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ESTATE PLANNINGE-2 NOVEMBER 12 - 18, 2012 Advertisement

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PRESIDENT’S LETTER

DisclaimerContent provided within thisSpecial Advertising Section isoffered solely for informationaland educational purposes. Theinformation is not intended astax, legal, accounting or in-vestment advice. No represen-tation or warranty is made thatany tax savings or other resultswill be achieved. Consult anattorney and financial advisersto evaluate individual estateplanning needs. Internal Rev-enue Service Circular 230 Dis-closure: Advice (if any) relatingto federal taxes that is con-tained in this section is not in-tended or written to be used,and cannot be used, for thepurpose of (a) avoiding penal-ties under the Internal Rev-enue Code or (b) promoting,marketing or recommending toanother party any transactionor matter discussed herein.

Experts can implement your plansBy MARIE MONAGO

The Estate Planning Council of Cleveland, inconjunction with Crain’sCleveland Business, is

pleased to present our annual Estate Planning section.

Our goal is to offer our community valuableinformation and resourcesrelated to financial, insur-ance, business succession,and estate and charitableplanning. The followingarticles and commentariescannot answer all yourquestions, but may sparkan idea or thought thatyou may want to reviewwith your trusted advisers.If you are looking for an adviser,the articles and listings may helpyou identify a few candidates toconsider.

Estate planning is an area thatis often overlooked. Studies showthat less than 50% of Americanshave an up-to-date estate planand/or medical directives. Why is this important and what iskeeping us from finalizing or updating our plans? By not having an updated plan, we areallowing others to decide for us,which may cost a lot of money,

create unnecessary hardship ornot be according to our wishes.One of the reasons that we don’treview or finalize our plans maybe that we are not sure what todo or how it will actually work.Plus, we have to face the fact thatwe are not immortal.

The only thing that is constantin our world is change,and we have seen plentyof changes in estate andgift tax laws, as well aseconomic performances— both domestic and in-ternational. How one per-son can keep track of thechanges is a mystery tome, but you can surroundyourself with people thatare knowledgeable about

different parts of the income, giftand estate tax laws as well as up-to-date information in the invest-ment world. These are the profes-sionals you should consult withwhen it comes to preserving assets for the benefit of your family, heirs and charities.

They can help you evaluatehow your personal goals are affected by the ongoing changesin laws and market conditions.They can assist with methods,techniques and documents thatwill help you reach your personal

objectives — be it the transitionof a family-owned business, taking care of a family memberwith special needs, planning forretirement, creating a legacy orfulfilling a philanthropic goal.

The Estate Planning Council ofCleveland has over 400 members,all professionals in the GreaterCleveland area including attor-neys, accountants, bankers andtrust officers, financial planners,investment managers, insuranceagents, appraisers and representa-tives from charitable organiza-tions.

All of us are dedicated to serveour clients and our communitywith thoughtful, tax-efficient,value-based planning. We wantto help guide you as you deter-mine what will work best for you,your family, your heirs and thecharitable organizations youwant to support. Our website,www.epccleveland.org, can be auseful resource to locate profes-sionals to assist you with yourplanning needs.

We are pleased to share the insights and commentary of ourmembers and other area practi-tioners with you in this publica-tion. We hope you will find theinformation insightful, helpfuland valuable. ■

MARIE MONAGO

TABLEOFCONTENTS

Succession Planning: Exitstrategies require specialattention. S6-S7

Gifts to family: Choosethe right path to preserve

inheritances. S9-S12, S14

Charitable giving: The best waysto help make a difference. S13-S20

PlusTRENDSUncertainty inpotential taxchangeskeeps adviserson their toes.S4-S6





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BUSINESS CLIMATE

Give your investment portfolio a wellness check

Planning in a low interest rate environmentBy MICHAEL MATILE

Many people only thinkof how little interestthey receivefrom their sav-

ings account when facedwith low interest rates.However, the current lowinterest rate environmentmay provide significantopportunities to managepersonal debt, efficientlytransfer wealth and fulfillcharitable intentions.

Now is a good time to reviewpersonal debt and to considermaking adjustments to your per-sonal balance sheet. For instance,a homeowner with a mortgagemay be able to refinance the mort-gage to a shorter term, cutting years

off the mortgage, or refinance to ob-tain a much lower monthlypayment. Alternatively, in-vestors may instead chooseto use an investment port-folio to collateralize a lineof credit, with interest ratespotentially lower than current mortgage rates.

Often, estate planningtechniques are based on interest rates issued by the

IRS. For many of these strategies,the lower the rate, the greater thepotential benefit to families. Thecurrent low IRS interest rates provide another unprecedentedopportunity for wealth planning.

For instance, the IRS requires

(GRATs) and sales to defectivegrantor trusts, that work well wheninterest rates are low and the assets being transferred appreciatefaster than the IRS interest rateimposed on such transactions.

People who are charitably inclined also can take advantage ofcharitable giving techniques thatwork well when paired with lowinterest rates.

A Charitable Lead Trust, for ex-ample, pays afixed annuitystream to a charityfor a trust’s term,then distributesthe remainder tothe trust benefi-ciaries estate taxfree. The amount

paid to charity each year is calcu-lated, in part, by IRS imposed in-terest rates.

When interest rates are low, lesswill be paid during the trust termand, therefore, more should beavailable to the beneficiaries freeof estate and gift tax.

Low interest rates may not beadvantageous to one’s savings account, but they can be meaning-ful in helping to achieve personalwealth planning objectivesthrough debt management, estateplanning and charitable giving. ■

Michael Matile is a senior wealth plannerat PNC Wealth Management. He can be reached at (216) 222-5885 [email protected].

Look beyond impact on savings accounts for benefitsthat loans from one family mem-ber to another must charge at least acertain amount of interest to avoidhaving them be deemed a gift andsubject to the gift tax rules. Thisminimum interest rate is calledthe applicable federal rate and isbased upon the length of the loanterm and the month in which theloan is established.

For example, if in October 2012a parent were to loan $100,000 toa child, with the agreement thatthe loan is to be paid back in fiveyears, the applicable federal ratewould be only 0.93%. Each year,the child will pay $930 in interestto the parent. In the fifth year, thechild would pay back not only theinterest, but the full $100,000.

Here’s the interesting part. If, atthe time the loan is made, thechild invests the $100,000 andearns more than 0.93% (ignoringany income tax that might bedue), the child gets to keep any return in excess of the 0.93% —with no gift tax implications.

This technique may be particu-larly powerful when combined withtrust planning. For example, Mr.and Mrs. Smith, a married couple,could transfer $10.24 million (theircombined lifetime gift exemptionsunder 2012 law) to a trust createdfor the benefit of their childrenand future generations. An addi-tional amount could be loaned to thetrust with a promise to pay backthe full amount of the loan at theexpiration of the loan term. Further-more, Mr. and Mrs. Smith could

By MARY EILEEN VITALE

Health professionals willtell you to to get acheckup at leastonce a year. Your

financial situation needsone as well. At least annu-ally you should reviewyour existing holdings anddetermine whether there isa gap between your cur-rent situation and yourability to reach your goals.This will enable you to develop a plan that canmost effectively meet both yourshort- and long-term needs.

To determine whether or not aninvestment is “good,” most peo-ple look at its returns. They maycompare the performance of theinvestment to an appropriatebenchmark or index. But this per-formance check analysis is almost always insufficient.

In terms of adding value toyour account, an investment is a wise one if its role in yourportfolio can be justified. For example, there must be a reasonyou own the position that can beexplained by process and method-ology; the position must be con-sistent with your short- and long-term financial goals and needs;and you must feel comfortableowning it.

Consider the following whenevaluating your portfolio:

Suitability: Does the invest-ment match your goals and objectives?

Risk: Can you tolerate the investment’s volatility?What types of risks areyou taking on by owningthe investment?

Relative performance:How has the investmentperformed in relation toits peers?

Asset allocation: Howwell is your wealth allo-cated among various non-correlated asset classes?

Specific investment detail:Have there been any changes in fund management? Does theinvestment yield match your income needs?

Investors often make invest-ments at one point in their livesbut fail to sell them when they nolonger make sense. What’s more,it is not uncommon for investorsto form emotional attachmentsto certain investments. You needto assess what your portfolio isdoing well and what it lacks.

Put your goals and your hold-ings side by side so you can startto make determinations about thenext step — developing a plan thatis specific to your needs. ■

Mary Eileen Vitale, CPA, CFP, is princi-pal with Howard, Wershbale & Co. Contact her at [email protected] or(216) 378-7210.

MARY EILEENVITALE

agree to be responsible for payingall income taxes owed by the trust.

While Mr. and Mrs. Smithwould receive the full loanamount back at the end of five years,if we use the terms of the loan ex-ample earlier, any return above the0.93% would pass to the trust, notonly income tax-free because Mr.and Mrs. Smithwould pay theincome tax, butgift tax free. Theseadditional assets,resulting fromthe earningsabove the inter-est rate, wouldincrease the value of those trans-ferred assets, thereby creating a largernest egg for Mr. and Mrs. Smith’schildren and later descendants.

The low rates could be a boonto a child who needs to borrowmoney from a parent for a downpayment on a house. Families thatown businesses are also using loansfrom parents to allow children to buyshares in the business or to allowchildren to purchase equipmentor real estate (perhaps in an entitysuch as an LLC) to then lease tothe business. The lease paymentscould then, in turn, be used to repay the loan to the parents.

There are many other estateplanning techniques, such asGrantor Retained Annuity Trusts

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ESTATE PLANNINGAdvertisement NOVEMBER 12 - 18, 2012 E-5

THE ESTATE PLANNING COUNCILOF CLEVELAND

PresidentMarie L. Monago

Vice PresidentBeth M. Korth

SecretaryJennifer A. Savage

TreasurerMichael T. Novak

Program ChairMichael W. Matile

Immediate Past PresidentLisa H. Michel

Tanzie D. AdamsKelly G. AdelmanChristopher P. AdkinsCharles F. Adler, IIIRichard A. AhrensThomas D. AndersonGraham T. AndrewsOakley V. AndrewsGordon A. AnholdGary S. ArchdeaconKemper D. ArnoldRosanne J. AumillerJames S. AussemP. Thomas AustinCharles J. AvarelloMolly BalunekPeter BalunekAlexander D. BarclayAlbert J. BarnabeiLawrence C. BarrettRonald E. BatesRussell BaumanStephen BaumgartenMaureen K. BeaverEdward J. BellSteven BermanGina Marie Bevack-CianiMohammed J. BidarGary B. BilchikJohn J. BindasMichelle M. BizilyAlane BoffaJason BogniardDaniel L. BonderNicole BornhorstAileen P. BostChrist BoukisLaura BozellJill A. BranthooverHerbert L. BravermanChristopher Paul BrayDavid J. BrownC. Richard BrubakerRobert M. BruckenBethany J. BryantArmond D. BudishMartin J. Burke, Jr.Eileen M. BurkhartAmanda M. BuzoJ. Donald CairnsPeter H. CalfeeCarl CamilloWilliam G. CasterSal A. CatalanoJames R. ChrisztTrevor R. ChunaMark A. CiullaR. Michael ColeWarren ColemanJeffrey P. ConsoloDavid E. CookJames I. W. CorcoranHeather A. CornellBarbara J. CottrellGreg S. CowanSteven CoxThomas H. CraftJoseph CreaM. Patricia CullerCheryl A. D'AmicoJason S. DamiconeDana Marie DeCapiteHolly N. DenhamThomas A. DeWerthCarina S. DiamondDavid S. Dickenson, IIJames G. Dickinson

Gary L. DinnerAnthony J. DiSantisNick DiSantoMary Ann DohertyLynda DolandTimothy DoyleEmily A. DrakeTherese Sweeney DrakeJill DugovicsWilliam A. DuncanCarl J. DyczekHoward B. EdelsteinElaine B. EisnerMichael E. ErneweinChristopher M. EssigHeather R. EttingerChristina D. EvansSusan M. EvansDarren A. EwaskaFrank FantozziCharles E. FederanichTimothy A. FerrisWilliam C. FerryJ. Paul FidlerJulie A. FischerMary Kay FlahertyRobert E. FleckKenneth J. Francis-SableMaryann Clarisse FremionPatricia L. FriesJohn C. FroelichWilliam H. FultonNaomi D. GanoeBeverly GansStephen H. GariepyRao K. GarudaPatricia D. GarvenJames E. GaydoshKyle B. GeeThomas M. GencoThomas C. GilchristCatherine Klima GletherowRonald J. GogulScott A. GohnJames A. GoldsmithSusan S. GoldsteinTom S. GoodmanLawrence I. GouldAlexandra G. GrayKaren GrecoSally GriesNancy Hancock GriffithAlan GrossJames P. GruberTimothy R. HaberEllen E. HalfonJennifer R. HallosPatrick A. HammerSarah HannibalRonald F. HansonDana G. HastingsLawrence H. HatchRobert A. HauptmanThomas I. HausmanJanet W. HavenerAlbert G. Hehr, IIIJames M. HenrettaJames R. HickeyMark W. HicksJean M. HillmanMark L. HoffmanRonald D. HolmanHarold L. HomRobert S. HorbalyJames M. HorkeyBrent R. HorvathMichael J. Horvitz

Stuart M. HorwitzMyah Moore IrickLynnette JacksonGeorge A. JacobsPaula JagelewskiChristopher P. JakymaBarbara Bellin JanovitzRobert B. JensenTheodore T. JonesJames O. JuddMatthew F. KadishStephen L. KadishRonald L. KahnJoseph W. KampmanKaren J. KannenbergWilliam E. Karnatz, Sr.William E. Karnatz, Jr.Bernard L. KarrHoward KassDavid B. KearnsJohn D. KedziorLesley KellerVeena KhannaWoods King, IIIAmy I. KinkaidRichard B. KiplingerRaymond G. KlincPaul S. KlugVictor G. KmetichErik R. KneipMelissa L. KniselyJames R. KomosThomas H. KonkolyHarvey KotlerRoy A. KrallFrank C. Krasovec, Jr.Thomas W. KrauseBruce A. KretchJames B. KrostDeviani KuharCraig A. KuklaLouis D. LaJoeGary E. LanzenDonald LaubacherDaniel J. LaulettaMichael LeonakisHerbert B. LevineWendy S. LewisKeith M. LichtcsienJames LineweaverDavid F. LongTed S. LorenzenAmy R. LoriusAdrienne LoveEdward C. LoweCharles S. LurieRobert M. LustigJames M. MackeyDavid S. MaherStanley J. MajkrzakChad MakuchLaura J. MaloneKaren T. ManningWentworth J. Marshall, Jr.Donald C. MayMark J. McCandlessNancy McCannKaren M. McCarthyLarry E. McCoyRobert F. McDowell, Jr.Erica E. McGregorDaniel J. McGuireStacey L. McKinleyJoseph M. MentrekLawrence MihevicRichard S. MilliganWilliam M. Mills

Daniel F. MiltnerWayne D. MinichGinger F. MlakarM. Elizabeth MonihanMichael J. MonroeKenneth R. MorganPhilip G. MoshierSusan C. MurphyNorman T. MusialChristine MyersJodi Marie NeadLisa Wheeler NeelyRobert NemethMichael A. NiederstAnthony J. NuccioEric A. NyeKevin J. O'BrienMichael J. O'BrienLacie L. O'DaireLinda M. OlejkoLeslie A. O'MalleyDavid OrthCharles J. O'TooleMichael ParenteJodi L. PenwellMichael D. PepeDominic V. PerryCraig S. PettiDaniel W. PhillipsThomas PillariJennifer N. PinkertonJohn W. PinterDouglas A. PiperCandace M. PollockMary Ellen PotterDouglas PriceWilliam J. PriceMaria E. QuinnHoward S. RabbSusan RaceyJeffrey H. ReitzesIzabela ReszkoLinda M. RichR. Andrew RichnerRadd L. RiebeElton H. RiemerMichael G. RileyFrank M. RizzoLisa Roberts-MamoneKenneth L. RogatJames D. RosemanCarrie A. RoskoLarry RothsteinRennie C. RutmanPatrick J. SaccognaFran SchaulRonald S. SchicklerBradley SchlangDennis F. SchwartzVassie Scott, Jr.Aimee M. ScullinJune A. SeechJohn S. SeichDoris A. Seifert-DayMarc J. ServodioEmily ShacklettAndrea M. SheaStanley E. ShearerJohn F. ShelleyRoger L. ShumakerJudith C. SingerSandra M. SkocirMary Jean SkuttMark A. SkvoretzJohn M. SlivkaN. Lindsey SmithCristin Snodgrass

Arthur K. Sobczak, IIIMichael L. SolomonJames Spallino, Jr.Richard T. Spotz, Jr.William L SpringM. Randal StancikDaniel N. SteigerKimberly SteinLaurie G. SteinerSaul StephensE. Roger StewartJohn M. StickneyBeverly A. StiegeleRobin R. StillerRobert H. StockDiane M. StrachanThomas B. StrauchonThomas E. StuckartLori L. SullivanJohn E. Sullivan, IIILinda DelaCourt SummersScott E. SwartzJoseph N. SwiderskiYeshwant K. TamaskarJohn R. Telich, Sr.Mark M. TepperBarbara TheofilosDonald A. ThompsonDonna ThranePhilip TobinEric TolbertFloyd A. Trouten, IIIMark A. TrubianoPatrick J. TulleyDiann VajskopRobert A. ValenteMissia H. VaselaneyJoseph Frank VerciglioCatherine VeresAnthony ViolaMary Eileen VitaleMichael A. WalczakKimberly A. K. WalrodKittie WarshawskyRobert W. WasaczNeil R. WaxmanRonald F. WayneMichael L. WearStephen D. WebsterDavid G. WeibelPaul A. WeickJeffry L. WeilerRichard WeinbergKatherine E. WensinkKatherine WerreElizabeth Wettach-GanocyMarcia J. WexbergTerrence B. WhalenSharon Kai WhitacreFrederick N. WidenErica K. WilliamsGeoffrey B.C. WilliamsScott A. WilliamsJ. Mark WipperTeresa M. WisniewskiMatthew D. WojtowiczCarol F. WolfBrenda L. WolffAlan E. YanowitzJames D. YurmanJeffrey M. ZaborMichael J. ZeleznikDavid M. ZoltJack ZugayShawn D. ZuratGary A. ZwickDonald F. Zwilling

BUSINESS CLIMATE

Beware 2013’s fiscal cliffBy CHRISTOPHER P. BRAY

Estate planning in 2013 maybe much less attractive thanestate planning in 2012. Bynow you’ve likely heard

about the “fiscal cliff.” The phraseis a euphemism for big tax hikesscheduled to take place in 2013.Absent a change in federal legisla-tion before the end of the year,the top federal estate and gift taxrates will jump from 35% to 55%and the current lifetime estate and

gift tax exemp-tion amount willdrop from $5.12 million to$1 million.

Federal in-come taxes alsowill increase. In2013, the topfederal incometax rate for divi-dend income

will jump from 15% to 39.6%. The top tax rate for long-term capital gains will jump from 15%to 20% and the top tax rate for ordinary income will jump from35% to 39.6%. Also, the new 3.8%Medicare surtax on net investmentincome related to the Patient Protection and Affordable CareAct will take effect in 2013.

With the federal gift tax exemp-tion dropping to $1 million nextyear, individuals planning onmaking gifts larger than $1 millionduring life to reduce federal estatetax exposure at death should con-sider making these gifts prior tothe end of the year. This significantestate planning opportunity willno longer be available in 2013.

Estate planning in 2013 will bemore difficult because of substan-tial legislative uncertainty. Regard-less of the outcome of the elec-tions, many experts believe thatsome type of change in federal taxlaw will occur in 2013. Any antici-pated change in tax law might nottake place until well into 2013(consider the retroactive estate taxchanges that occurred in Decem-ber 2010), making any planningdifficult until such certainty is resolved. Don’t put off until 2013what can be done in 2012. ■

Christopher P. Bray, JD, CPA is a man-aging director for Willow Street Advisors,LLC, Private Wealth Management. Contacthim at [email protected].

Clock ticking on higher exemptions and lower tax ratesBy ELLEN K. MEEHAN

Some commentatorsare referring to 2012as the greatest yearever for estate plan-

ning. This is because the so-called “Bush tax cuts”enacted in 2001 and 2003,and extended by Congressin 2010, expire on Dec.31. On Jan. 1, 2013, if Congressdoes not act, the current transfertax exemptions will dramatically decrease with a correspondingincrease in the transfer tax rates.

This impending changeprovides a window of opportunity through theend of 2012 to take advantage of the high exemptions and low ratesbefore this window is potentially closed for good.

The exemptionamount is currently $5.12million per person for es-

tate, gift and generation-skippingtransfer tax (GST) purposes,while the tax rates are 35%.Moreover, in 2010, Congress en-acted the concept of portability,

which permits a surviving spouseto use the deceased spouse’s unusedexemption amount in a futureyear to make additional gifts, orto transfer more wealth at thesurviving spouse’s death tax-free.

Barring congressional action,the estate-tax exemption will decrease from $5.12 million to $1 million in 2013 and the taxrate will increase to 55% (with a60% top rate for estates in the $10million to $17 million range).

Likewise, the gift tax exemp-tion also decreases from $5.12million to $1 million with a tax

rate increase to 55%.The GST exemptionamount for 2013 isexpected to be $1.36million (because ofan inflation adjust-ment) with a tax rate of 55%.

Finally, the portability featurethat has been effective in 2011and 2012 will no longer be avail-able to surviving spouses.

In addition, a number of othertransfer tax-friendly provisionswill expire Dec. 31, includingrules relating to the GST tax, estatetax installment payments and

conservation ease-ments.

Given the impending increasein tax rates, coupled with the

decrease in exemption amounts,individuals should make the mostof this opportunity to make giftsof up to $5.12 million, includingGST gifts, before the windowcloses on Dec. 31. ■

Ellen K. Meehan is of counsel withSquire Sanders (US) LLP. Contact her at (216) 479-8366.

CHRISTOPHERP. BRAY

ELLEN K. MEEHAN




Mandel Building · 25701 Science Park Drive Cleveland, Ohio 44122 216.593.2900 · www.jewishcleveland.org

BUSINESS CLIMATE SUCCESSION PLANNING

Evaluate portfolio by year’s endBy STEVEN BERMAN

Many significant provi-sions of the landmark2001 “Bush-era taxcuts” are scheduled to

expire at the end of 2012, whichmay result in substantialincome tax rate increasesand reductions in the fed-eral estate tax exemptions.If this seems like déjà vu,it is. The same thing wasscheduled to occur in2010, but Congress votedto extend most of the affected provisions. WillCongress extend themagain? We don’t know.That’s why you should considertaking steps before year’s endthat could dramatically improveyour financial picture:

1With the estate tax exemptiondue to drop to $1 million, you

may want to explore steps tomove assets out of your estatewhile the lifetime gift tax exemp-tion is at historic highs.

2Income, capital gains andqualified dividend tax rates

are set to increase in 2013 with-out new tax legislation. Theremay be an advantage to acceler-ate the recognition of these in-

come items at the 2012rates.

3If tax rates increase in2013, your deductions

for charitable contribu-tions, state and local taxes,business expenses, etc.could become more valu-able in 2013. You maywant to delay these deduc-tions until 2013.

4A new 3.8% Medicare tax willapply to married/joint tax-

payers with incomes over$250,000. This is in addition tothe potential increase in incomeand capital gains taxes. Theremay be steps you can take to re-duce the impact of this tax.

5Roth IRA conversions becomemore attractive in 2012 if tax

rates increase in 2013. Conver-sions completed in 2012 are subject to the current rates andthe 3.8% Medicare Tax does notapply; taxes paid this year reducethe estate for federal estate taxpurposes; and Roth IRAs are notsubject to required minimum dis-tributions or future income taxeson distributions for you and yourbeneficiaries. You can even makeRoth conversions of your 401(k)plan.

6Currently married taxpayerswith incomes under $70,700

do not pay dividend or capitalgains taxes. Fully utilize strategiesto maximize this benefit while itremains.

7With interest rates at historiclows, review financing on

homes, vacation homes, inter-family loans, etc.

8If you are still planning tomake charitable contribu-

tions, consider making themwith appreciated stock. You may

Should anESOP be partof your exitstrategy?Family is only oneoption for future

SUCCESSION PLANNING

save the capital gains taxes and re-ceive the tax deduction — and ifyou still want to own the stock,repurchase and establish a highercost basis.

9Some effective strategies suchas grantor trusts, dynasty trusts

and GRATs are facing limits underthe administration’s proposals. High-net-worth families may have lim-ited time to utilize these strategies.

The potential expiration of thetax cuts and proposed changesmay affect you in different ways.How you should respond to thisuncertainty depends on your viewof what steps Congress may take.

Talk with your financial, legaland tax advisers to understand thefull impact of these provisions. Asa team, you’ll want to develop aplan to take advantage of any opportunities.

If you don’t plan, you may notbe prepared to act and could loseout on valuable tax-saving strate-gies. ■

Steven Berman, CFP, is first vice presi-dent/investment officer for The Spain-Berman Financial Group of Wells FargoAdvisors. Contact him [email protected].

What makes a goodsuccession plan?By ROBERT NEMETH

An effectivesuccessionplan isn’tjust a plan

to hand over yourbusiness. Whetheryou want to sell out-right or transfer thebusiness to the nextgeneration, one objective is the same— have the businessprosper for years to come. It’s rarethat today’s business owner walksaway without any future financialor emotional entanglements, so actions that improve the future viability of the business are a critical part of any successionplan.

An effective successionplan includes an analysisof strategies to minimizeincome taxes and futureestate taxes and provideplanning for the next generation of leaders andowners. Plans also need touse basic financial analysis tech-niques and a SWOT analysis togive additional insight into acompany’s operations and identifypositive and negative trends affecting the company. Timelyinformation can allow manage-ment to act swiftly, correct anynegative trends and focus on theimportant financial issues.

A succession plan should alsoaddress the human resource sideof the business and include an assessment of the current man-agement team. The assessment

will help identify potential leadersand/or owners of the company as well as assess its strengths and weaknesses. An assessmentallows the owner to see more

clearly whether the cur-rent management teamand possibly a group ofemployees could be a realistic option when considering transitionstrategies.

Children or other relatives may become an option if they are involved or want to be involved in the business,

and gifting to children may be apart of the solution.

Although simple in concept,the future value of your businessand the ultimate success of yoursuccession plan can be enhancedby implementing a SWOT analysis,conducting management assess-ments, identifying key indicators,and developing a follow-up plan. ■

Robert Nemeth, CPA/ABV, CVA, CDFA,CFE, is a principal at Apple Growth Partners. Contact him at [email protected].

By JOSEPH M. MENTREK

One of the most vexingpropositions facing theaging owner of a closelyheld business today

involves how to design and exe-cute his transition to retirement.An Employee Stock OwnershipPlan (ESOP) is an effective, but often overlooked, strategy thatmay warrant more serious consid-eration when a transfer by gift orsale to interested family membersmay not be a viable transition alternative.

STEVENBERMAN

ROBERTNEMETH

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Calfee, Halter & Griswold LLP Calfee.com1405 East Sixth Street, Cleveland, Ohio 44114 216.622.8200

When you are mapping a path for the future of your family or your business, the Estate andSuccession Planning Group at Calfee can help you make some of the most importantdecisions of your life.

We assist our clients in developing and implementing sophisticated estate plans thatcarefully balance personal goals with tax and administrative concerns. We also providecomprehensive probate and trust administration, litigation services and asset protectionplanning counsel.

Setting asteady coursefor the future

SUCCESSION PLANNING

Why consider an ESOP?

Utilizing an ESOP as the centerpiece of a transition strategyallows the business owner a rela-tively high degree of control overthe outcome. The company con-tinues to be operated by themanagement team he carefullyput in place, and the employees feel a sense ofemployment security anda higher level of commit-ment to the goals of thebusiness. In addition,there are significant taxadvantages that can be enjoyed by the sellingowner, the employee-ben-eficiaries of the ESOP, andeven the company itself.

What is an ESOP, andhow does it work?

An ESOP is fundamentally a qualified employee benefit (retirement) plan that invests pri-marily in employer stock. Theemployer establishes the ESOPand makes an annual tax-deductible contribution in stockor cash to the plan for the bene-fit of the covered employees.Cash contributions will ultimate-ly be used by the ESOP to pur-chase company stock from theowner. The stock acquired by theESOP is allocated among the

employee participant accountsbased on their compensation. Insome instances, the owner mayimplement what is commonlyknown as a “leveraged ESOP,” using borrowed capital to fundthe ESOP, thus enabling theESOP to immediately purchase alarger quantity of stock thanwould be possible by simply using the annual contributionsto the plan.

In that case, the com-pany borrows funds froma commercial lender and,in turn, loans the fundsto the ESOP. The ESOPpurchases the shares ofthe exiting owner andholds those shares in asuspense account until it receives employer con-tributions to the plan toallocate to the employees.

When the company makes itsannual tax-deductible contribu-tion to the ESOP, the ESOP usesthe contributed funds to repayprincipal and interest on theloan from the company. Thecompany then uses the ESOP repayment to satisfy its obliga-tion to the lender. As the ESOPrepays the loan, shares are re-leased from the suspense accountand allocated to participants.

What are the benefitsof an ESOP?

There are several advantagesthat make an ESOP attractive.

For certain selling shareholdersof a C corporation, capital gainscan be deferred on the sale of shares to the ESOP if the proceeds are invested in qual-ified replacement property, andavoided altogether if the replace-ment property is held untildeath, when a basis step-up may occur.

For covered employees, there is no taxable income recognizedby the participant in the year ofthe contribution. The taxableevent occurs when a distributionis made from the ESOP to theemployee due to retirement,death, disability or termination,depending on the terms of theplan.

For the company that facilitates a leveraged ESOP

transaction, the debt is paid withpre-tax dollars since the repay-ment stream starts with a tax-deductible contribution to theESOP.

Finally, if the ESOP companyis a Subchapter S corporation, the shares owned by the ESOPwill escape income taxation, and instead the company maycommit the funds to futuregrowth because the ESOP itself is a tax-exempt entity under theInternal Revenue Code.

ConclusionThe decision to utilize an ESOP

as part of a business owner’s exitstrategy is not one to be takenlightly. Generally speaking, thecompany should have a fair mar-

ket value of at least $3 million,eligible payroll of at least$800,000, and a minimum five-year history of profitable busi-ness operations. Perhaps mostimportant, the company musthave capable successor manage-ment in place.

Finally, the owner and thecompany should plan carefullyand support a comprehensivefeasibility study to ensure thatthe desired results may be obtained. In appropriate situa-tions, a properly conceived andexecuted ESOP can be the center-piece of a very successful busi-ness transition strategy. ■

Joseph M. Mentrek, JD, is vice president of Meaden & Moore, Ltd. Contact him at (216) 928-5343.

JOSEPH M.MENTREK

A glimpse of the Employee Stock Ownership Plan

1Develop an idea of thetype of plan that willbest serve the company’sinterests. Companies

have created ESOPs as an employee retirement plan, forpurposes of business continuity,

financing, enhancedemployee motivation

or as a combination.

2A qualified consultantcan help you design thespecifics of the ESOP.The actual feasibility of

an ESOP needs to be estab-lished. Such issues that need tobe addressed include who willparticipate, how the stock will beallocated, what vesting scheduleshould be adopted and how

voting rights will be handled.

3Put the ESOP in place.The company will typi-cally have an attorneyprepare a formal plan

document, which will set forththe specific terms and featuresof the ESOP. An appraiser willprepare a finished and formalevaluation report, based on datapreferably no more than 60 daysold at the date the ESOP is created.

SOURCE: THE ESOP ASSOCIATION

continued from previous page




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GLOBAL GIVING

International philanthropy requires adherence to U.S. lawsBalance donor’s goals with best strategies for tax planningBy ELLEN E. HALFON

Globalization and worldmedia have increasedawareness of internationalissues as well as the desire

of U.S. taxpayers to fund charita-ble needs beyond U.S. borders.

U.S. tax laws,however, imposecertain hurdlesfor individuals,corporations andcharities thatwish to supportcharitable activi-ties in foreigncountries in a taxadvantageousmanner. This

article provides a brief overview oftax issues relating to internationalphilanthropy, and addresses someuseful tax-advantaged strategiesfor international giving.

foundation, without the administrative burden of main-taining a separate entity. Like pri-vate foundations, however, grantsto foreign charities from a DAF aresubject to the taxable expenditurerules under IRC § 4945, and excisetaxes can be imposed on the fundand fund managers unless expen-diture responsibility is exercised oran equivalency determination ismade.

International givingthrough public charityintermediaries

Cross-border charitable activi-ties can be carried out throughcontributions/grants to U.S. publiccharities that conduct or fundcharitable activities outside theU.S. (including to so-called“Friends of” charities that supportdesignated foreign charities). If properly structured, grants/contributions to such an interme-diary can be a practical and effi-cient way for individuals, privatefoundations and DAFs to furtherinternational giving. The interme-diary domestic charity, however,must have and exercise exclusivecontrol over the contributedfunds, and cannot function as a mere conduit for funds earmarked by the donor for use bya foreign charity.

ConclusionSupport for the charitable activ-

ities of international organizationswill continue to be a priority formany in the philanthropic com-munity. Effective tax planning forcharitable giving outside the U.Srequires a working knowledge ofthe various alternatives, optionsand potential pitfalls, as well asthe particular donor’s goals andoptions. While there is no one size fits all solution, with carefulplanning, international philan-thropy can be accomplished in amanner that accomplishes intendedcharitable goals in a tax advanta-geous manner. ■

Ellen E. Halfon is counsel in Baker-Hostetler Cleveland’s Private WealthGroup. Contact her at [email protected] or call (216) 621-0200.

Direct contributionsIncome tax charitable deduc-

tions: In the absence of an applic-able tax treaty, a contribution by aU.S. individual or other taxpayerwill only qualify for a charitableincome tax deduction if the recipi-ent is a charity created or organized in the U.S. A contribu-tion to a U.S. charity that supportsor conducts charitable activities ina foreign country, however, will qualify for a charitable income tax deduction, so long asit is not “earmarked” by the donorfor use by a foreign charity suchthat the domestic charity func-tions as a mere conduit.

Gift and estate tax charitabledeductions: Gift and estate taxcharitable deductions are generallyallowed for direct gifts to foreigncharities, including foreign gov-

ernments, provided the gifts are designated exclusively forcharitable purposes. Tax treatiesmay also apply.

Direct grants by privatefoundations or donoradvised funds

Grants by private foundations:Private foundations (charitable entities generally funded and con-trolled by individuals or corpora-tions) are subject to special rulesthat can make grant-making toforeign charities challenging.

For instance, “minimum distrib-ution” rules under Section 4942 of

the Internal Revenue Code (IRC)require a private foundation todistribute 5% of its investment assets annually as “qualifying dis-tributions” to charity. A grant to a foreign charity, however, willgenerally only count for this purpose if the private foundationeither: (1) makes a good faith“equivalency determination” thatthe foreign charity is the “equiva-lent” of a U.S. public charity; or(2) exercises “expenditure respon-sibility” with respect to the grant.

Similarly, under IRC § 4945, agrant by private foundation to aforeign charity will be a “taxableexpenditure,” subject to excisetaxes (and correction require-ments), unless the private founda-tion makes either an equivalencydetermination or exercises expen-diture responsibility.

An “equivalency determina-tion” requires (a) diligent reviewof the grantee’s organizational andfinancial documents and an affi-davit from the grantee regardingits “equivalency;” or (b) an opinion of legal counsel as toequivalency. “Expenditure respon-sibility” requires (1) documentedpre- and post-grant due diligenceto confirm the proposed grantee’sorganization/operations ensuregranted funds are used for the intended charitable purposes; (2) agrant agreement; and (3) reportsby the grantee to the private foun-dation detailing how grant fundshave been spent.

Because both equivalency deter-minations and expenditure responsibility can be burdensomeand costly, many private founda-tions only make foreign grants, ifany, through “intermediary” U.S.public charities that carry out orsupport charitable activitiesabroad (see below).

Donor advised funds: A donoradvised fund (DAF) is a compo-nent fund of a U.S. public charity,with respect to which the donor(and/or a designee) may make rec-ommendations for distributions toother charities; however, the pub-lic charity must have exclusive authority over distributions. IRC §4966. A DAF can provide a donorwith many of the same consolidatedgrant-making benefits as a private

ELLEN E. HALFON




Allied Partners in Philanthropy

Philanthropy has helped make Cleveland Clinic a world leader in healthcare. To honor those allied professionals who have helped

facilitate a charitable gift to Cleveland Clinic, a new society has been established – Allied Partners in Philanthropy.

By working with allied professionals, Cleveland Clinic’s gift planning team helps supporters achieve their philanthropic goals. Together, we

are securing Cleveland Clinic’s future through gift planning.

If you would like more information on Allied Partners in Philanthropy, or information on gift planning, please contact

Nancy McCann at 216.445.8980 or [email protected].

Same-day appointments available.

GIFTS TO FAMILY

Valuation formula clausesstand up to IRS challenges Unexpected, hard-to-value assets in the spotlight

A formula clause setsthe amount that is beingtransferred. For example,the document makingthe gift could state thatthe gift is for a specificdollar amount, and ifthe value of the assetstransferred exceeds thisamount, then the excessis deemed not to havebeen transferred. This approachhelps avoid an unexpected giftwhen hard-to-value assets are being transferred. Examples are interests in partnerships or LLCs,minority interests in businesses,

By JEFFRY L. WEILER

Whether the exemptionfrom gift tax is thecurrent $5.12 million,$1 million (effective

in 2013) or another amount,avoiding payment of gift tax whentransferring a hard-to-value assetis a cause for concern.

For the past 68 years, the IRS hasobjected to the use of formulaclauses to avoid unexpected gifts;however, it has been losing courtdecisions for the past nine years overits attack on transfers made throughthe use of these formula clauses.

In Wandry v. Comm., T.C.Memo 2012-88, a gift was madesubject to a formula stating thatif the value of the assets trans-ferred exceeded a fixed amount,then the assets comprising theexcess value were deemed not tohave been transferred. The courtheld that the formula clause wasvalid. This is the third consecu-tive decision in which the U.S.Tax Court has stated that formulaclauses are valid and not contraryto public policy. The IRS filed anotice of appeal in the Wandry

case to the U.S. 10th Circuit Courtof Appeals. However, the IRS dismissed its appeal on Oct. 17.

Based on the taxpayer successesin the U.S. Tax Court concerningthe use of formula clauses, peopletransferring hard-to-value assetsby gift or by sale will want toconsider the benefits associatedwith using this technique. ■

Jeffry L. Weiler is an attorney with TuckerEllis LLP in Cleveland. Contact him at(216) 696-5044 or email [email protected].

Valuation issues as2012 comes to a closeBy RADD RIEBE

As the leaves in NortheastOhio turn, the annualguessing game begins asto how severe our winter

will be. This year, the unknownsof the winter season are competingwith the uncertainties surroundingthe estate planning landscape after Dec. 31. Will the estate, gift and generation-skipping taxexemption drop from $5.12 million to $1 million after theball drops at Times Square? Willfamily entity discounts be curtailed? Will grantor trusts beincludible in the grantor’s estate?

The answers to each of thesequestions are unknown and unlikely to be known beforeyear’s end.

The only solid ground for estate planning is that the answers to these questions areknown today. Most importantlyfor valuation purposes is thatmeaningful valuation discountsfor properly structured transac-tions involving family entities arein effect and sustainable.

Lack of control discounts from5% to 20% are empirically sup-portable today. Discounts for lackof marketability from 20% to45% continue to exist. It is expected that our economy andthe real world will continue tosupport such discount levels nextyear. However, Congress has the

power to overrule real-world con-ditions by statute. Sections of thetax code currently require certainvaluations for transfer tax purposesto ignore the market and applypre-ordained valuation require-ments only found in the tax code.Proposals are now floating aroundto legislatively “fix” the tax codeby taking away certain valuationdiscounts for family entities.

Current low interest rates (Section 7520 rate of 1.0% for November), coupled with existingvaluation discounts for passiveilliquid closely held interests, pro-vide the environment for tur-bocharged transfer planning in-volving grantor retained annuitytrusts, sales to grantor trusts, andintra-family loans. The ability totransfer a significant amount ofassets at discounted values todayand have your heirs benefit from future appreciation free from yourestate taxes has never been betterthan the fourth quarter of 2012.

Not knowing what may hap-pen to the amount of availableexemptions in the near futureand whether certain valuationdiscounts will exist in the IRSworld makes 2012 the year for estate planning. ■

Radd Riebe is a managing director inthe Valuations and Financial OpinionsGroup at Stout Risius Ross, Inc. in Cleveland. Contact him at (216)373-2998 or visit www.srr.com.

and fractional interests in real estate. While the dollar amount ofthe gift is stated, the number ofunits of the asset being transferredis uncertain. It’s like giving a $20gift certificate for gasoline. It’sclear that the gift has a value of$20 but it’s uncertain how manygallons of gas it will buy.

Recent court decisions have rejected the IRS position thatthese formulas are contrary topublic policy.

TThhiiss aapppprrooaacchh hheellppssaavvooiidd aann uunneexxppeecctteedd ggiifftt wwhheenn hhaarrdd--ttoo--vvaalluuee aasssseettss aarree bbeeiinngg ttrraannssffeerrrreedd..

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GIFTS TO FAMILY

Planning with partnerships

By SCOTT E. SWARTZ

Partnerships (and limited lia-bility companies) have longhad their place in businessformation and estate plan-

ning. For estate planning, that useis often tied to certain tax advan-tages — such as valuation dis-counts when transferring wealthto younger family members —while maintaining control over access to the partnership’s assetsby spendthrift family members, orexposure of family assets to credi-tors and third parties.

Trusts may bemore difficult to manage

The usefulness of partnershipsextends further, and in some situ-ations forming a partnership is abetter option than creating andfunding a trust.

Consider the typical situationin which there is an immediateneed to transfer assets away fromexposure to estate taxes, but alsoa need for long-term controlledmanagement of assets for thefamily.

Using an irrevocable trust forthese goals carries the burden of adocument that is difficult tochange. An irrevocable trust thatcannot be amended later cancause the trust terms to not fitupdated family circumstances.Partnership agreements, however,can be amended by vote of thepartners.

Partnerships have completeflow-through tax treat-

ment, meaning that thepartnership income is

allocated to the partners, whether ornot the income isactually distrib-uted. With manytrusts, the in-come must bedistributed tothe beneficiaryto avoid trustlevel taxation.Given that

the highest income tax brackethits at around $12,000 of trust income, and with the addition of the 3.8% surtax imposed on trust net investment incomeby the Affordable Health CareAct, avoiding trust level incometax is an important considera-tion.

For plans involving real estateheld for development or rental,partnerships offer the advantageof early losses flowing to themembers to offset against othersources of income. Net lossesfrom real estate activities held ina trust are suspended at the trustlevel, and not currently usable bythe trust beneficiaries to offsetother income.

Partnerships have their advan-tages in the right situations …and then there are those valua-tion discounts. ■

Scott E. Swartz is of counsel to the Business Succession Planning andWealth Management Practice Group of Benesch, Friedlander, Coplan &Aronoff LLP. Contact him at (216)363-4154 or email [email protected].

By LINDA DELACOURT SUMMERS

It’s possible that when you firststepped into your attorney’soffice to discuss the draftingof your estate planning docu-

ments, you did not know therewere so many decisions to make.

Who shouldbenefit, when,why and how?Upon yourdeath, whoshould be the executor, theguardian andtrustee? Whilesome decisionswere probablyeasy, others mayhave been chal-

lenging. If you have a trust as partof your estate plan, your choice oftrustee should not be taken lightly.

Trustees must make all invest-ment and distribution decisions.They must prepare federal andstate income tax returns and accountings. They must knowwhat is required of them pursuantto the Ohio Trust Code and com-mon law fiduciary standards. Evenif unaware of a violation, a trusteecan be sued by your beneficiariesif laws are violated.

Don’t takechoice oftrusteeslightly

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Who to choose? There are times when it is en-

tirely appropriate to name familymembers as trustees since theyare able to handle these duties ontheir own or with the appropriateadvisers assisting them. The bene-fit of a family member serving astrustee is the personal relationshipto you and the personal knowledgeof the beneficiaries’ needs. Becauseof this, family members generallydo not charge for their services.

Alternatively, there are timeswhen an independent trustee,such as a bank, trust company orunrelated third party should benamed since they have trust administration knowledge andexperience. Such a trustee willalso take a non-emotional ap-proach to decisions related to thetrust, but they generally charge afee. Or, you can also choose ablended approach: You can havefamily members serving astrustees, followed in succession

by an independent trustee; or,just name them as co-trustees.

There is no right answer. Naming a trustee is a personalchoice and your decision will depend upon many factors. Care-fully consider the value of thetrust and the complexity of thetrust provisions. The higher thevalue and/or the complexity, theless a family member shouldserve as sole trustee.

Also, think about the beneficia-ries. If there is discord in the fam-ily, one family member shouldnot serve as sole trustee. Estimatethe length of time the trust willoperate. If it is intended to spanmultiple generations, you shouldconsider a corporate trustee.Whatever decision you ultimatelymake will depend upon your personal circumstances. ■

Linda DelaCourt Summers is of counselfor Ulmer & Berne LLP. Contact her at(216) 583-7212 or [email protected].

LINDA DELACOURTSUMMERS




MY BENESCH MY TEAM

For all the time and effort you’ve put intobuilding your wealth, you deserve peace ofmind in return. The kind that comes fromknowing your assets are protected, your wealthwill be distributed as you wish, and your futureis as secure as you can make it.

Whether you need to build an estate plan fromscratch, or ensure your current plan is in syncwith today’s rapidly changing laws, ourattorneys can help. We have the specializedknowledge and experience to manage allaspects of your estate.

Have you considered how taxes will impactyour wealth? Do you have a businesssuccession plan in place? Are you sure thatyour assets have been aligned properly withyour estate plan? Have you planned forcharitable gifts…long-term care…incapacity?

We can assist in these areas and help youmanage your assets in ways that will minimizethe probate administration process.

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Scott E. Swartz, Of Counsel


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on receiving the2012 Distinguished Estate Planner Award

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GIFTS TO FAMILY

Roth IRA conversions: The gift that keeps givingBy DORIS SEIFERT DAY

Roth IRA conversions offerbenefits to both the account owner and bene-ficiaries. Conversions in

2012 will be subject to the taxrates currently in effect, whichare quite low. The account owneris in complete control of when andif to take withdrawals. The RothIRA funds, including earnings,will not be subject to tax. If earlydistributions are taken, penaltiesmay apply. Beneficiaries will receive the funds tax free over aperiod of up to their life expectancy,with no tax on the earnings ofthe funds that remain in the Roth.The funds used to pay the incometax on conversion will reduce theaccount owner’s gross estate.

The maximum income taxbracket in 2012 is 35%, and isscheduled to increase to 39.6% in2013. Effective in 2013 there willbe additional tax on net invest-ment income and on wages in ex-cess of $250,000. While distribu-

tions from qualified plans are notincluded in the definition of in-vestment income subject to addi-tional tax, it will increase modi-fied adjusted gross income, usedin determining its application.

Once the funds have been con-verted, annual required minimumdistributions (RMDs) no longer willbe required during the accountowner’s lifetime. If the accountowner does not need these funds,the earnings can accumulate forfuture tax-free withdrawals.

The earnings are tax-free ratherthan tax deferred. This advantagecontinues for the beneficiaries, although they will be subject toRMDs upon inheriting. A survivingspouse inheriting the Roth mayroll it over and continue with thesame advantages as the originalaccount owner. A conversioncould be the best gift, for yourselfand your family. ■

Doris Seifert Day, CPA, is director of tax-ation for Walthall, Drake & Wallace LLPCPAs. Contact her at (216) 573-2330.Delaware trusts offer

exceptional advantagesBy ANNE MARIE LEVIN

Asset protection, tax savings, control, privacy.These are a few of thereasons Delaware trusts

are so popular among affluent individuals across the country.Delaware has a tradition of lead-ership in personal trust laws thatoffer extraordinary estate, tax andfinancial planning benefits notavailable under the laws of mostother states.

Business owners, doctors andother successful individuals createDelaware trusts to protect theirhard-earned assets, includingbusiness interests, from futurecreditors. Delaware law permitsyou to create a trust for your ownbenefit that protects your assetsfrom future creditors, ex-spousesand disastrous lawsuits. You canretain control of investment decisions, enjoy confidentialityand appoint special advisers topersonalize and add flexibility tothe trust.

Most advisers are unaware thata Delaware asset protection trustmay be used to save state incometax on the sale of a closely heldbusiness in certain circumstances.For premarital planning, aDelaware trust created prior tomarriage should protect premaritalassets in the event of a future divorce. It offers an alternative to

a prenup that avoids financialdisclosure, emotional discomfortand the notorious ineffectivenessof prenups in many divorce situa-tions.

Today, wealthy individuals aremaking gifts in trust to take advantage of the historically high$5.12 million gift tax exemption,scheduled to expire at year’s end,to potentially save millions intransfer taxes.

Delaware trusts offer exceptionaladvantages. For example, unlikethe law of Ohio and other states,Delaware law permits you to restrict the trustee’s duty to inform beneficiaries.

In my experience, today mostindividuals do not want theirchildren or grandchildren to knowabout the trust. Another fact mostadvisers don’t know: You canmake a completed gift to a prop-erly structured Delaware trust,but still receive discretionary distributions from the trust. Thisgives you a safety net, just in caseyou need the assets in the future.

A Delaware trust is a powerfultool to help you fulfill your goals.Let it work for you. ■

Anne Marie Levin, J.D., L.L.M. is nationalfiduciary advice leader and senior vicepresident for Key National Trust Company of Delaware. Contact her at(302) 574-4700 or [email protected].




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It’s vitally important to design your estate plan around an expert, goal-oriented framework.

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GIFTS TO FAMILY

Assisted reproductive technology and your estate planBy FRAN MITCHELL SCHAUL

We live in a world inwhich advances inthe science of repro-ductive tech-

nology have made possiblethe creation of children inways never anticipated byour system of laws that de-fine who is a “descendant”or “issue” and is thus enti-tled to inherit under a willor trust. The resultantproblem is the possibilityof a “mismatch” betweenwhat you think your estateplan provides and how the lawwill interpret it, in the event anyof your children or other descen-dants have been conceived using some form of Assisted Re-productive Technology (ART).

ART refers to conception of achild not by the “usual means”but rather by use of a method inwhich the sperm, the egg or bothare handled outside the humanbody.

The most common methods areartificial insemination, in whichsperm are inserted into a woman’sbody by means other than sexualintercourse; and in vitro fertiliza-tion, which involves extracting awoman’s eggs, collecting thesperm, combining them in a labo-ratory setting and transferring thefertilized embryo into a woman’suterus.

The term “descendants” (or “issue”) is commonly used in atrust instrument (without furtherdefinition) to delineate those whoare entitled to inherit one or more

Bloodline trusts protect unintentional transfersBy MISSIA H. VASELANEY

Many times, inan initialclient meetingto review ex-

isting documents, a dis-cussion occurs pertainingto a client’s wishes regard-ing the ultimate disposi-tion of his or her assets.Generally, most older estate plan-ning documents provide for anoutright distribution of assets tothe children.

In discussing these provisions,clients are sometimes operatingunder the misimpression thattheir documents guarantee thatthe assets will ultimately pass totheir grandchildren. They readthe standard provision, whichstates that if a child predeceasesthem, then that child’s share willpass to the child’s children. Theydo not realize that only applies inthe unlikely event that their childpredeceases them.

Even parents who love theirchildren’s spouses may have aconcern about their wealth passing“sideways.” If a child receives hisor her inheritance outright, thoseassets will be controlled by thechild’s estate planning documents.The child most likely will leave

the assets to his or herspouse. Naturally, it is assumed that the spousewill leave these assets to thegrandchildren, but that maynot happen if the spouseremarries. The spouse mayintentionally leave the assetsto a new spouse, or throughpoor estate planning, causethe wealth to spin sideways

to unintended beneficiaries.A way to help ensure that this

does not happen is to establish aDynasty Trust, in which the assets are held in trust for thechild’s life and pass to the grand-children (or possibly the client’sother children where a child doesnot have his or her own children)either in further trust or outright.

The child can serve as trusteeor co-trustee if the trust is struc-tured correctly. The child can begiven the power to appoint a lifeinterest to the child’s spouse. Thisstructure can bolster a child’sprenuptial or serve as a substitutein instances when a child has fewassets and does not want to raisethe issue with a future spouse. ■

Missia H. Vaselaney is a partner in thePrivate Client group at Taft. Contact herat [email protected] or (216)706-3956.

You may be unintentionally disinheriting your grandchildrengenerations below that of a child.Both terms are old ones, and have

historically been under-stood to mean “of thebody” (bloodline). “Chil-dren” also typically in-herit, yet the term is of-ten used in a will or trustwithout definition otherthan that relating to theinclusion/exclusion ofadopted children.

As a result,when chil-

dren are conceivedvia Assisted Repro-ductive Technolo-gy, there oftenemerges the poten-tial for significantinjustice, the exclusionin a will or trust of childrenor grandchildren who arebeloved family members.

To make this a bit more concrete, let’s consider a few increasingly common examplesinvolving Assisted ReproductiveTechnology children and a trustset up by parents for their chil-dren and other descendants.

1An infertile son and his wifeconceive a child via artificial

insemination, using donor sperm.This grandchild may not inherit.

Though recognized as a child ofthe son under Ohio law, he/she may not be a “descendant” ofthe son’s parents as not “of thebody” because the grandchild isnot genetically related to them.

2An infertile daughter and herhusband arrange for in vitro

fertilization using a donor eggand the husband’s semen. The resultant embryo is implantedinto the daughter’s uterus.

This grandchild, though a childof the daughter under Ohio law,may not be a “descendant” of thedaughter’s parents and may notinherit from them.

3Prior to undergoingchemotherapy

(which he has been advised may renderhim sterile), a sonarranges for the

cryopreservation of aquantity of his sperm.

Two years after his deathfrom cancer, his widow, fol-

lowing his wishes, con-ceives via artificial in-semination and givesbirth to their child.

This grandchild alsomay not inherit. Though

probably not recognized as theson’s child under Ohio statutorylaw, this grandchild may nonethe-less be a “descendant” of the deceased son’s parents, due to thegenetic relationship with them.

It is likely that the grandpar-ents of each of these children expected them to inherit in thesame manner as their othergrandchildren (conceived in thecustomary manner). Some courts— seemingly intent upon avoiding

an injustice — have bent over backward to construe trust instruments to include childrensuch as these as “descendants” or“issue” by finding that the creatorof a trust intended to includethem (notwithstanding the factthat the technology employed toconceive the children had notbeen developed when the trustswere established).

The need for judicial construc-tion of a trust instrument is not a desirable option, nor is it neces-sary, especially where the problemis reasonably foreseeable and canthus be dealt with in the trust instrument.

What to do?Update the provisions of yourestate plan, including or excludingthe children of the new biology,as appropriate. If you are settingup a dynasty trust — one that isdesigned to continue for genera-tions — be aware that the use ofAssisted Reproductive Technologyis increasing and that it may affect your family in a future generation, even if it does not doso presently. ■

Fran Mitchell Schaul is a senior counsel in Calfee, Halter & GriswoldLLP’s Estate and Succession Planninggroup. Contact her at (216) 622-8351or at [email protected].

MISSIA H.VASELANEY

FRAN MITCHELLSCHAUL




Have you ever thought about what your loved ones want in their final years of life? Thinking about the end-of-life is the first step to talking about it. At Hospice of the Western Reserve, we believe discussing it early will help both you and your family when the time comes. That’s why we encourage you to talk to your family about your wishes now. Contact us for a booklet that explains our services and helps you start the conversation.

hospicewr.org/plan | 855.852.5050

INDEPENDENCE BEGINS WITH A CAPITAL “G”. Since our founding by the Pew Family in 1956, we’ve remained client-focused, financially sound, and proudly independent. As a privately-held trust company with over $20 billion under management, we’re in a position of strength and we never struggle with competing priorities.

www.glenmede.com Glenmede’s services are best suited for those with $3 million or more to invest.

To learn more, please call Linda Olejko for a personal conversation at 216-514-7876.

CHARITABLE GIVING

Making gifts to young childrenBy TINA MYERS

As part of estate and income tax planning,parents and grandpar-ents often consider

making gifts to minors. Beforemaking transfers, several factors should be considered:

Can investment income beshifted to a lower tax bracket?

Beware of the“kiddie tax”rules. Currently,childrenyounger thanage 19, and de-pendent full-time studentsunder age 24,having investment in-

come over $1,900 are taxed at theparents’ marginal rates. If trustsare used, income may be taxed athigher trust rates due to com-pressed tax brackets, or if incomecan be used to satisfy a grantor’s“parental obligations,” incomewould be taxable to the grantor,

not thechild.

Should access to theproperty be restricted beyond age 21? Transfers to UniformTransfers to Minors Act (UTMA)accounts become the unrestrictedproperty of the child upon reaching age 21 (varies by state).Transfers made in trust can beheld past age 21.

Would the transfer be subjectto gift or Generation SkippingTax (GST)? Transfers to UTMA accounts can qualify for the annual gift tax or GST exclusion.

However, transfers to trusts qual-ify only if the trust is drafted togive the child a present interestor in a way that qualifies it for the GST annual exclusion.

Will the gift impact financialaid eligibility? Assets held inUTMA accounts, and certaintrusts for the benefit of a child,will be considered the child’s assets. A custodial 529 collegesavings plan is considered an asset of the parent, not the child.

Is the purpose of the gift limit-ed to education? If so, considerfunding tax-advantaged 529 accounts or paying tuition directly.

For more flexibility, a trustmay be a better choice.

Gifting to minors can be bene-ficial, if structured properly. Con-sult a financial or tax adviser before making such gifts. ■

Tina Myers, CPA, MTax, AEP, is taxmanager for estate, gift & trusts for Zinner & Co. LLP. Contact her at (216) 831-0733 x 108 or email [email protected].

TINA MYERS




A BANK INVESTED IN MORE THAN YOUR BALANCE.At Huntington, we do things a little differently. Okay, a lot differently. For starters, we reinvest your money right back into the community. Helping businesses open. And neighborhoods grow. We staff our call centers locally and service all our loans right here. Creating jobs and opportunities for our neighbors. So ifyou’re ready for a bank that’s interested inmore than your balance, call Chris Cwiklinskiat 216-515-6547 or Era Griffin at216-515-0259.

50 thAnniversary Gala

SuperstarsBrennan Industries/David and Carole Carr John R. and Carolyn Climaco1-888 OHIOCOMP and

Minute Men Staffing Services/The Lucarelli Family

Shooting StarsDr. Joseph & Beverly CalabreseWorkers’ Compensation Management

Solutions/ The Fedeli Group

Select Restaurants, Inc.

Rising StarsBen M. BonannoBlue Technologies—Paul HannaCuyahoga County Board of

Developmental DisabilitiesDillard’sHELP Foundation, Inc.Independence Excavating—

The DiGeronimo FamilyMetroHealthOur Lady Of The WaysidePepco–Jack Borkey

Our mission is to empower persons affected by intellectual and developmental disabilities (IDD) through advocacy, education and

promotion of activities that improve quality of life.

Thank you to the lead sponsors of our 50th Anniversary Gala held on September 29, 2012:

thearcofgreatercleveland.org

GIFTS TO FAMILY

Charitable lead trusts a goodoption in today’s economyBy KATHERINE COLLIN

What makes today’seconomy so attrac-tive for lead trusts?The answer is the low

IRS discount rate, which is a mea-sure of the annual rate of returnthe IRS assumes that gifted assetswill earn during the gift term.

The discount rate is an integralpart of the cal-culation whendetermining adonor’s charita-ble deductionfor making agift. Whenthere is a lowdiscount rateand the charityreceives an assetfrom a donor at

the beginning of a gift term, suchas with a lead trust, the deductionavailable will be higher becausethe donor forgoes the use of thatasset in favor of the charity.

With a charitable lead trust, adonor transfers assets into thetrust, which pays a percentage orfixed dollar amount of trust assetsto the favorite charity for a setterm. The trust term can be up toa maximum of 20 years, or it canbe established for one or morelifetimes. Once the trust term iscomplete, assets remaining in thetrust are usually returned to thedonor’s designated beneficiaries.

Although there is no incometax charitable deduction for a

donor who creates a charitablelead trust, the donor still has theprospect of substantial savings ongift and estate taxes, while passingalong trust growth to heirs tax-free. Income earned by thetrust is not attributed to the donor.Instead, the trust is taxed accordingto trust rates. It is the trust that isentitled to an income tax deduc-tion for the amount paid out annually to the donor’s chosencharity. This type of trust allowsdonors to meet philanthropic objectives while both they andtheir heirs achieve tax savings.

Lead trusts can be establishedwith one of two payment meth-ods.

Annuity trusts provide a fixed,annual gift to charity for theterm of the trust. The amountpayable to the charity each yearis determined by the donor’s ini-tial funding amount placed inthe trust — commonly, 5% to 8%annually of that initial amount.Due to the structure of annuity

trusts, no additions can be madeto the trust corpus. To increasephilanthropic support, a donorwould need to establish anothergift vehicle for the charity.

Unitrusts provide a fluctuating,annual gift to charity for theterm of the trust. The trust is val-ued on the last day of the year todetermine payment for the fol-lowing year. Again, the charitycould receive 5% to 8% annually,but it is equal to that percentageof the trust’s calculated year-endvalue. Additions can be made tothe trust corpus that will increaseboth the annual gift to charityand the amount returned to heirsat the end of the trust term.

Ultimately, giving throughcharitable lead trusts is a win-winoption, allowing donors to sup-port their favorite charities whilerealizing tax savings. ■

Katherine Collin, Esq., is assistant direc-tor, gift planning, for Cleveland Clinic.Contact her at (216) 444-1245.

CHARITABLE GIVING

Beyond the bequest:What’s your plan?By LAURA MALONE

Americans are a naturallycharitable society, andmost people judge theirgiving capacity by what is

in their checkbook. Often, be-quests are considered the mostcommon type of planned gift because the assets are consideredto no longer be needed. However,other giving options allow indi-viduals and families to assist theirfavorite charities without com-promising their financial security.

Gifts anyone can makeLife insurance purchased with

the charity as both owner andbeneficiary of the policy can createan amplified gift that costs “pen-nies on the dollar.” Gifting an ex-isting policy for the charity to sellor surrender can create immedi-ate impact instead of waiting for adeath benefit.

Qualified retirement plans(IRA, 401k, etc.) may be taxed upto 60% when passed on to heirs, yetcan transfer tax free to a charity.Lifetime withdrawals can bemade because the charitable deduction typically offsets thetaxable income.

Appreciated securities, closelyheld business interests or real es-tate gifted in advance of sale canmitigate capital gains taxes for theowner while creating a meaning-ful gift. Since business interestsand real estate often have little tono basis, the fair market deduc-

tion could create significant benefit. Donor advised funds or private

foundations can create long-termlegacy to help support charities orserve as a conduit if charities donot have the capacity to acceptmore intricate gifts.

Gifts that pay incomeCharitable remainder trusts

and charitable gift annuities cancreate income to the donor whileproviding a charitable deductionup front and potentially defer oreliminate capital gains tax.

Gifts that protect assetsCharitable bargain sales, chari-

table lead trusts and retained lifeestates can maintain the benefitsof an asset or transfer assets toheirs at a reduced cost or tax free while making a gift to charityat the same time. Taxable rateson charitable lead trusts are verylow, making it more likely thatthe family will receive the assetsback tax free at a higher apprecia-tion than if gifted without thetrust.

Leveraging assets other thancash in a planned gift can createsignificant benefits to both thedonor and their favorite charities.These strategies can be complex,so always consult trusted profes-sionals throughout the process. ■

Laura Malone is director of gift planningfor The American Endowment Founda-tion. Contact her at (877) 599-8903 oremail [email protected].

WAYS TO SET UPLEAD TRUSTSAnnuity trusts: These vehicles provide a fixed, annual gift to thecharity for the term of the trust.

Unitrusts: This option provides afluctuating, annual gift to charity forthe term of the trust.

KATHERINE COLLIN




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CHARITABLE GIVING

Foundationsoffer their ownopportunities

By CAROL F. WOLF

Creating a charitable foundation is a major decision for donors, particularly given that they mustchoose between establishing a

private foundation or a supporting founda-tion. As with all planned gifts, the donor’sgoals are of utmost importance and advisersmust understand and review the similari-ties and differences when consideringwhich foundation is appropriate for adonor.

Every foundation, whether private or supporting, is a separate nonprofit entity. A supporting foundation qualifiesas a public charity because of its legal con-trol by a public charity (e.g., Jewish Federa-tion of Cleveland) and thus is free of thelimitations applicable to private founda-tions.

Private foundations can be structured togive donors total control over grantmakingand investments. In contrast, supportingfoundations cannot be completely con-trolled by donors. Family members may beon the governing body, but the supportedorganization (public charity) must elect or

Consider donor advised funds to combat potential tax increasesBy MATTHEW S. OLVER

By the time this article goes toprint, we will know the out-come of the U.S. elections.Ongoing political rancor and

a lame-duck Congress make trying to predict how they will address the potential tax increasespure speculation.

What we do know is that undercurrent law, beginning in 2013, a new3.8% Medicare contribution tax will be imposed on the unearned income (includingcapital gains) of higher income individuals.Further, there is a possibility that the long-term capital gains tax rate will go from15% to 20%.

If you itemize deductions on your tax return, one opportunity to harvest sometax savings is through charitable dona-tions.

However, the tax benefit can be magni-fied by donating appreciated assets heldmore than one year, as you may be able todeduct the full market value of the assetand avoid paying the capital gains tax youwould have otherwise paid by selling thatasset. Not only do you get to offset ordi-nary income (taxed up to 39.6% in 2013)but you also avoid paying capital gains taxes (up to 23.8% in 2013).

What if you want the biggest tax benefitnow but aren’t yet ready to give the moneyto charity? Donor advised funds can helpyou remove assets from your taxable estate

and get a bigger income tax benefittoday while maintaining flexibility regarding who receives the donation, how much and when.They are particularly useful whenyou have a spike in income (e.g.,business sale, options exercise), ifyou believe your future tax rate willgo down (e.g., after retirement) or ifyou believe Congress will reducethe charitable deduction in the

future. “A donor advised fund is similar to a pri-

vate foundation but requires less money,time, legal assistance and administration toestablish and maintain,” says Kara Downing,portfolio manager at Spero-Smith Invest-ment Advisers, Inc. When you donate anasset to your fund, the sponsoring organi-zation liquidates it and transfers the pro-ceeds into investments you select fromwithin the donor advised fund’s availableoptions. You can then use these funds tomake cash gifts to charitable organizationsover several years.

Many community foundations, financialinstitutions and some public charitiessponsor donor advised funds. Consult yourqualified tax professional to help you de-termine what makes the most sense givenyour goals and financial situation. ■

Matthew S. Olver, CFP, is senior vice president anda wealth adviser for Spero-Smith Investment Advis-ers, Inc. Contact him at (216) 464-6266 or [email protected].

appoint a majority of the trustees.Private foundations have a minimum dis-

tribution requirement — their annualgrants and administrative expenses must beat least 5% of the value of their investmentassets annually. Supporting foundationshave no minimum distribution requirement.

Private foundations are responsible fortheir own recordkeeping and IRS and statefilings. A supporting foundation’s record-keeping and filings can be handled by thesupported organization, often at a reducedcost.

Private foundations pay an excise tax of2% on their investment income (reduced to1% if certain distribution requirements are met). Supporting foundations pay noexcise tax on their investment income.

Private foundations have ceilings on de-ductibility of gifts that are lower than theceilings applicable to gifts to a supportingfoundation, which are the same as those forgifts to a public charity.

As with most charitable gifts, there is nobest choice, but by understanding the fea-tures of each type of foundation, donorscan make the appropriate choice andachieve their philanthropic and financialgoals. ■

Carol F. Wolf is senior development officer for theJewish Federation of Cleveland. Contact her at(216) 593-2805 or email [email protected].

Appropriate vehicledepends on goals

MATTHEW OLVER




Building a financial plan

Building a financial plan that helps meet your needs is much easier when

you rely on the expertise of Lincoln Financial Advisors. We can provide you

with the appropriate financial strategies for your individual needs through

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and services to help meet your goals in:

©2012 Lincoln Financial Advisors Corp.Securities offered through Lincoln Financial Advisors Corp., a broker-dealer. Invest-ment advisory services offered through Lincoln Financial Advisors Corp. or Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. It is not our position to offer legal or tax advice. We encourage you to seek the advice of

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and non-profit organizations

Personal financial planning involves creating a plan to help you reach specific

financial goals. We can help. Call for an appointment, and let’s get started.

Jeremy DiTullio, CFP®, AWMA®, CRPC® Managing Principal Lincoln Financial Advisors

[email protected]

CHARITABLE GIVING

Deciding to give is the first of many choicesMatching financial goals with charitable motivations and timing must be consideredBy SUNNY MASTERS

Comfort. Love. Respect. At Hospiceof the Western Reserve, everythingwe do comes back to thosethree important words.

This is especially true when wespeak with others about their finallegacies, regarding how they wantto be cared for and how they wantto be remembered.

Many people come to a point intheir lives where they feel inclinedto give back. They do so for a num-ber of reasons, all very personal tothem. What motivates you? Perhaps you feel strongly about acause. Perhaps an organization hastouched your life or the lives of loved ones.Maybe you want to create a legacy and setan example that inspires others to give.

Or your giving is a way to get your family together and pass along your valuesto younger generations.

For as many motivations as there are togive, there are as many ways of giving. Thekey to having a rewarding giving experi-ence is finding the best fit — for your charitable priorities, financial goals andpersonal preferences. This checklist is designed to help you and your professionaladviser determine the custom giving solu-tion that’s right for you.

What are your charitable priorities?

Charitable interests. You may have asingle charitable interest — an importantcause or organization. Or you may

have several, or a desire to explore newcommunity needs and opportunities asthey arise.

Impact. What kind of impactwould you like to make with yourcharitable gift?

Perpetuity. Should your gift lastforever? You can endow your gift sothat only the income is spent andthe principal becomes a growingsource of community capital. Or,you can choose to spend all of yourcharitable assets. What is your preferred timetable?

What are your financial goals?Assets and taxes. Most large gifts

present the opportunity for significant taxdeductions. Some people choose to giveduring high-income years to defray theirtaxes with deductions. You may wish to donate appreciated securities or real estateto avoid taxes on the sale of these assets.And charitable bequests can play a role inestate planning for your heirs. Your profes-sional adviser can help you assess the finan-cial and tax implications of giving assets.

Transitions. Major life events often drive changes to an estate plan and promptcharitable gifts.

Timing. Maybe you would like to startgiving now, so you can get involved andpotentially see the results of your gift. Or perhaps you’d like to give through your estate. Most philanthropists do a

combination. What is yourpreference?

Income. Some peoplegive in a way that providesthem — or a loved one —a stream of income for life.Your professional advisercan help you select a givingvehicle that suits your timehorizons, tolerance of riskand income requirements.What kind of incomewould you like your estateto provide?

What are your personal preferences?

Recognition. Some people like a tasteful levelof recognition for theirgood work. It attracts atten-tion to their cause, gener-ates awareness, and mayinspire others to give. Somepeople prefer anonymity.What level of recognitiondo you prefer?

Control. Is control over assets you give tocharity important to you? Some people areglad to let go of control, once they’ve madesome guiding decisions. Determining therange that’s comfortable for you will helpyour adviser recommend appropriate givingvehicles.

Knowledge. Would you like more infor-mation regarding establishing a philan-thropic plan and/or evaluating charitablegiving options?

To help people identify their particular

charitable interests, we’veproduced a brochure calledDeciding to Give. It is yet another tool Hospice of theWestern Reserve providesto offer our patients, fami-lies and donors the oppor-tunity to give others thecomfort, love and respectthey received while in ourcare.

Planned gifts are an important source of fundsthat enable Hospice of theWestern Reserve to providecomprehensive end-of-lifecare regardless of ability topay. ■

Sunny Masters is chief develop-ment officer for Hospice of theWestern Reserve. To receive acomplimentary copy of Decidingto Give, please call or email Staci Lowell at (216) 383-6678or [email protected] or visitwww.hospicewr.org/donate.

Hospice of the Western Reserveis a community-based,

non-profit agency providing comfort and emotionalsupport to patients and their families. The agencycares for people in a variety of settings, includingDavid Simpson Hospice House overlooking Lake Erie,in patients¹ homes, in hospitals and long-term carefacilities, and at Ames Family Hospice House inWestlake. Headquartered in Cleveland, Hospice of the Western Reserve provides hospice services,palliative care and bereavement support to patientsand families throughout Northeast Ohio includingAshtabula, Cuyahoga, Geauga, Lake, Lorain and Summit counties with offices throughout, and outreach, into Medina, Portage and Stark counties.

SUNNY MASTERS



Your philanthropic support helps University Hospitals provide the

highest quality of care for our patients, now and for future generations.

It’s because of you that we can live our mission every day:

To Heal – enhancing patient care, experience and access

To Teach – training future generations of physicians and scientists

To Discover – accelerating medical innovations and clinical research

And it’s with your support, that we’ll continue to provide the same

high-quality care we’ve been providing for nearly 150 years.

Join the many who are making a difference. To learn more about ways

to leave your own legacy, contact our gift planning team at 216-983-2200

or visit UHgiving.org.

Your legacy can truly make a difference.

By JEREMY DITULLIO

For many Americans, givingmoney to charity — duringtheir lifetime or in theirwill — is an important

financial goal. But commonsense says you shouldn’tdo so at the expense ofother goals — for in-stance, educating yourchildren or funding yourown retirement. By thinkingahead it’s possible to include charitable givingin the comprehensive fi-nancial planning process.

Beyond taxesWhen you integrate charitable

giving with your other goals, themost important question to askyourself is: “Do I have a heart forcharity?” Don’t make donationsjust to get a tax deduction. Whileyou get a tax deduction, peopletend to be bitter about money theygave away if they don’t haveenough assets in 10 or 15 yearswhen they retire. The bottom lineis that charitable contributions mayreduce your tax liability, but makesure those dollars are truly discre-tionary before giving them away.

Charitable contributions cantake many forms. Most people arefamiliar with giving cash orchecks. But it’s also possible todonate stock or other securities.The advantage is you may nothave to pay capital gains taxes onany appreciation in the value ofthe publicly traded securities —and you may receive an incometax deduction for the currentmarket value. Note that yourchoice in charitable beneficiariesmay affect your allowable charita-ble deduction.

More sophisticated strategies,such as family foundations, arealso available. Although the assis-tance of an attorney is needed, youand your family members can usethe foundation to make gifts to yourfavorite charities. Other commonlyused charitable vehicles include:

■ A charitable remainder trust.You retain an income interest fora period of time. Then the assetsgo to the named charity. Thedonor gets the income plus anavailable income tax deductionbased on the present value of theinterest going to charity.

■ A charitable lead trust. It op-erates in reverse, with paymentsfirst going to charity. After a periodof years the assets go to a non-charitable beneficiary you select.This strategy works best for indi-viduals who don’t need the in-come the assets will generate inretirement but want to controlwho gets the property.

Giving during retirementBefore starting the charitable

giving process, determine whatyour passion is and who youwant to help the most. Charity

does truly begin at home,and you should make sureyou have enough assets tomaintain your standard ofliving in retirement. Workwith your financial adviserfrom the beginning to makesure you have sufficientdiscretionary assets to con-tinue making charitablecontributions in retirement.Computer modeling can

help gauge what any financial decision — including large giftsto charity — will mean 10 or 20years in the future, and they candetermine whether gifts may bepossible in the future after you’vemet your other financial goals.

Charitable bequestsThere are generally three places

your money can go when you die— to family members, to charityor to estate taxes. An estate plancan help you control who getsyour money at the lowest possi-ble tax cost. In their wills, peopleoften list charities and the dollaramount each will receive. But,make sure your estate can affordthe bequests. If you make specificbequests and the market declines,there might not be enough left totake care of family members.

How you phrase things in yourwill can make a big difference.Consider, for example, a $2 millionestate that makes five $100,000bequests to individual charities. Ifthe estate shrinks to $1 million, thecharities now get 50% of the estateinstead of 25%. Instead, considerleaving beneficiaries a specificpercentage of your estate. With a$2 million estate, $100,000 is 5%.If the estate shrinks to $1 million,5% is only $50,000, but more isleft for family members.

Future legacyOftentimes, people’s charitable

interests often expand as retire-ment nears. They have a greatersense of their mortality and won-der about their legacy. Giving tocharity can help add meaning totheir liVES. With proper estateplanning, you and your spousenot only can have a comfortableretirement but also leave a chari-table legacy that will continueeven when you’re gone. ■

Jeremy DiTullio, CFP is a registered rep-resentative and investment advisor rep-resentative of Lincoln Financial AdvisorsCorp. Contact him at (800) 466-7150ext. 7450 or [email protected].

By J. DONALD CAIRNS AND KYLE B. GEE

If one of your goals is to make gifts while minimizingtaxes, you should consider acting before 2012 draws to

a close.Currently, each year an individ-

ual may give up to $13,000($14,000 in 2013) to any numberof recipients free of federal gift tax.Gifts in excess of this annual ex-clusion are subject to gift tax, butthe good news is that for 2012there is a lifetime gift tax exemp-tion of $5.12 million.

However, if Congress does notact before the end of 2012, thisexemption will drop dramaticallyto $1 million on Jan. 1, 2013. Further, the highest tax rate ongift and estate taxes will climbfrom 35% to 55%.

This means that if the com-bined value of your lifetime gifts

CHARITABLE GIVING

Integrate retirementplanning with charitable giving

JEREMY DITULLIO

Don’t delay during this season of givingThis is the year to take advantage of opportunities

(in excess of annual exclusions)and the value of your estate atyour death exceeds $1 million, estate taxes may take from 41%to 55% of the value of the assetsover $1 million, leaving signifi-cantly less to your family or otherbeneficiaries.

Utilizing the $5.12 million exemption while it is still herecan help you pass greater wealthto your descendants and others. Alifetime gift also removes fromyour taxable estate all post-gift income and appreciation on thegifted property.

There are diverse gifting strate-gies that should be tailored toeach unique circumstance. Strate-gies include making outright giftsof cash, securities or other assets;funding an irrevocable life

insurance trust (ILIT) so the trust can pay life insurance premiums on policies that willnot be taxable in your estate;funding Section 529 college education plans; gifting limitedpartnership interests; establishingdynasty trusts; and creating aqualified personal residence trust(QPRT).

Also, with interest rates cur-rently at historic lows, this is anoptimal time for grantor-retainedannuity trusts (GRATs); charitablelead unitrusts and annuity trusts(CLUTs, CLATs); income/powerof attorney trusts for non-citizenspouses; and the creation, refi-nancing or forgiving of intra-family loans.

Such gifting opportunitiesshould be carefully considered before the end of 2012. ■

J. Donald Cairns and Kyle B. Gee are attorneys at Spieth, Bell, McCurdy & Newell, Co., LPA, a law firm specializing in wealth transfer taxationand planning, estate and trust adminis-tration, fiduciary representation, and charitable giving. Contact them at (216) 696-4700 or visit www.spiethbell.com.


J. DONALDCAIRNS

KYLE B. GEE




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By PATRICIA FRIES

Philanthropy is per-sonal. Each donoris motivated by aunique history and

individual reasons for sup-porting a charitable orga-nization. In addition, eachgift may be made in vari-ous ways and some op-tions may be more appealing orappropriate for a donor’s situa-tion than others. We work with

each donor or adviser tounderstand individual cir-cumstances and find thebest way to structure eachgift.

Life insurance may beused to creatively achievethe donor’s philanthropicand financial goals. De-pending on the donor’sage and health, life insur-

ance can be an excellent andcost-effective way to provide future support for a charity.

Current support may be providedthrough other means. The chartabove summarizes life insurancegift options and tax advantages.

Given financial and tax uncer-tainties for the foreseeable future,it is important to understand thevarious gift options to determinethe best way to support a favoritecharity. ■

Patricia Fries is director of gift planningat University Hospitals. Contact her at(216) 844-0430.

COLLECTIBLES AND FINE ART

PATRICIAFRIES

Donor remains ownerof policy. Income tax deduction is notapplicable.

No ongoing incometax deductions sincedonor remains ownerof policy and pays insurance premiumsto insurance company.

Life insurance is included as part of estate assets. Estatetax deduction foramount transferred to charity.

Immediate tax deduction

Ongoing tax deduction

Estate tax deduction

Income tax deduction equal tolesser of net premi-ums paid or policy’sfair market value.

Donor receives ongoingincome tax deductionsfor contributions tocharity covering premium payments.

Life insurance is notincluded as part of estate assets. Deductions during life(estate tax deductionnot applicable).

Income tax deductionequal to lesser of netpremiums paid or policy’s fair marketvalue.

Paid-up policy: Nopremium paymentsrequired (ongoing income tax deductionsare not applicable). Partially paid-up policy:If additional premiumsare required, donorreceives income taxdeductions for contri-butions to charity.

Life insurance is notincluded as part of estate assets. Deductions during life(estate tax deductionnot applicable).

Gift Options

Charitynamed asbeneficiaryof life insurancepolicy

Obtain newpolicy andtransferownership to charity

Transferownership of existing policy tocharity

Reappraise high value personal property

By JAMES CORCORAN

Despite weak economicconditions, various classesof collectible personalproperty have escalated

substantially in value in the national and international market— up to and beyond 100% over

Markets stillfavorable for collectibles

the last five years.The classic example of

such an increase in valueis probably the gold andsilver market, where pricesper ounce have increasedmore than 250% in thelast five years.

Flight from paper cur-rency (Euros and even theU.S. dollar) has signifi-cantly increased market demandfor certain collectibles. As withgold and silver, these collectiblesare perceived as a solid and tangi-ble way to lock in value as a

hedge against currency devaluation. Such high-quality collectibles haverisen dramatically in valueas a result of increasedmarket demand.

For example, top qualityworks of art, especially impressionist, modern andcontemporary works, havereached record prices

within the last two years. Thistrend does not show any signs ofabating. High-quality Chinese artand antiques and contemporary

JAMES CORCORAN

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CHARITABLE GIVING

Life Insurance gift options

Life insurance offers donorscreative gift opportunities




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CHARITABLE GIVING

Hold your trust company to fiduciary standard of care

By LINDA M. OLEJKO

In today’s turbulent financialenvironment, a trust companyis legally bound to place clientconcerns ahead of company

interests. A striking aspect of thetrust company model is this

embedded legaland moral commitment to a fiduciarypurpose.

In contrast,broker-dealersare bound by a“suitability stan-dard.” The lawsdefining aprovider’s obliga-

tions under this standard varygreatly and only require theprovider’s recommendations beappropriate in light of the client’sinvestment objectives and circum-stances.

Trust companies are also distin-guished by their safekeeping ofclient property. The expectationthat assets will be available whenclients need them seems funda-mental and reasonable. Under certain circumstances, however,many broker-dealers are permittedto borrow assets from client margin accounts for corporatepurposes.

LINDA M. OLEJKO

Chinese art are in nearly parabolicmarkets at present – even theChinese prefer tangibles to paperyuan, it seems.

Among others, the followingcategories of col-lectibles includingbooks, firearms, antique automobilesand boats, have also shown sus-tained increases inmarket prices for topquality items.

Dramatic increasesin value of certaincategories of highvalue personal prop-erty mean that acurrent appraisal or reappraisal ofclient assets based on current fair market value is essential.

A current appraisal providesyou with the data you need toprovide current and accurate ad-vice and guidance to your clients:

Insurance purposes. Does thepresent insured value adequatelyreflect current market value? Isthe present insurance value toolow or unrealistically high?(There are collectible categoriesthat have fallen 30% or moreover the past five years). A

replacement value appraisal willaddress this issue.

Estate planning and wealthmanagement. What percentageof the client’s total net worth is

in theform ofpersonalpropertyholdings?A fair marketvalue appraisalcan be essential toa completeand up-to-date estate

plan for clients who own signifi-cant high value collectibles. Remember, too, that you may be largely unaware of client holdings of such property. A dis-crete inquiry can yield importantinformation.

Charitable donations. Thismay be a particularly valuabletool for wealth management andestate planning purposes whenvalues have increased dramatically.Partial annual charitable gifts of asingle item are sometimes desirable.The availability of large increases

in income tax deductions makesuch gifts much more advanta-geous to the client than ever.

Inter vivos gifts. Gifts of tangi-ble personal property to family orfriends should also be considered,depending on current fair marketvalue data and client objectives.Use of partial gifts and annualgift tax exemptions should alsobe considered.

Things to remember. Use a nationally certified appraiser ingood standing. Is your appraiser amember of any of the three majornational appraisal organizations:AAA (Appraisers Association ofAmerica), ISA (International Soci-ety of Appraisers), ASA (AmericanSociety of Appraisers)? Check theAppraisal Society websites.

The IRS now requires an “IRSQualified Appraiser” for charita-ble gifts. Does your appraisermeet the IRS requirements? And,importantly, does your appraiserhave adequate Errors and Omis-sions Insurance? ■

James Corcoran, JD, AAA, ASA, ISA, isfounder of Corcoran Appraisal Group, whichhas been active professionally for morethan 35 years. Contact him at (216) 767-0770 or [email protected].

continued from previous page

For these reasons, the trustcompany model incorporatingthe fiduciary standard of care isthe highest protection for clientsavailable today. A fiduciary stan-dard always requires the selectionof the best option for the client.When a provider places the high-

est importance on client interests,clients start from the best possibleposition. ■

Linda M. Olejko is vice president, business development for Glenmede.Contact her at (216) 514-7876 or [email protected]

Top-quality collectibles are sustaining increases

Decisions, decisionsWhile client goals vary based on preference and need, the

following questions highlight important information all investorsshould know before choosing a provider:

■ What is the organization’s corporate ownership structure?

■ Which regulatory agency supervises the business, and whatare the real implications of this oversight?

■ What is the standard of care? Is it a fiduciary standard?

■ How are the company and its investment professionals com-pensated?

■ What are the protocols governing custody of client assets? Can the organization potentially access client holdings withoutclient consent?

■ Is the company financially sound? Does the organiza-tion include business lines exposedto significant market risksthrough trading or other practices?

■ How does the company demon-strate its objec-tivity and emphasis onfiduciary services?

Other modelsbuilt on suitabilitystandards




If your clients want to

CHANGE TOMORROW,help them start today.

The Cleveland Foundation helps caring individuals — people like your clients — make our community a better place by giving to their favorite causes. If helping Greater Cleveland is important to you and your clients, partner with us. We make it easy. To learn more, contact us today and start a conversation.

YOUR CLIENTS + OUR COMMUNITY

ClevelandFoundation.org

Please call our Advancement Team at 1.877.554.5054

Give a charitable gift that will last forever.

CHARITABLE GIVING

KAYE RIDOLFI

PPeeooppllee aarree eexxpplloorriinngg tthheeiiddeeaa ooff ffaammiillyypphhiillaanntthhrrooppyyaass aa wwaayy ttoo rreeccoonnnneecctt wwiitthh eeaacchh ootthheerr..

By KAYE RIDOLFI

For many, Thanksgiving isthe rare time of year whenfamily members put asidetheir busy schedules and

gather to spend time together. The holiday also provides aunique opportunity for families to discuss making charitable giving a shared activity.

The Cleveland Foundation is often invited to help families facilitate this process, one of themany ways we practice donorstewardship.

Each year, hundreds of individ-uals, families, organizations andcorporations use the ClevelandFoundation as their partner inphilanthropy. Through our extensive knowledge of the community and sound fiscal stewardship, we help them

Donor stewardship is helping you help others

achieve their philanthropic goalsin intelligent and creative ways,often designing personalizedfunds to ensure that donors’ charitable contributions have thedesired impact.

Simply put, our role as donorstewards is to help you help others. For those interested in creating a charitable family legacy, we are available to guidefamilies as they work together tomake a difference in the lives ofothers.

Increasingly, people are exploringthe idea of family philanthropy as a way to reconnect with each other and teach the nextgeneration valuable lessons, aschildren and grandchildren learnthe importance of being charita-ble. It’s also a way for senior family members to prepareyounger people for leadership opportunities and to practice philanthropy in ways that reflectthe values of the family.

The Cleveland Foundation staffknows how to best approach theconcept of family philanthropyand will work closely with donorsand their families to ensure thatthe family legacy continues. ■

Kaye Ridolfi is senior vice president for advancement at the Cleveland Foundation, the largest grant-making organization in Northeast Ohio. To learn more about donor stewardship or family philanthropy, contact the Cleveland Foundation’s Advancementteam at (216) 861-3810 or (877) 554-5054.

Families should seek guidanceto shape philanthropic legacy


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