The Need for Speed — and an Estate Plan?

By Matthew L. Hall Wealth Manager, First Republic Investment Management
May 24, 2018

It could be said that the peak of recent price movements in classic cars occurred at Bonham’s August 2014 auction in Pebble Beach, California. The auction was held during the prestigious Concours d’ Elegance, which is considered a mecca for car enthusiasts.

The star of the auction was the 1962 Ferrari 250 GTO — one of only 36 ever built. Everyone watched to see what it would bring and cheers went up as the Ferrari 250 GTO was knocked down at a stunning $34.65 million — it was exciting to see.

The Ferrari 250 GTO is a legendary car that could be considered “rolling art.” The list of owners of the 36 GTOs is a who’s who of car collectors around the world. Considering that a Leonardo da Vinci painting sold for $450 million in 2017, many of these collectors would argue that the Ferrari 250 GTO was a relative bargain.

Trends in the market

Collectible car prices, even for the greats, have softened somewhat in recent years, yet there are some “deals” to be had. Of course, there’s no telling what will be the next hot car but once it’s crowned, asking prices climb fast. Factors that could make a car collectible include great lines, high performance engines and a limited production run — if there weren’t many made in the first place and they become desirable, then the price could go up.

Take a look at the likely buyers today to find clues on identifying the next hot car. They are usually successful types in their 40s, 50s and 60s who remember the automotive icons from their high school or college years. Which car posters did they hang in their bedrooms or college dorms? Some cars from the 1980s are now making their move, such as the Lamborghini Countach (now a $1 million car), Ferrari Testarossa or Porsche 930 Turbo.

Looking back, the Aston Martin DB5, made from 1963 to 1965, renowned as James Bond’s ride in Goldfinger and other films, and surely one of the most well-known cars in the world, saw total production numbers of only 1,059 units. There are a lot more James Bond fans around with money to spare than there are cars to go around, hence the current price of $1 million.

As summer begins, pleasant weather brings with it a tide of car shows and auctions. Collecting cars is a social activity and the best of these events — like Amelia Island, the Goodwood Festival of Speed and Pebble Beach Car Week — are worth planning for a year in advance.

Key considerations for protecting your collection

From an estate planning perspective, any type of collectibles can present unique challenges. Estate plans are not only vehicles for passing real estate, investments or cash along to beneficiaries, but are also very important for the transfer of artwork, extensive wine collections and classic cars.

Typically the primary goal of ensuring the automobile is properly distributed, with the tax liability potentially mitigated, is with appropriate estate planning documentation. A provision in a will, for example, may not be the best method for addressing the collection. Assets transferred by a will must go through probate, are on public record and are subject to probate court fees. It’s also important to plan for outcomes: What if the inheriting spouse does not have the same passion as the original collector? Perhaps then the main objective is to preserve the collection in a museum for the community to enjoy.

If you are planning to sell, keep a comprehensive log book of all your expenses associated with upkeep, restoration and maintenance, as this will be part of the total cost of ownership at the time of sale. One thing to keep in mind from an investment standpoint is that if a classic car is sold as a collectible asset, the transaction could garner a 28% long-term capital gains tax instead of the ordinary capital gains tax of 20% for more conventional asset types. Charitable gift planning could also minimize the elevated capital gains tax when the car is sold.

Turning a lifetime of collecting into a legacy

With upfront planning, your car collection has the potential to survive as a legacy for your family or community. Your team at First Republic is here to help with all your estate planning needs and to align them with your collection and legacy.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.