sale or gift, you must be able to defend its title. A trustee should obtain evidence to confirm that the transferor has legal title to the artworks before arrangements are made for them to be transferred into the trust. Artwork that is stolen creates difficult legal issues for the unsuspecting trustee and any art that crosses international borders may have more than one legal system at play bringing further difficulties.

Provenance

Provenance relates to the recorded journey of an artwork from its origin through one or more owners to the present day. Curators use this information to provide more context for a work as an object’s story might include a famous collector or a period when it was part of a larger collection. Provenance is a clear determinant in a work’s value and provides a verifiable, public certification of authenticity. Trustees should ensure they have a record of the artwork’s ownership history, auction records, conservation records, certificates and any bills of sale.

Cultural considerations

Dealing with art that has cultural significance can bring its own challenges. Over the past few years, restitution claims and processes have become more common where cultural art, that has remained hidden from the public and is now listed for sale, is being returned to its rightful owner. Where this happens, trustees may be left having paid for a piece of art which they no longer own.

If a trust currently holds a piece of cultural property, knowing the provenance of that piece of art is especially important to ensure no issues arise in the event the trustees wish to sell the art in the future. Museums are reluctant to purchase cultural art given the risk of restitution claims that may be made against that particular artwork. It is important that planning is put in place to deal with this now, as on the sale of the cultural art, certain tax liabilities can arise in different jurisdictions.

Type of trust structure

From a Cayman Islands perspective, effective trust structures used solely for holding and actively administering and managing artworks in accordance with the settlor’s objects include STAR trusts and reserved powers trusts. The trust deeds for both forms of trust structures can be tailored to offer the settlor greater involvement in the succession planning process, and to carefully prescribe arrangements for the management of the particular categories of artworks settled on the trust. Practically speaking, housing artworks in a trust can also allow for a clear and easier administration and management process: provision can be included to allow for the trustee to delegate tasks to specialist advisors or curators who can make the necessary arrangements for matters such as transportation, insurance, storage, and display or exhibition of the artworks.

Considerations for a trustee

Once a piece of art is included as part of a trust’s corpus, there are a number of important considerations for trustees who are tasked with administering a trust to take into account:

• Consideration should be given to whether there are any legal or taxation considerations for the transferor of the artworks at the time of transferring the artworks into the trust, such as gift taxes. As there are no taxes of this nature in the Cayman Islands, no such issues will arise locally but it would be prudent for the transferor to take domestic advice.
• The trustee should ensure that suitable insurance has been obtained from a specialist insurer (and security for the physical protection of the artworks, if necessary) with effect from the date of transfer.
• The trustee should also take care to ensure that sufficient funds are maintained in the trust structure to meet the ongoing costs relating to the artworks, as well as professional fees charged by specialists, insurers, and other parties involved in protecting and managing the artworks.
• From time to time, the trustee may be asked to make a decision about where the artworks will be kept (for example, at the residence of a beneficiary or loaned out to a museum). If the artworks are to be moved from its current location after execution of the transfer documentation or at any later stage, the trustee will also need to attend to careful shipment by fine art shippers, as necessary. The trustee should at all times keep clear and careful records of the location of the artworks, have arrangements in place to inspect them from time to time, and to ensure that any third party holding the artworks understands that the trustee remains the legal owner in its capacity as trustee of the trust.
• The trustee should also take clear instructions from the settlor as to his or her wishes regarding whether the artworks can or should be sold in the future (if so, at what time and in what price range) or preserved for the enjoyment of the family.

While managing artworks as trust assets can seem a daunting task for a trustee more used to ‘run of the mill’ assets such as cash and shares, with careful attention and the assistance of specialist advisors, the risks can be greatly minimised and the settlor’s legacy preserved. It is prudent for trustees to ensure there is careful planning around pieces of art and trustees should have conversations with beneficiaries early on and often. With the art market constantly changing, flexible planning will ensure that, when the time comes, trustees have a clear vision as to how to deal with the art held in the trust.

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