Article published in Family Office Magazine Summer 17 Issue
Pierre-Yves Augsburger – Senior Consultant
In this recent contribution, we will not dedicate any time towards examining the classic car market and elaborating about the evolution of prices, but rather focus on the governance aspect of owning classic cars. In fact, a proper due diligence and risk mitigation/management is not merely necessary at the time of each acquisition but further critical on an ongoing basis when structuring and managing a collection of classic cars.
As known to most readers, the price surge in classic- and exclusive sports cars have been massive over the last 10 years, as quantified by key classic car indices showing increases above 400% over the course of a time period which is considered relatively short when taking into account the typical time horizon for the preservation and growth of HNWI’s wealth. Such an extraordinary price appreciation has largely affected the concept and practicalities of classic car investments.
A passion investment…
Indeed, for illustrative purposes let’s consider a classic car collection initiated in the late 90’s or early ’00s at a worth of one million Euros at that time. In today’s environment, the same collection could easily be worth tens of millions.
This means that the practice of investing in classic cars, which initially was mostly done purely out of passion for the asset itself (referred to as “passion investments”), driven by the pursuit of an aesthetic pleasure and a so called “dividend of pleasure” derived from the use of the asset, has developed recently into an investment category requiring a proper organisation, structure and planning taking into account among others tax, succession and governance constraints.
While these aspects can be addressed with specialized lawyers and tax advisors, the particularities of the asset class entail that it is important to complement this advice with the expert opinion of classic car consultants.
A proper planning is required…
The current investor landscape is still heavily represented by “older generation” classic car collectors whose investment approach is strongly dominated by their eccentricities, personal preferences and love for the assets themselves. However, in preparation of passing on the classic car collection to the second generation, a proper planning is required.
The importance of accounting for aspects such as the addition of new cars, reshaping of the collection, conservation and maintenance of the cars in setting-up a robust planning shall not be undermined and can rather easily be addressed via a wide range of solutions available on the market, notably expert assessments and valuation services. Nevertheless, in order to guarantee a successful succession planning, the involvement of family members as well as their education on the intention behind the succession and the planning thereof is essential.
In particular, the governance of a classic car collection has to be laid down in writing, so as to ensure that the planning is clear, known to all parties and can be passed down from generation to generation. This should avoid family discords and costly litigations that often follow the passing away of a collector.
In this context, we would like to quote the following passage from the famous movie “Gran Torino”, where the classic car owner (Walt) passed away and family members had hoped they would be entitled to the house and in the daughter’s case the classic car, only to find out that Walt’s last wishes were somewhat different and most importantly had not been communicated to any of the family members beforehand…
Lawyer: [reading from Walt’s will] And I’d like to leave my 1972 Gran Torino to…
[the lawyer pauses and looks up at Ashley, who smiles expectantly]
Lawyer: …my friend… Thao Vang Lor. On the condition that you don’t chop-top the roof like one of those beaners, don’t paint any idiotic flames on it like some white trash hillbilly, and don’t put a big, gay spoiler on the rear end like you see on all the other zipperheads’ cars. It just looks like hell. If you can refrain from doing any of that… it’s yours.
In order to avoid such unfortunate misunderstandings, the classic car owner shall take the time to properly plan the succession by asking himself / herself the following set of questions:
Does your family, your heirs want the cars?
What are the options to be considered?
– Sell the cars during the life.
– Gift the collection during life.
– Donate during life.
– Sell the cars at death.
– Bequeath at death.
– Donate at death.
All listed options and potentially combinations thereof are viable solutions, in any case, the most appropriate planning and structuring of the collection may vary in accordance with the collection itself.
Structuring a collection…
Indeed, for a collector with a truly significant collection, the creation of their own collector museum may be an appropriate solution, while this would hardly be appropriate for a collection of a much smaller scale.
However, even if viable, a proper governance addressing the financing of the museum’s running costs over the span of several years has to be established so as to avoid a premature closing of the museum.
Such closing occurred for instance in the context of the death of the Swiss car manufacturer Monteverdi: the Monteverdi Museum in Binningen has to be closed this year and the collection will partly be taken over by another Swiss museum.
In today’s environment characterised by major disruptions, one of the key challenges for a classic car collector might take the form of changing/evolving family relations as well as the internationalisation of families and associated complexities in operating within different tax and legal systems.
Documenting the purpose of the car collector in writing and securing it in an appropriate ownership structure will help the next generation to be re-wired to connect to the power house of the first generation. As such, the collector might require coaching as to how he can explain the wealth/collection he has accumulated and it’s implications to his spouse and family. Providing simple answers on how to keep the collection together respectively how to sell the cars after the collectors’ death are points to be addressed. It is also possible to set-up a family council as part of a robust governance.
In any case, it is any good consultant’s responsibility to raise awareness of the pitfalls/issues that may occur not only during the life but also after the death of the car collector. Ownership structuring is first and foremost about setting up a smart and compliant legal structure within which to hold and develop the classic car collection not only during the life of the collector but also thereafter, by properly addressing its succession to the next generation.