Making Cents: Protecting Your Valuables
By: John P. Napolitano, CFP®, CPA, PFS, MST
When it comes to insurance, most people look for ways to keep their premiums as low as possible. But the smart money looks to pay as little as possible for the best coverage they can find. The best coverage is hardly the cheapest, but it often provides more protection. It could be more protection as in higher limits for losses or lower deductibles, replacement cost coverage versus depreciated value coverage or no excess liability coverage versus $5 million of coverage.
Beyond the basics of most homeowners and auto policies is where you would look to cover valuables such as jewelry, art or other collectables like wine, signed memorabilia, stamps or baseball cards. Any collectable is subject to accidental damage or ruination from the elements. Your typical homeowner’s policy often has very low limits for these collectables and are not likely to compensate you for any significant appreciation that has occurred since you’ve acquired that valuable item.
If you own collectables as a part of a trade or business activity, or even if it’s your “side job,” it will raise an entirely different set of issues relative to insurance protection. In this case, it may be wise to consider a separate business policy covering your business activity and inventory. Talk to a qualified agent about this activity even if you hold certain pieces for years prior to sale.
Another issue taking a bite out of your collection of valuables is taxation. As you know, sales of collectables that create a gain would require claiming that gain and paying taxes on the amount of the gain. Remember to factor in the potential taxes from the sale if you are planning to use those funds for retirement or other needs.
Beyond income taxes are death taxes. For larger collectors, the death tax could cause a real problem if the intent is for the collectables to be passed on to beneficiaries. These valuable, but illiquid assets would be taxed on their fair market value on the date of death. As of now, the estate tax threshold is over $11 million federal and only $1 Million in my home state of MA. That could put many collectors in a situation where death taxes would be due and attributable to the collectables.
You can’t really protect against the income tax issue for gains, but for the estate taxes, you have options for mitigation, offset or avoidance.
For mitigation, you can begin to gift some of your collection to eager and interested beneficiaries during your lifetime. For offsetting the tax, you could buy a life insurance policy on your life in an irrevocable trust. This would create a tax free pool of funds to pay the death taxes due upon your passing. This is often used for larger estates, but is frequently ignored by collectors. To avoid paying any income or estate taxes on your valuables, gift them to a charity now or upon your passing.
Collectables are fun, valuable and can be profitable for those in the know. Make sure that you have the protection that you need.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. US Wealth Management, US Wealth Advisors and LPL Financial do not offer tax or legal advice. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.