USA - NATIONWIDE: An Introduction to Art and Cultural Property Law

The Artist’s Estate Tax Return

June 2026

Background

My father, Philip Pearlstein, came to New York City with Andy Warhol in the early 1950s and went on to become a leading figurative and representational painter of his generation. Philip was also an eclectic and sophisticated collector who accumulated hundreds of objects of art and artifacts.

In December 2022, Philip died at 98 after a career spanning almost 85 years. Under his will, I became the executor of his estate. Although I had decades of experience as a lawyer and the founding partner of a boutique firm focusing on art law, nothing prepared me for administering Philip’s estate. I hope this article can help other artists and collectors avoid some of the problems that I inherited (a longer version of this article, detailing those problems, can be found here).

An executor’s role is generally straightforward: prepare and file the estate tax returns, pay any federal and/or state estate tax, dispose of the remaining assets and distribute the net proceeds to the beneficiaries of the estate. However, if the artist leaves a significant amount of art to the estate, then the executor’s job also includes maintaining the art pending its disposition by sale or gift. This involves obtaining fine art storage and insurance; creating a website and an inventory database; engaging dealers, auction houses, appraisers, lawyers and accountants; and funding the related expenses. If the estate consigns work to dealers, they will be responsible for storage and insurance. But the estate will be responsible for any work that is not consigned.

The estate tax return

In the United States, estates are taxed at two levels: federal and state (in Philip’s case, New York State, where many artists and collectors reside). Preparing the estate tax return requires the estate to value each asset owned by the artist on the date of death and then determine whether the total value exceeds the federal and state exemption amounts. The assets remaining after paying any federal and state estate tax and the costs of preparing the returns will be used to pay the expenses of maintaining those assets prior to the estate’s termination, with any remainder distributed to the beneficiaries of the estate.

Federal estate tax

For 2022 (the year Philip died), the federal estate tax exemption amount was USD12.06 million per individual. The value of a taxable estate exceeding this threshold was subject to the federal estate tax, with a top rate of 40%.

New York State estate tax

In 2022, the New York State estate tax exemption amount was USD6,110,000. Above USD6,415,500, the entire value became subject to the New York estate tax "cliff” at rates up to 16%. New York State excludes the value of property owned or stored out-of-state.

Filing deadline and extension

The federal and state estate tax returns must be filed within nine months after the date of death. They may be extended for a further six months if the estate pays the estimated tax on the original due date.

The estate filed for an extension while we gathered the necessary information. I ordered appraisals to value the assets that Philip owned at death to calculate the total value of his estate for purposes of determining whether, and if so, how much, federal and New York estate tax the estate owed on its value above the exemption amounts.

The appraisals

Like many Americans, Philip owned an investment securities account and real estate: a co-op apartment in New York where he had lived, worked and stored part of his work, and a weekend house in New Jersey. Unlike most Americans, Philip left his estate a large collection of art, artifacts and collectables, and a large number of his own original works of art in all media (oils, watercolours, works on paper and prints) and all genres (studio nudes, landscapes and portraits). These presented unusual problems.

The collectables

Hindman (now Freeman’s) appraised Philip’s collectables. Hindman needed several months to inventory and photograph the property in both the New York and New Jersey residences and then to pack and remove the material they accepted for consignment. Their appraisal division produced a lengthy report, in which every lot was assigned an appraised value based on comparable reported auction sales. The appraised value of each lot became the estate’s basis for determining gain or loss of that lot on its sale. Hindman then sold the consigned material in about ten separate auctions in Chicago over an eight-month period. Some “unsolds” were sold privately and the rest sold in bulk. I spent weeks comparing the appraised value of each lot to the final net sale price received by the estate. The sale of Philip’s collectables generated a substantial capital loss that the estate can use to shelter any future capital gains.

Philip’s original art – blockage discount analysis

Philip also left behind a large number of his original works. This material was stored in the two residences and a legacy art warehouse. Other works were consigned to dealers.

Hindman also appraised Philip’s original art. Inventories existed only of the work stored in the legacy warehouse and the work consigned to dealers, so we created a new master inventory list including the work in the two residences. Hindman relied on reported sales of comparable works at auction on the secondary market. Philip had been selling work through his dealers since the 1960s and many of these works had been resold over time. This active but irregular secondary market had been unsupported by his dealers for decades. In addition, some categories of Philip’s work, such as prints and landscapes, had lacked dealer representation for decades. Consequently, the secondary market prices were only a fraction of the retail prices for paintings offered by Philip’s dealers on the primary market. However, even at depressed auction market prices, the large number of Philip’s original artworks held by the estate ensured that their total, unadjusted, appraised value was substantial.

The “blockage discount” is one of the main tools that an artist’s executor has to reduce the taxable value of art left to the estate. It was originally conceived to reflect the market’s inability to absorb multiple examples of comparable works by one artist offered for sale at one time. We considered various approaches, including applying different percentage discounts to figurative oils, other oils, watercolours, works on paper and prints based on their relative market comparables.

The final value of the estate’s assets was under the federal estate tax exemption but above the New York State exemption. As I signed an unexpected check to New York State, I was troubled by the thought that the blockage discount analysis fails to address the unusual circumstances presented by Philip’s estate. The concept assumes the existence of a structured and functional market for the work. This simply did not exist for much of Philip’s unsold inventory, which had lain in storage for decades because the subject matter lacked market appeal and dealer representation. In essence, the estate paid tax on a large amount of stale or dead inventory that may not be sold or gifted for decades, if ever, based on a history of sporadic, irregular, unsupported, online sales in different markets, venues and platforms.

Also, much of the estate tax paid to New York State could have been avoided had Philip stored his art outside of New York State. It was predictable that, even without the value of his original art, the combined value of the co-op apartment, his stock market investments and collectables would exceed USD6 million and that New York State estate tax would be due.

Fine art storage

The decision to sell Philip’s studio raised the question of where to store the art after the sale. We ultimately consolidated all the work in a private storage unit at a modern fine art warehouse in Queens, which was a significant logistical undertaking.

Database and website

We also migrated our inventory database to a modern, industry-standard software platform integrated with our website. The new database stores the descriptions and location of all the work in the storage unit, so that the estate now knows what work it owns and where to find it.

Fine art insurance

Consolidating the work triggered a review of Philip’s fine art insurance arrangements. Hindman’s delivery of its appraisal allowed the estate to obtain a new fine art insurance policy covering the estate’s art before the art was delivered to the new warehouse. The insured values exclude work consigned to dealers, which is covered by their policies.

Conclusion

Philip Pearlstein was a prolific artist and voracious collector who surrounded himself with the art and objects that he loved. He and his advisors underestimated the amount of time, effort and expense it would take to organise this material for estate tax purposes. The filing of the estate tax return forced the estate to organise the work he left behind and the estate is now in a position to carry his artistic legacy forward.