Hobby Assets: Business and Estate Planning Considerations

Smartphone on a table in the artist studio

Though hobbies are often seen as trivial, any category of assets with significant value should be treated as an important part of a person’s estate. Whether your hobby deals with a valuable collection of something like art, jewelry, watches, or even airplanes, or if you operate a small-scale microbusiness selling products as a hobby, it is important to make sure that your hobby is dealt with properly both as a business asset and as a part of your estate plan.

Hobby or Business?

If you make money as a result of your hobby, the IRS may consider it to be a taxable business. There is a long list of considerations used by the IRS to make this determination contained within Section 183 of the Internal Revenue Code, formally titled “Activities Not Engaged in For Profit” but commonly known as the “hobby loss rule.” The IRS will base their decision on whether or not you depend on your hobby income, whether your hobby income is commensurate with the time and effort expended on the hobby, whether you represent your hobby activities as a business, and whether you have an expectation to make a profit. If, based on these factors, the IRS determines that your hobby resembles a business, it may be taxed as one. There is also an upside to this determination, though: if a hobby is determined to be for profit, losses from that hobby can be used to offset your income from other sources.

There are also local laws and regulations to take into consideration when determining whether or not your hobby is a business. Even if the IRS says your hobby doesn’t count as a business, it may require local permits and licenses. Failure to acquire these permissions may result in fines and back taxes that are far greater than the expense of acquiring them, so make sure that your hobby is fully compliant with all local, state, and federal rules, even if your hobby is only minimally commercial.

Protecting Hobby Assets

There are several strategies that can be used to ensure that your hobby assets are protected, whether from theft or from division of your estate due to bankruptcy, divorce, or death. Your collection should be described in an accurate written inventory and properly insured against loss or damage. If your collection is especially rare or valuable it should also be appraised to ensure that its true value is determined and recorded.

Hobbies and Estate Planning

You may wish to bequeath your hobby collection as a whole, or you may want it to be split between your heirs. You may also be able to give your collection as a gift to a museum or other institution. Regardless of how you elect to have your hobby assets dealt with, it is important to specify how these assets are treated in your estate plan. If your loved ones do not share your love for your hobby, accurate recording and valuation is even more important: without proper valuation, a beneficiary who prefers liquidated hobby assets may not be able to receive the full value of their inheritance.

We Can Help

Like any other valuable asset, hobby assets should be treated seriously. If you would like to meet with one of our attorneys to discuss your hobby’s relationship to estate planning or business law, please contact us by clicking here or by calling our office at 832.510.2900 to schedule a complimentary consultation.

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