Why We Love Classic Cars
Most people buy cars to be utilitarian and to get from home to work and back, pick up the kids from school, go grocery shopping, and run errands. It's about safety ratings, gas mileage, and efficiency.
But classic cars are different. Driving a classic car is an experience of style, craftsmanship, and nostalgia. Driving a midnight blue convertible 1966 Mustang on a sunny California day is not about speed or efficiency. And when you are sitting at the stoplight in a dark metallic green 1963 Porsche 911, no one is checking out the Tesla in front of you.
Classic cars are part of our culture and are sometimes the stars of the movies. In the 1964 James Bond movie Goldfinger, the Aston Martin DB5 instantly became one of the most well-known cars in the world. With only 1,059 produced, those models sell for more than $1 million today.
And the car chase scene in the 1968 movie Bullit, between Steve McQueen's dark green Mustang GT and the menacing black Dodge Charger flying over the hilly San Fransisco streets, may be the most iconic car scene ever filmed.
Imagine Ferris Bueller's Day Off without the red Ferrari 250 GT California Spyder. Or, Back to the Future without Doc's time-traveling silver DeLorean DMC-12. And the battle between the Ford GT40 Mark II and Ferrari 330 P3 is the backbone of the story in Ford V. Ferrari.
And while we all love and admire these cars in the movies, some of us buy, drive and collect them. When that happens, it is crucial to have asset protection and estate planning in place to keep these treasured and iconic assets protected and in the family.
What are Classic Cars?
Car collectors buy cars for many reasons, like investing and building a collection. There are three categories of collectible cars: classic, antique, and vintage. While age is not the only determining factor, it is the most common. The generally agreed-upon definitions are as follows:
- Vintage cars were manufactured between 1919 and 1930.
- Antique cars are generally those older than 45 years and manufactured in the mid-1970s.
- Classic Cars are at least 20 years old and manufactured in the 1990s or earlier.
Whether you collect vintage, antique, or classic cars, they should all be included in your estate planning.
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Image by Paul Wood at Ramona American Graffiti Cruise
Should You Personally Own the Classic Cars?
When collectors buy their first collectible car, they often take personal ownership and put the title in their name. It is simple and easy to do. And so, they do the same on the next car and the rest of the collection.
But this is usually the worst of all ownership choices for your classic cars. This choice offers no liability protection and makes you vulnerable to future lawsuits. And with personal ownership, there are no tax advantages to minimize your tax burden.
As personal assets, the collection becomes part of your estate with the need to go through probate. And while California does not have estate taxes, the federal government does. Between your assets, real estate, and business, your classic car collection might move you over the federal estate tax exemption limit, currently $12,060,000 for 2023. After you pass that exemption, the tax rate is a steep 40%.
If you collect classic, vintage, or antique cars, strategic planning by a qualified California estate planning attorney is a necessity.
Should Your LLC own Your Classic Cars?
Many people think all their cars, including their classic cars, should be owned by their LLC for liability protection. LLCs are state entities designed explicitly for the limited liability of the LLC owners. While every state law is different, the idea of LLC protection is in the name - a “limited liability company.”
So when your company is sued, your LLC does offer protection against the owners and their personal assets.
But an LLC offers little protection against creditors regarding assets owned by the company. If your car collection is one of the LLC assets, it is vulnerable to creditor judgments against the company.
Why Keeping Your Classic Cars in Trust Makes Sense
The most popular estate planning tool for serious car collectors is the trust.
What is a Trust?
A trust is a legal entity you can use to hold assets, like your classic cars, on behalf of your chosen beneficiaries. As the grantor, you establish the trust and transfer assets into it. You name a trustee who administers the trust and distributes the assets to your future beneficiaries according to the trust's terms.
You transfer assets, like your classic cars, into a trust you establish. The person establishing the trust is called the grantor, settlor, or trustor. The trustee administers the trust and will distribute the assets to the beneficiaries you named according to the terms of the trust.
While there are various types of trusts, most are used for things like estate planning, reducing taxes, or asset protection.
Celebrity Use Trusts for Their Classic Car Collections
Many famous classic cars and collections have been left to family members through the use of trusts. Some celebrity examples include:
James Dean's Porsche 550 Spyder was left to his family in a trust and is now on display at the Peterson Automotive Museum in Los Angeles.
Steve McQueen's iconic Ford Mustang GT, which he drove in the movie Bullitt was left to his son. The care is on display at the Petersen Automotive Museum in Los Angeles.
Paul Newman's Datsun 240Z left his personal car to his daughter, Clea, by using a trust. The car was later auctioned off by Sotheby's.
John Lennon left his 1965 Rolls-Royce Phantom V to his son, Sean Lennon, through a trust. The Rolls is on display in Liverpool at the Beatles Story Museum.
Jay Leno has one of the world's most famous car collections, and he keeps it in trust for his family.
Classic cars are personal and sentimental assets most people want to keep in the family and direct which family members inherit them. A California trust is one way to ensure your wishes are followed after you are gone.
Living Trusts and Irrevocable Trusts
There are two main types of trust for you to consider for your classic cars and estate planning strategies: a living trust and an irrevocable trust. While both trusts avoid probate, there are significant differences between them.
Living Trust: A living trust, also called a revocable trust, can be amended, altered, or revoked by you as the grantor at any time during your life. You retain control over the trust assets, and if there are significant changes in your life, you can change the terms of the trust or even dissolve it entirely.
Irrevocable Trust: An irrevocable trust is a legal entity separate from you. Once you establish the trust, transfer your assets into the trust, and appoint the trustee, you give up control over the assets. This type of trust is designed not to be changed.
The trustee administers the trust and the assets according to the terms of the trust. You, as the grantor, cannot change the trust any time you wish. Each state has laws about whether an irrevocable trust can be modified and how.
While it is possible sometimes to change or terminate an irrevocable trust in California, it is not easy. The trustor, trustee, and beneficiaries must petition the California Probate Court to recognize that, due to circumstances not known or anticipated by the trustor, continuing the trust would “defeat or substantially impair” its purposes. Some reasons might be a divorce, a beneficiary becoming disabled, or an unexpected death.
But after hearing the facts and circumstances, the court may or may not agree to allow the trust to be amended or terminated. The court may decide that continuing the trust is necessary to fulfill its material purpose.
A qualified California estate planning attorney can help you determine the best trust for you and your family.
Advantages of a Living Trust:
Avoids Probate: Assets in a living trust can be transferred to beneficiaries without going through the time-consuming and expensive probate process.
Control: The grantor retains control over the assets in the trust and can use them for their benefit, change the terms of the trust, or even dissolve the trust entirely if they choose to do so.
Privacy: The terms of a living trust are not made public as they are in probate, which ensures privacy for the grantor and the beneficiaries.
Disadvantages of a Living Trust
Taxes: Since the grantor maintains control over the asset and income of the trust, the IRS views the trust's income as the grantor's income. The income is included on the grantor's tax return, and there is no tax saving.
Trust Assets Not Protected from Creditors: Since the assets are under the grantor's control, they are vulnerable to creditor judgments.
Advantages of an Irrevocable Trust
Tax Benefits: The IRS recognizes that an irrevocable trust is separate from you and responsible for its taxes. An irrevocable trust can provide tax benefits, such as reducing estate taxes or avoiding capital gains taxes.
Asset Protection: When the grantor's assets are placed in an irrevocable trust, they are protected from the grantor's creditors. This can be particularly advantageous for high-net-worth individuals. And in California, a well-written irrevocable trust can offer substantial protection from beneficiary creditors.
Disadvantages of an Irrevocable Trust
Lack of Control: When you establish an irrevocable trust, you give up control over the assets. And you can only change the terms of the trust by petitioning the Probate Court and having them rule in your favor.
Irreversibility: The terms of an irrevocable trust cannot be altered, amended, or revoked, which means that the grantor cannot change their mind about the trust or the assets in it.
Should a Trust be Part of Your Estate Planning?
A trust is a powerful estate planning tool for your classic cars and other assets. But choosing the best estate planning tools and strategies for you and your family is complex and confusing for most families. Which type of trust is best for you? How do you maximize your protection and minimize your taxes?
These are important decisions that can seem overwhelming. Advanced planning with a qualified California estate planning attorney is always the best option.
Let us help you choose the best options for you, your family, and your beloved classic cars.
At San Diego Legacy Law, our trust attorneys work closely with clients to evaluate their personal goals and available assets before incorporating trusts into their estate plans. Our founder, attorney Nicole D'Ambrogi, holds an LLM in International Taxation with concentrations in Financial Services and Wealth Management, which allows her to strategically analyze the many variables that can affect your ability to meet your estate planning goals instead of focusing on simple document preparation.
San Diego Legacy Law serves clients throughout San Diego and those in La Jolla, Del Mar, Rancho Santa Fe, El Cajon, Poway, Spring Valley, Chula Vista, Santa Rosa, Petaluma, Novato, and Healdsburg.
Contact us today to schedule a consultation to discuss your estate planning and asset protection needs.
Don't wait to pass on your love of cars.