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Mountain Forms, a 1926 work by Group of Seven painter Lawren Harris, is one such iconic piece of art that collectors may have to carefully consider when planning the succession of their estate.HO-Heffel Fine Art Auction House/The Canadian Press

Art collectors face a dilemma as they update their estate plans: What to do with a collection that is potentially worth hundreds of thousands or even millions of dollars?

Whether they've bought the pieces as an investment or to fuel a passion, collectors heading into their retirement years are trying to figure out whether to sell the works they've accumulated for a potential profit, pass them down to the next generation or donate them to charity.

It's a financial decision as well as an emotional one, says Gary Brent, chairman and co-founder of Toronto-based HighView Financial Group, which works with high-net-worth (HNW) investors, some with art as part of their asset mix.

"Some of these art collections are worth an absolute fortune, but what do you do with them? In many cases, the kids don't want them," Mr. Brent says. "That then becomes the dilemma: How long do you enjoy it and do you want to leave the burden of getting rid of it to the estate?"

Art is a growing part of HNW portfolios

According to Deloitte's global Art & Finance Report 2016, 72 per cent of art collectors said they bought art for passion "with an investment view." The report also says 51 per cent of collectors consider the diversification benefits of buying art, up from 37 per cent in 2014.

"They buy for passion as the main reason. The money aspect is the second thought. It's not just pure investment; it can also be a store of value," says Adriano Picinati di Torcello, director and art and finance co-ordinator at Deloitte Luxembourg.

Regardless of why art is acquired, Mr. Brent says it has to be managed like any other asset in an estate, with considerations of how and when to sell or pass it on.

"These are the conversations we're having," Mr. Brent says. "They're far more emotional because there's often a personal attachment to [the art]."

Donating art

Many HNW individuals have built "fabulous collections" during their lifetimes with a goal of eventually donating it to a gallery, says John Budd, co-author of The Canadian Guide to Will and Estate Planning and a portfolio manager with Cumberland Private Wealth Management in Toronto.

There are legal and tax considerations to donating. Mr. Budd cites the well-known example of Robert and Signe McMichael, who in 1965 donated their Kleinburg estate and 179 Group of Seven artworks to the Ontario government, which then turned it into a museum. Legal disputes followed after the collection grew to include other artists, which the couple argued was against the original terms and conditions of the gift.

"Lessons were learned from that situation about what to do and not do if one is thinking about making a gift to a gallery or government-run institution with various strings attached and conditions," Mr. Budd says.

From a tax viewpoint, a donation of art that qualifies as " cultural property" receives "a very favourable Canadian tax treatment," Mr. Budd says. "Although the tax saving resulting from the donation receipt for cultural property is usually not as much as the after-tax proceeds from actually selling the art (for example through Sotheby's or other auction houses), it's still pretty significant."

Still, a tax credit isn't what motivates most HNW individuals to build a collection.

"It's wanting to leave a legacy and to be recognized for their generosity," Mr. Budd says.

Art as an investment

Selling art can be more complicated, Mr. Budd says. The works need to be valued by experts, can have high transaction costs and are less liquid than most other assets.

"From an investment diversification perspective, valuable art can obviously be regarded as a separate asset class," Mr. Budd says. "However, arriving at the current valuation for purposes of periodic net worth statements is problematic. Most people will not want to go the trouble or expense of having regular valuations done – unless they are thinking of a sale or donation."

Stories about skyrocketing prices for painting, such as Lawren Harris's Mountain Forms that sold for a Canadian artist record of $11.2-million last fall, remain rare in the art world, especially in Canada.

"Most art is not a good investment," says Laing Brown, of Vancouver-based BrownArtConsulting Inc. "There is so much art out there."

Mr. Brown says many of his clients buy art because they love the work, but do want to see it increase in value over time.

"The good thing about art is when it's hanging on your wall, and you're enjoying it … and it goes up, it's kind of a lovely bonus. Art is good for the soul," he says.

Not for neophytes

To better protect their wealth, art buyers should diversify their collection just as they do in their stock portfolio, says Sharon London Liss, president of the Art Dealers Association of Canada and a private dealer and appraiser.

Buying art also requires a lot of knowledge and homework – again, like buying stocks – especially when eyeing works that have the potential to hold or increase in value.

For example, Ms. London Liss says some people don't know that a Group of Seven period A.Y. Jackson is more valuable than an A.Y. Jackson painted in the 1960s.

"Those who have been collecting, or watching the market would definitely know … For a neophyte, it just has the right signature," she says. "Some people buy something because they have a gut reaction to it. I'm not sure that's a healthy way to build a collection."

According to a RBC survey, a large portion of Canadians don't have a full wealth transfer strategy in place.

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