By David L. Ganz
Buying, selling, and trading coins and precious metals is more than a hobby in 2019; it’s a trillion-dollar business. With proper investment, it’s also a way to amass wealth and build a nest egg to help make your retirement more comfortable, perhaps by providing gold, quite literally, to see you through your golden years.
Buying coins wisely, though, is only half the battle. It also may be advisable to take steps to safeguard your investment against the hazards that threaten that store of wealth and put that nest egg in jeopardy. Needlessly high tax payments and costly divorce settlements, for example, could seriously erode the net gain you realize from your coins.
Considering Taxes When Collecting
Unless you act preemptively to shield your numismatic holdings through prudent legal and tax planning, you – or your heirs – could see much of their value end up in the hands of the taxman, or perhaps a significant other who’s leaving your relationship with something far more substantial than “parting gifts.”
Whether you contemplate selling, trading, or otherwise disposing of your coins yourself or passing them to your heirs upon your death, there are important legal and tax decisions to be considered – decisions that will have major implications when the day of reckoning arrives.
As a practicing attorney for more than 35 years with extensive experience in the field of collectibles, I have helped many clients devise protective strategies – plans of action that are perfectly legal and entirely credible – to reduce the risks that may cloud the disposition of their holdings. I’ve also pointed out ways they can minimize the tax obligations associated with the acquisition, maintenance, and disposition of a collection. And I’ve shown how to help assure financial privacy.
I’ll share some of the insights I’ve gleaned from these decades of experience. Keep in mind, however, that there’s no single answer that’s right for everyone – no one-strategy-fits-all approach that works every time. You have to evaluate your needs and your goals, obtain appropriate legal and tax advice, and come up with a plan that best fits your particular situation. This includes changes in your location, net worth, and type of assets held.
Looking At An LLC
One of the ways to protect your coin collection from excessive taxation is to form an “S” corporation or a limited liability company and designate that entity as the owner of the coins. You also may form a family limited partnership or limited liability corporation and place these assets into that entity with different voting classes, giving your spouse or partner non-voting shares and retaining voting control yourself, with rights otherwise equal. Children of the parties also might be given non-voting shares. There might be valuation issues, but these should not affect the entity’s structure. I’m referring here to the valuation of ownership interest in the entity, not the value of the numismatic items themselves.
For any of these strategies, be certain to seek the advice of qualified tax and legal counsel. The tax laws are quite complex, and a deal must be structured in a way that passes muster.
All of these entities have both positives and negatives that every collector ought to weigh carefully when considering whether to select this method of asset protection. In addition, you must take into consideration local tax laws that may have a significant impact on the total sum involved.
On the plus side, corporations traditionally are perpetual, and other entities also may be perpetual, though you can limit the life of an entity by stating so in its charter. Since the entity never dies, it never pays estate tax, though it does have to pay income tax, just as you do.
However, bear in mind that the value of the shares or ownership interest is taxed as part of an estate, and whenever any asset receives a discounted value for estate tax purposes, there is likely to be an estate tax audit.
Safety Deposit Box Option
Another advantage is that safe deposit boxes can be held in the name of a corporation or other legal entity. When you die, your personal box may be sealed under your state law, but your entity’s box will remain open to any authorized signatory, including officers of the entity (who may include a spouse or trusted friend). This avoids a lengthy wait to dispose of assets such as double eagles ($20 gold pieces) or encapsulated coins that may require prompt sale in a changing marketplace. If you have a trusted friend or another corporation itself, this can add yet another layer between the decedent and the parties involved.
There also are potential drawbacks, starting with the fact that forming various entities can be tricky – which is why it never should be undertaken without qualified legal and accounting guidance.
With a “C” corporation, you have to keep separate books and records; you have to file a corporate tax return; and taxes are imposed at both the corporate level and then again at the individual level when the money is passed to a shareholder as a dividend. “S” corporations are more common among small businesses, and limited liability companies are gaining increasing acceptance. With an “S” corporation, you have to file a tax return every year. Be aware that each state has different laws pertaining to the formation of each of these entities.
You and your collection could be placed in serious financial jeopardy if you and your significant other came to a parting of the ways. By “significant other,” I mean your spouse, partner or anyone else with whom you have a permanent or intimate relationship recognized as such under the law.
Practical Planning Before Nuptials
No one likes to talk about it, but statistics show that more than half of all marriages taking place today are likely to end in divorce. In “community property” states, each partner would get 50 percent of the couple’s combined assets in a divorce settlement, after exclusions specified in a pre-nuptial agreement, if any. In “presumptive equality” states, a 50-50 split would be the starting point, but adjustments would be made for factors such as the longevity of the marriage, tax consequences, earning capacity, retraining, and debt. As of this writing, February 2019, community property is the rule in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington State (DC is not community property), and Wisconsin. Presumptive equality is the practice followed in the other 41 states.
Unless you make provision for such a contingency, half of your numismatic investment might be transferred to your significant other – or worse, the entire collection might be sold to provide liquidity and facilitate the settlement even if that generates significant adverse tax consequences.
Considerable planning goes into the financial aspects of a wedding. Far less attention is given to what will occur if the relationship doesn’t work out – even though the financial implications of divorce or separation are potentially far greater. Business deals routinely spell out what will happen if there’s a breakdown in the parties’ relationship; not planning for such a contingency could be devastating. Clearly, the same kind of prudence is called for in a personal relationship, lest the lack of proper planning lead to adverse legal and financial consequences.
My recommendation is to seek a pre-nuptial agreement in which your significant other stipulates that your coin collection is excluded from the property subject to being divided. Skeptics might question why anyone would willingly waive a claim to such an asset, given its high potential value, but concessions of this nature are far more readily made when viewed through the prism of love than they would be later on, when marital strains have altered the parties’ perspective. You also might balance the scales, and overcome any reluctance, by accepting the exclusion of property that is meaningful to your spouse or partner.
Preparation In Light of Court Challenge
There’s always a chance that exclusions contained in pre-nuptial agreements might be challenged if a split takes place. To maximize your chance of withstanding such as challenge, you should make sure that each of the following questions has been addressed:
• Are both parties represented by separate and independent legal counsel?
• Are the parties conversant in English as a primary language? If not, provision should be made for a translation.
• Are the parties willing to stipulate, and agree upon prior to their marriage, certain mutual rights and obligations with respect to how their estates should be handled at death?
• Have both parties prepared and reviewed a schedule stating each other’s assets, liabilities, and financial condition? In short, has complete disclosure been made? This is essential.
• Do the parties desire to settle and adjust all matters relating to the financial and property rights arising out of their marriage?
• Do the parties desire to provide for an equitable distribution of their marital property, including final settlement of all questions relating to the support and maintenance of the partners arising from their marital or other intimate relationship?
• Will the participants waive and release, at death, any and all claims upon each other’s estate which either would have under the laws of any jurisdiction?
If you’ve already entered into a permanent relationship with a significant other, you can achieve legal protection for your coin collection by getting your spouse or partner to acquiesce to an ante-nuptial agreement.
Nuances of a "Pre-Nup"
This would stipulate that your collection is inviolable and can’t be used
to satisfy joint obligations. As in the case of a “pre-nup,” you could provide an incentive by offering a similar exclusion for property your significant other deems important.
Such an agreement also could encompass other matters. For instance, the parties might agree that each would be fully responsible for paying the expenses related to his or her real property, as set forth in a detailed list of assets. They might agree to share rent, utility bills, food expenses, and other household costs – and even agree that each would be responsible for his or her own health insurance coverage. It might also be wise to consider who might bear the cost of conservation of assets, how and by whom, they are to be performed. Keep in mind, however, that nothing should preclude either party from adding the other to a family health insurance plan which may vary as the Washington, DC, political drama plays out.
Even as you worry about the valuation and disposition of key numismatic assets, you also should be concerned about minimizing your acquisition and maintenance costs. One area you should watch with particular concern is the sales tax on your purchases, which can add more than 8% to your cost and can be imposed by one or more of 40,000 sales tax collection entities in the United States.
As of February 2019, about one-half of the 50 states imposed no sales tax on the purchase of rare coins and other selected numismatic items including bullion on the grounds that they are an investment that is not taxable, at least as defined by the legislatures in those states. Slightly fewer than half the states imposed a sales tax and a compensating use tax on numismatic sales. In these states, the tax typically is a percentage of the gross sales price of the numismatic item and is remitted by the dealer along with a sales tax return to the state imposing the tax. In a typical over-the-counter sale of coins in states where such tax is imposed, the dealer adds the sales tax to the invoice price.
Wholesale (dealer-to-dealer) sales typically are exempt. This is the case where the buyer holds a valid resale permit or certificate from a state recognizing that buyer as a merchant.
Specific exemptions for gold, silver, and platinum bullion and certain numismatic items are provided by some state laws and regulations. Sales by out-of-state retailers are exempt from sales tax if (1) the customer orders goods directly from the dealer and (2) the goods are shipped from outside the state. In addition, it is specified that the seller must have no in-state branch, office, outlet, or other place of business. The buyer still may be liable for a compensating use tax.
States which do not apply sales tax to the sale of money typically exempt coins of the realm, which are defined as coins that remain legal tender of the United States or a foreign government. These include all U.S. Mint issues since 1792 and the coinage of many foreign countries. Other states do not tax investment purchases and assume that purchases of more than a certain amount – say, $500 or $1,000 – are for investment. In some states, however, unless a purchase falls into one of the common exemptions, sales tax will apply.
If you’re a collector who lives in a state that charges sales tax on the purchase of rare coins, be prepared to pay a compensating use tax on rare coins that you purchase out of state. There has been a long-accepted principle that no sales tax or compensating use tax is due on rare coins bought elsewhere and imported into a state that has no tax. However, a recent Supreme Court action challenges this, according to some Supreme Court commentators. Presumably, this will be settled in the coming months of the 2019-2020 Congress.
Addressing Sales and Use Tax
Sales and use tax laws generally provide that an out-of-state person or entity that engages in regular and/or systematic solicitation resulting in sales of tangible personal property within the state is deemed a vendor (and required to collect and remit sales tax) if the solicitation satisfies due-process and nexus requirements – that is, regularly and systematically delivers property in the state.
A person who regularly or systematically solicits business through the distribution of catalogs (presumably including auction catalogs), advertising fliers, letters, or other means of solicitation, without regard to the location from which such solicitation originated, is presumed to regularly and systematically solicit business based on a substantiality test.
The best ways to avoid incurring sales tax on numismatic items are to reside in a state that does not impose such tax and always have out-of-state purchases shipped to you; to become a bona fide dealer and make purchases for inventory; or to have your coins acquired and held in a no-tax jurisdiction.
If you currently live in a state that imposes high sales tax on coin and bullion purchases and your expenditures for such items are substantial enough, you should seriously consider relocating to a state that exempts these purchases from its sales tax or, alternatively, setting up a second home in that state and establishing it as your primary residence.
This step is not as extreme as it may sound, considering the potential savings. It’s not uncommon today for serious collectors and investors to spend upwards of $500,000 or $1 million a year on coins and bullion – and in a state with sales tax of 8%, that translates into a $40,000 or $80,000 payment, respectively, up-front to the taxman, taking a very big bite out of your investment and making it much harder to turn or return a profit.
David L. Ganz is managing partner and principal litigator for law firm Ganz & Sivin, L.L.P. of Fair Lawn, N.J., and Ganz & Hollinger, P.C. in New York City. He is an author, speaker, and expert in the field of collectibles. He is former president of the American Numismatic Association, a founding director of the Industry Council for Tangible Assets, and former general counsel for the Professional Numismatists Guild. He was appointed by President Richard Nixon to the 1974 U.S. Assay Commission and was the Clinton Administration’s first appointee to the Citizens Commemorative Coin Advisory Committee.