When it comes to estate planning many advisors forget to talk about a client's cars.
But given how expensive cars can be (The most expensive used car ever sold was a 1957 Ferrari 250 Testarossa, which fetched a record-breaking $12 million at auction last May) and how passionate some are about their car collections, starting a conversation makes business sense.
Famous celebrities, including Jay Leno, Jerry Seinfeld and Oprah Winfrey, collect cars, but even if your clients don’t occupy those heights, they may have a few “muscle cars” stashed away in a local garage, and it could be good business for you to discuss those cars with them.
Advisors may not realize that their clients have such tangible collections. “This is an area people forget about when it comes to estate planning,” says Kevin Transue, a certified financial planner with Heacock Financial, in Lakeland, Fla., a subsidiary of an insurance company that provides auto insurance to car collectors. “Often these collections are mysterious. The collectors don’t even tell their spouses what they paid for the car. Nobody out there is talking about it or planning for it, so what typically happens is the cars sell at auctions, where they get bottom dollar and pay sellers’ fees.”
There are three general categories of collectable cars: antique cars, which date back more than 25 years, classic cars, which can be as little as 15 years old, and vintage cars, which are many more decades older. Recently 1950 and 1960 muscle cars—corvettes and mustangs--have been in vogue.
“A lot of people have a passion around cars and other mechanical things that are well made,” says Kemp Stickney, chief fiduciary officer of Wilmington Trust as well as a car buff himself. “With interest rates so low, why not put your money into something you can enjoy rather than have it sit in the bank and do nothing.”
Mike Mendelsohn, head of the Briddge group, in Ryebrook, N.Y., a consultant to high-net-worth collectors and their advisors says a muscle-car collector recently told him that the “major fear of collectors is having our wives sell the cars at the prices we told them we bought it at.”
Usually the advisory community is not aware of of car collections because they’re not managing this asset, which may have no income stream and can have substantial carrying costs in the form of storage, maintenance and repairs, says Mendelsohn.
Advisors will expand their influence with clients by starting a discussion about what’s in their home. About 30% to 35% of clients who are worth more than $10 million collect something whether it’s sports memorabilia or Chinese fire costumes. It’s encumbent on advisors to begin some kind of dialogue. Mendelsohn talks to collectors about the options available to them, which may be a systematic way of selling them on tax-deferred basis or gifting part to the children as fractional gifts from an LLC, building a philanthropic legacy by putting the cars in a family foundation or borrowing against them and creating an irrevocable life insurance trust (ILIT) to pay for the collection if heirs want to keep it.
When a classic car, or any tangible personal property for that matter, has appreciated and needs to be sold during the owner’s lifetime—say a car bought for $50,000 that’s now worth $500,000—one good option is a Charitable Remainder Trust. Capital gains taxes on collectibles are relatively high, at 28%. When a client puts the assets into a CRT, he will keep all those gains.
“Collectors get a stream of income on $500,000 without the tax bite,” says Mendelsohn. “Part of the advisor’s job is to talk with the next generation and find out if they have an interest in the cars and whether they know what they want to do with them. It’s much better to have that conversation in life than to have the children sue each other later.”
Mendelsohn tells the story of collector who had 54 corvettes dating from 1953 to 2003. The owner wanted to give back, so the plan was to create a tax exempt organization and use the cars to raise funds for the Ronald Mcdonald fund.”
In addition, the owner wanted to create a legacy video to train his children and grandchildren how to run the foundation. “This created a tremendous opportunity to fulfill the charitable needs of the family," Mendelsohn added. Unfortunately the owner died before any of this was set up and now the children are suing the wife over who owns the cars.
Advisors don’t have to be experts in collectible cars to have a discussion with clients. By expanding their intake questionnaires this will allow a conversation about objects of value to the client. “By getting into that discussion, advisors are in a position to manage more money in that the client feels like this advisor cares about them as total person,” Mendelsohn said.