Crains Cleveland Business

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VOL. 33, NO. 44

Advisers busy as gift deadlines draw close

Oswald Cos. to remain downtown

Lifetime tax exemption set to shrink on Jan. 1

Insurance brokerage’s expansion to come in 1100 Superior building

By MICHELLE PARK mpark@crain.com

By STAN BULLARD sbullard@crain.com

The clock is ticking for those wealthy individuals who want to gift millions of dollars to people tax-free.

And that countdown is creating a deluge of work this quarter for local attorneys, wealth managers and accountants who say they’re seeing unparalleled demand for estate planning and gift-related services.

At present, an individual can gift up to $5.12 million over his or her lifetime without a dollar of the transfers being taxed, thanks to the most generous gift tax exemption amount in at least a decade. On Jan. 1, when Bush-era tax cuts are set to phase out, the lifetime exemption is scheduled to drop to $1 million, and the gift tax rate is set to jump to 55% from 35%.

INSIDE: How The pending will $5 million changes mean the affect heirs? amount a person Those handmay transfer uning down that taxed to anyone, gift grapple typically heirs, will with the quesdrop and the tax tion. Page 10 levied on non-exempt amounts will rise. Consequently, wealthier individuals are trying to make gifts so their estates can benefit from the favorable tax treatment now in the event that such a favorable exemption is not extended.

“I’ve never seen more people interested in large gifts before,” said Brian J. Jereb, a member and certified specialist in estate planning, trust and probate law with law firm McDonald Hopkins LLC in Cleveland.

“Clients … now see a risk which is unacceptable to them, and that is the risk that the exemption will go back to $1 million from the current $5.12 million,” said Mr. Jereb, who will present during a McDonald Hopkins event called “Estate Planning in Uncertain Times” this Friday,

Oswald Cos., an insurance brokerage based in downtown Cleveland since 1893, has decided to remain in the city center as it embarks on a big expansion by moving to 1100 Superior Ave., which will be renamed Oswald Centre.

Marc S. Byrnes, Oswald chairman and CEO, said the company reviewed several suburban office and downtown options for the 220 employees at its headquarters before striking a deal with American Landmark Properties Ltd., the Skokie, Ill.-based owner of 1100 Superior, which began life as the headquarters of the former Diamond Shamrock Corp.

Oswald is leasing for 12 years the 13th, 14th and 15th floors of the building, a total of 71,000 square feet. That’s a 48% increase from the 48,000 square feet it currently occupies at IMG Center, 1360 E. Ninth St. RENDERING PROVIDED The firm is on a single floor The building that will be at IMG that connects to more known as Oswald Centre offices in the adjoining Lincoln Building. Employees from a Beachwood office will be reassigned downtown when Oswald occupies its new offices next August.

Robert J. Klonk, who will become Oswald’s CEO next Jan. 1 as Mr. Byrnes moves into the chairman’s role full time, said the new offices will be “bright and open and will not look like a traditional office.”

“It will be designed so employees can work well

JUST A FRIENDLY REMINDER ...

Health care providers increase efforts to limit missed appointments, which cost big bucks

By TIMOTHY MAGAW tmagaw@crain.com

L

ocal health care providers are taking a crack at reducing the number of patients who are no-shows for appointments, as an absent patient often means absent revenue.

Though it might seem like a minor inconvenience, missed appointments can cost hospitals and doctors’ offices big bucks — and in an era of tightening budgets and declining reimbursements from government and commercial payers, every dollar counts.

Officials at Akron General Health System say missed appointments accounted for roughly $18,000 in lost revenue each month for just its cancer program.

See REMINDER Page 7

See OSWALD Page 8

INSIDE From seeds to sale for Christmas tree farm owners Fritz Neubauer Jr. and wife, Jane (right), take pride in their role in creating families’ holiday memories. SMALL BUSINESS, PAGE 11 ■ Big Cheasapeake loss raises Ohio eyebrows. PAGE 3

JASON MILLER

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NEWSPAPER

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See ADVISERS Page 10

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CRAIN’S CLEVELAND BUSINESS

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$2B Chesapeake loss raises Ohio eyebrows But CEO McClendon still high on Utica shale’s prospects

By DAN SHINGLER dshingler@crain.com

Forgive Ohioans if they’re concerned about Chesapeake Energy Corp.’s latest quarterly report.

When a company loses $2 billion and it operates in this neck of the woods, it’s usually a big deal.

So much red ink often portends a plant closing, layoffs or other economic woes. In this case, though, the concern is over whether the large loss by the big natural gas producer will slow the advance of shale gas drilling in Ohio’s Utica shale.

It might, but it won’t affect nearterm drilling as much as a lack of pipelines and infrastructure to handle future production will, analysts say. They’re also quick to note that Chesapeake’s big loss mostly was due to the Oklahoma City-based

company’s decision to write down the value of its reserves because of low gas prices, not because anyone thinks its Utica acreage won’t pan out in terms of gas and oil output.

Chesapeake has been caught between an anvil and a hammer this year, as low prices for natural gas have hurt both its revenues and the value of its assets, which largely are in the form of mineral rights leases in shale fields around the United States.

Because of low gas prices this year, Chesapeake took a one-time charge of nearly $3.2 billion to reflect a drop in value for the natural gas and oil reserves it controls. The charge contributed to a loss of about $2 billion in the third quarter.

Chesapeake officials remain optimistic about the company’s Utica See LOSS Page 8

SEAN GARDNER/REUTERS

Chesapeake CEO Aubrey McClendon

INSIGHT

Sequoia deals reflect financial advisory climate Succession-oriented acquisitions gain steam as longtime owners seek exits

By MICHELLE PARK mpark@crain.com

In another example of the growing number of succession-driven mergers and acquisitions in the financial advisory world, Cleveland-based Sequoia Financial Group LLC has acquired the client assets of a Floridabased firm whose owners desired an exit.

And, industry insiders say, more deals driven by the sector’s aging leadership are sure to come.

Sequoia, a wealth management firm, added one professional and roughly $91 million in client assets through its Oct. 1 acquisition of investment adviser Hammerman & Strickland LLC. Sequoia did not

disclose terms of the deal, which brings its total employees to 34 and its assets under advisement to more than $1.2 billion.

Sequoia actually has acquired the client assets of three financial advisory firms in a little more than Haught three years, making this the most acquisitive period in its 20-year history.

Founded in 1991, the firm closed acquisitions in June 2009 and June 2011. In comparison, between 2000 and 2008, the firm did one acquisition, and in its first decade of business, it did none.

“It’s much, much more than we’ve done in the past,” said Thomas

Haught, the firm’s president. “A lot of that is the development of our company, our ability to take on more work. We know we have talented advisers, and they’re looking to grow their careers. Acquisitions create opportunities that those folks can grow into.

“There’s a lot of talk about acquisitions in our industry, and I think the demographics of advisers lead you to believe there will be more, especially succession-oriented acquisitions,” Mr. Haught added.

“I believe we’ll see more (consolidation) over the next decade.”

If plans pan out as anticipated, Sequoia will close another acquisi-

tion next year.

“We have a couple of (deals) right now that I would say are in the eighth inning,” Mr. Haught said.

The firm also is in early talks with a couple other firms, he noted.

Eating their own cooking Sequoia consolidated Hammerman & Strickland’s Lutz, Fla., office into its Tampa location and hired Hammerman’s only remaining employee. The founding principals of the firm are retiring but will work with Sequoia for a year on an asneeded basis, helping to complete the transition, Mr. Haught said.

A driving motivation for the two founders of Hammerman was a desire to transition out of the business, according to Mr. Haught.

The need for succession is high See SEQUOIA Page 9

THE WEEK IN QUOTES “Clients … now see a risk which is unacceptable to them, and that is the risk that the exemption will go back to $1 million from the current $5.12 million.”

— Brian J. Jereb, a member and certified specialist in estate planning, trust and probate law with law firm McDonald Hopkins LLC in Cleveland.

“When somebody misses an appointment, those dollars are not going to show. Then you’ve got an awful lot of expertise and infrastructure just sitting on the shelf not being paid for.”

— David Dumpe, associate professor of finance, Kent State University. Page One

“If I could’ve stayed young forever, I would’ve stayed in the business forever.”

— Glenn Battles, former owner, Sugar Pines Farm, Chesterland.

Page 11

“Some really want as many hours as possible, and it’s a positive sign that I have hours to give them.”

— Liz Murphy, owner, The Learned Owl Book Shop, Hudson.

Page 11

Entrepreneur assistance programs multiplying Groups fulfill startups’ need for advice, cash

By CHUCK SODER csoder@crain.com

TECHudson didn’t exist in 2010.

The same goes for the Cleveland branch of Bad Girl Ventures. And Reach Ventures. And Venture for America.

A wave of new programs designed to help entrepreneurs has crashed on Northeast Ohio’s shores.

Today, area entrepreneurs can get assistance — and in some cases, cash — from at least 16 programs and organizations that weren’t around two years ago. Few are more than a year old.

Some of the programs, such as the TECHudson incubator, target entrepreneurs in a particular city. Others focus on startups in a specific industry sector, like Reach Ventures does with ideas related to data analytics.

A few programs are designed to help student entrepreneurs, and one, Bad Girl Ventures, aims to help women start businesses.

But the goal of them all is to create jobs and wealth in Northeast Ohio.

They’ve got a good shot at succeeding, according to several people who pay attention to the local entrepreneurial community.

These observers agreed that there are plenty of local entrepreneurs See ASSISTANCE Page 37

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CRAIN’S CLEVELAND BUSINESS

WWW.CRAINSCLEVELAND.COM

NOVEMBER 12 - 18, 2012

PUBLISHER/EDITORIAL DIRECTOR:

Brian D. Tucker (btucker@crain.com) EDITOR:

Mark Dodosh (mdodosh@crain.com) MANAGING EDITOR:

Scott Suttell (ssuttell@crain.com)

OPINION

57%-43%

V

oters in Cleveland deserve applause for putting the city’s children ahead of their wallets by approving in resounding fashion a 15-mill levy for the Cleveland Metropolitan School District. Now the heat is on Mayor Frank Jackson, schools CEO Eric Gordon and other officials to put into motion the improvements to the district’s operations that have been promised in the mayor’s school transformation plan.

The percentages in the headline represent the for and against votes on the school levy issue. In terms of raw numbers, the levy passed by more than 18,000 votes — an impressive figure considering the size of the tax increase that Cleveland residents decided to impose upon themselves.

The big win is a testament to the hard work of Mayor Jackson, Mr. Gordon, Cleveland Teachers Union president David Quolke and various educators and civic leaders who got behind a plan that voters found credible for transforming the Cleveland schools. They were wise in promising that operators of quality charter schools, which greatly enhance the educational prospects of thousands of city school children, would share in the levy proceeds.

The clock already is ticking on turning promised improvements into reality. The levy expires in four years — a sunset provision that gave voters the assurance that there will be a referendum of sorts on whether the transformation plan is working to their satisfaction.

The provision puts a lot of pressure on the mayor, Mr. Gordon, district officials and teachers, but it’s a good pressure to have. It beats the alternative of another levy failure that would have left the district wallowing in an enormous budget hole.

They can thank Cleveland voters for giving them the chance to prove themselves worthy of their trust.

43%-57%

T

hose figures represent the stern rebuke voters in Cuyahoga County gave to Issue 108, the big levy increase sought by the Cleveland-Cuyahoga County Port Authority.

In a mathematical coincidence, the percentage of voters who cast ballots for and against the port levy is the opposite of how Cleveland voters treated the levy for the city’s schools. However, there is nothing coincidental about why the school levy succeeded and the port levy failed by 67,000 votes.

Many Cleveland voters had a vested interest in the future of their children in voting for the school levy. Voters in Cleveland and its suburbs lack the same emotional attachment to the Port of Cleveland.

We suspect many voters also weren’t keen on giving the Port Authority enough money to build a $25 million pedestrian bridge from Cleveland’s under-construction convention center to the city’s lakefront attractions. “What does a bridge have to do with shipping?” we can hear voters say.

These results shouldn’t quickly be brushed aside, which is why we’ll share more thoughts about the Port Authority in the near future.

FROM THE PUBLISHER

Dump archaic school finance method

O

cut from the district’s budget. ur editorial on this page rightly As most know, Medina had been one praises all those who helped of the state’s hot growth areas for years, steer the resounding levy victory and the school district had to absorb and for the Cleveland public schools. serve that growing population. But with It’s worth noting as well that the resithe continued rejection of levies, the dents of Akron also gave their school district has laid off 100 staff, dropped system a big boost with passage of a levy. busing, implemented “pay-to-play” fees That’s the good news, and it’s imporfor sports and extracurricular tant, given how much rides on activities, cut teachers in the the success of the region’s two BRIAN gifted-student programs and largest cities.

TUCKER dropped some honors and adThe bad news is that these vanced-placement courses. two levy campaigns were conThe district also cut the elespicuous not just in size but in mentary school teachers who how few others were successful. were helping the most chalI was reminded of that as our lenged students overcome family discarded yet another reading deficiencies. yard sign we had displayed in After this levy defeat, the dissupport of Medina’s schools. trict’s leadership is facing anThat district — rated excellent other $3 million in personnel reductions by the state — lost its effort at a 3.9-mill by the next school year. Now, what kind levy by a margin of 769 votes out of nearof path is that for a once-proud school ly 21,000 cast. district that had been a cornerstone of the It’s usual to cite how little it would cost county’s residential growth? the average homeowner (about $10 a “We worked hard to prove we’ve been month for the owner of a $100,000 operating the district efficiently,” superhome). If the levy had passed, it would intendent Randy Stepp said. “We’ll rehave merely paid for what the state had

group and convince the community we’re worth the investment … in 2013.”

I’ve written about it, and we have editorialized on the subject for years, to no avail. The Ohio Supreme Court ruled many years ago that the method the state uses to fund its schools — on the backs of property owners — is unconstitutional. The General Assembly and governor have steadfastly not only failed to fix it; they haven’t even seriously considered the issue.

As Ohio ages, something must be done.

Retired folks who’ve seen their savings decimated will be hard-pressed to buy the argument about strong schools protecting their house values. It’s true, certainly, but these are folks whose retirement funds are tied up in cautious plans dependent on interest rates that are next to zero. And these folks vote.

It’s certainly an inopportune time to suggest that our lawmakers realize the harm they’re causing to Ohio’s future.

Too many of them are worrying more about the job they’ll chase as their term limits loom. But you can help by writing to legislators to demand change.

■

THE BIG ISSUE On what issue would you like to see Democrats and Republicans in Congress compromise?

SAIRA RAHMAN

JIM YOUNG

MICHAEL CERMAK

FELICIA KING

Cleveland

Kirtland

Cleveland

Pepper Pike

Women’s rights would be the big one for me … especially with reproductive rights. …

They should be allowed to choose what they’re doing with their own bodies.

They’ve got to compromise on the deficit. … Right now everybody’s idea of compromise is, ‘The other guy should do what I want to do.’ It’s about time people actually started doing legitimate compromise.

Funding … public transportation. I do (work for the Greater Cleveland Regional Transit Authority). Federal funding for public transportation is absolutely dismal.

Everyone seems to be big on balancing this budget. …

That’d be great.

➤➤ Watch more of these responses by visiting the Multimedia section at www.CrainsCleveland.com.

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CRAIN’S CLEVELAND BUSINESS

Merrilee Crain, 69, was Crain board member Merrilee Patterson Crain, secretary and board member of Crain Communications Inc. and wife of Crain Communications president Rance Crain, died Nov. 2 of complications from cancer. She would have turned 70 on Nov. 27.

Mrs. Crain was active in charitable, business and family activities. She started the Gourmet Gala for the March of Dimes in Chicago and was a board member of the Hubbard Street Dance Company and the Goodman Theatre. She also ran the benefit and auction for Illinois’ Lake Forest Symphony. When the Crain family moved to Florida, Mrs. Crain served on the board of The Orlando Museum of Art.

OBITUARY Mrs. Crain met her husband in 1965 on a blind date arranged by Rance’s brother, Keith. They were married eight months later. The couple raised their two daughters, Heather and Cindi, in Lake Forest, Ill., and have six grandchildren.

“Merrilee was an extraordinary woman,” her husband, Rance, said.

“It’s very rare that a person combines creativity and intuition with a practical side, but Merrilee did. She came up with elegant solutions to problems that eluded the rest of us, and people gravitated to her for advice and counsel. We will miss her love, her pixyish sense of humor,

her generosity and her cious and welcoming, invincible can-do spirand our kids remember it.” it even now, 10 or more Brian Tucker, pubyears later. lisher of Crain’s Cleve“Merrilee will be land Business, recalled missed greatly, by both the graciousness of Mrs. my family and the enCrain. tire Crain organization,” “Once, when my Mr. Tucker said. family and I were vacaMrs. Crain is survived tioning in Florida, I by her husband; her took Rance up on a very mother, Frances (who kind offer to play golf at Merrilee Crain turned 100 in July); her his club,” Mr. Tucker brother, Pat; and her said. “Rather than let my wife Janet daughters and grandchildren. A just drop me off, Merrilee insisted memorial service will be held that Janet and our kids stay, and today, Nov. 12, in Craigville, Mass., Graham and Kelsey had a great where her family has owned a cottage time in their pool. She was so grasince 1919.

■

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CRAIN’S CLEVELAND BUSINESS

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County beats deadline with bonds Plan is to issue $114M before limit tied to property tax kicks in

By JAY MILLER jmiller@crain.com

A decline in property tax values that will limit its borrowing capacity is pushing Cuyahoga County to issue nearly $114 million in tax-exempt, general obligations bonds before the end of the year.

The plan is to issue both new and refunding bond issues now because lowered property values after a 2012 reappraisal will cut the county’s ability

to issue bonds next year without a public vote until some of the old debt is repaid.

In total, the county plans to issue 12 separate bond issues before the end of the year. Six new issues, totaling $66 million, are for capital improvements such as building a new kitchen in the county jail, upgrading radios used by county sheriffs and improvements to other county-owned facilities. Six issues are so-called refunding issues that will replace older debt that carries higher interest rates.

“This is the county’s last chance to do a sizable general obligation bond issue,” said county fiscal officer Wade Steen. “The total valuation (of county real property) will go down

and the 10-mill limit will kick in.”

The term 10-mill limit and its synonym, inside millage, are fiscal officer shorthand for the Ohio Constitution’s limit on property taxes.

The constitution limits the amount of indebtedness a county, city or school district can incur without a citizen vote to l% of the total valuation of property within its jurisdiction.

Earlier this year, all real estate in the county was reappraised and new values set. Because of the recession, the total value of real property in the county has declined 1.5% since the last revaluation three years ago.

When the revaluation kicks in next year, Mr. Steen said, the county’s debt outstanding, now at $298.1 million, would exceed the new 10mill limit. For now, however, there is room for $60 million in new debt.

Timing is everything

BUSINESS IS THE HEART OF THE COMMUNITY. WE’LL HELP KEEP IT HEALTHY.

Mr. Steen said planned debt refinancings, which total nearly $48 million, will save the county $5 million over the 12 years remaining on the older bonds. The new issues will add $1.9 million to the county’s annual debt service expense. Mr. Steen said if the county had gone to the market with the same new issues two years ago, the interest expense would have been about $2.4 million a year.

Cuyahoga County finance officials put their debt plan before County Council last month and will sell the bonds before the end of the year, Mr. Steen said.

The county’s timing is good, according to Tim Offtermatt, a senior vice president of public finance with the Cleveland office of investment firm Stifel, Nicolaus & Co. “Interest rates are at an all-time low and this is just an ideal time,” Mr. Offtermatt said.

“This is the county’s last chance to do a sizable general obligation bond issue,” he added.

Stifel Nicolaus will be the underwriter for several of the 12 bond issues.

Mr. Offtermatt said other large, industrial cities and counties are doing similar year-end bond issues.

He said older cities and regions are the ones seeing property tax declines.

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County officials are in the midst of meeting with bond rating agencies to see if the agencies will agree to boost the county’s credit rating, which would lower the interest rate on the bonds. The county currently has an Aa1 rating with Moody’s Investor Services. The next highest rating — Moody’s highest — is Aaa. Kevin O’Brien, executive director of the Center for Public Management at Cleveland State University, said he believes the efforts of Cuyahoga County Executive Ed FitzGerald to trim staff, lower costs and restore confidence in county government could sway the rating agencies.

“Moody’s should consider raising the bond rating from where they were three years ago,” said Mr. O’Brien, a former municipal finance analyst for Moody’s.

Mr. O’Brien said the county is doing the right thing with refunding its existing debt to get a lower interest rate. But, he said, he’s neutral on new bond issues.

“Rising debt is always a concern,” Mr. O’Brien said. “Public sector investments other than for infrastructure, they don’t have as big an impact on spending as spending on things that impact private economic growth.”

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Reminder: Readmission rates suffering continued from PAGE 1

“Our drugs are so expensive and the volume of patients is increasing so much that it was really putting a crunch on us,” said Connie Bollin, executive director of oncology services at Akron General.

Ms. Bollin said the cancer center’s no-show rate hovered between 15% and 20% before hospital volunteers in September started calling patients to remind them of their appointments. The gentle reminder, she said, accounted for a 25% decline that month in the number patients bailing on appointments.

From reminder phone calls, emails and text messages to sending vans to pick up patients, Northeast Ohio’s health care providers are looking for new ways to ensure their patients stick to their schedules. Health care officials say while it’s good for their bottom lines, it’s also good for their patients’ health.

“We try everything we can to mitigate no-shows in order to maintain the continuity of care for our patients,” said Bryan Fredericks, chief operating officer for Summa Physicians Inc., a multispecialty group of more than 270 physicians associated with Summa Health System in Akron.

Such efforts include a mailed reminder and a phone call — not an automated message but rather a conversation between a Summa staffer and the patient about the pending visit and whether he or she needs to bring any additional information.

according to Dr. Michael Nochomovitz, president of University Hospitals Physician Services. The new system has a secure online interface where physicians can send patients reminders. Inversely, patients will be able to send their physicians messages with any questions they might have about their care.

The Clinic, which boasts a systemwide no-show rate of about 12.5%, is launching a pilot initiative to remind patients via text message of their appointments at its Stephanie Tubbs Jones Health Center in East Cleveland, which sits near the site of the now-shuttered Huron Hospital.

The health center’s patrons — who to a large extent are low-income people, often without landlines —

will be able to confirm or cancel their appointment via text message, according to Mary Curran, executive director of special projects at the Clinic.

Also, Ms. Curran said the Clinic’s same-day appointment campaign, which launched earlier this year with an ad that aired during the Super Bowl, is designed to fill empty slots created by those patients who make last-minute cancellations.

“It would put pressure on any health care system when you have any blank slots,” Ms. Curran said.

“That’s just a given. There’s always somebody behind (someone who cancels) that needs access.”

Urban challenges Hospitals and physician groups

CRAIN’S CLEVELAND BUSINESS that mainly serve low-income patients often struggle with the highest no-show rates. The MetroHealth System, which is subsidized

by Cuyahoga County, sees a no-show rate of as high as 25% in some of its service lines, according to Dr. Alice Stollenwerk Petrulis, its medical director of managed care.

MetroHealth has tried to steer many of its patients away from using its emergency department as a one-stop shop for routine care and instead guides them toward primary care physicians. Often, however, those patients don’t show up for scheduled appointments.

To combat that problem, MetroHealth is employing care coordinators to act as concierges of sorts in setting up patients’ care. MetroHealth also has a van service that transports patients to its main campus — a service it hopes to expand to its

community health centers in the coming months.

“It’s a matter of meeting a patient at their current state and finding out their barriers and helping them surmount those barriers,” Dr. Petrulis said.

St. Vincent Charity Medical Center in downtown Cleveland faces similar troubles, according to Nan Woldin, its director of revenue cycle. The hospital, for one, is looking to cut down on the number of patients who cancel pre-admission testing appointments — the important step before a patient is cleared for surgery.

Ms. Woldin said surgeries are a revenue driver, and canceled pre-admission tests often set back surgeries. She said it’s harder to fill an empty surgery slot than a diagnostic procedure such as an X-ray because a surgical procedure often requires specialized staffing.

■

YOU CAN MOVE YOUR

Wallop to the wallet By their nature, Northeast Ohio’s health care organizations have a high amount of fixed costs given the rate at which they’ve acquired hospitals and physician practices over the last 20 years, according to David Dumpe, an associate professor of finance at Kent State University.

As such, hospital administrators are aware of what they must earn in order to break even and, in a best case scenario, turn a profit.

“When somebody misses an appointment, those dollars are not going to show,” Dr. Dumpe said. “Then you’ve got an awful lot of expertise and infrastructure just sitting on the shelf not being paid for.”

Giving medical providers further incentive to reduce no-show levels is the federal government’s decision to siphon Medicare dollars starting this fall from health care institutions with high readmission rates. Regulators plan to withhold a portion of Medicare payments — starting at 1% and rising each year — for hospitals with 30-day readmission rates that are above the national average for patients with certain chronic conditions.

Some health care providers say readmissions are due in large part to patients who skip out on their follow-up appointments.

Touching base The Cleveland Clinic and University Hospitals for years have dispatched automated appointment reminders, including letters and phone calls, to patients. But as Northeast Ohio’s two largest health care enterprises upgrade their information technology infrastructure, they’re introducing tools that could trigger fewer patients to brush off their health care.

University Hospitals is installing a new billing and scheduling system throughout its regional network of 1,500 physicians that will include new ways to communicate with patients that should help mitigate no-shows,

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NOVEMBER 12 - 18, 2012

Loss: Ohio still important to company continued from PAGE 3

holdings and are eager to drill them, but they also need to curtail spending and await infrastructure development that would make drilling here more profitable, analysts say. “We think the release is a mixed bag,� J.P. Morgan analyst Joseph Allman said in his writeup of Chesapeake’s Nov. 1 announcement of third-quarter results.

While Mr. Allman gave Chesapeake kudos for putting up for sale some of its assets, such as those in Texas’ Eagle Ford shale area, he noted that the company has continued to spend more on exploration and development than he had hoped. As a result, it will need to take further action to close what Mr. Allman sees as a “funding gap� between what Chesapeake will need for future operations and what it seems likely to have on hand to pay for them — which could mean more asset sales.

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But as far as the Utica shale region is concerned, Chesapeake is showing no signs of waning enthusiasm.

Ohio might become more important to the company because prices for oil and natural gas liquids — or so-called wet gas — have held up better than have natural gas prices, and the Utica is thought to hold more of such substances than most other U.S. shale regions.

In Chesapeake’s Nov. 2 conference call with securities analysts, the Utica was a hot topic. Asked whether the Utica was living up to its potential, especially for oil and wet gas production, Chesapeake CEO Aubrey McClendon was nearly effusive. “I think our Utica wet gas acreage is between 300,000 and 400,000 acres

Oswald: Location a draw continued from PAGE 1

together,� Mr. Klonk said.

Plans also call for the building to gain a fitness center and for Oswald to add a 4,000-square-foot conference center and board room on the building’s first floor. That room also will serve as a “community center� available for meetings of local nonprofits.

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out of our 1 million plus acres there.

So we’re thrilled with the Utica,� Mr. McClendon said. “If you’re in that (wet gas) corridor, which stretches from Columbiana down through Carroll and Harrison (counties) and maybe a little further south from there, you have results that are as good as any from any play in the country.�

In terms of dry gas, Chesapeake’s Utica wells have performed as well as its wells in Pennsylvania’s Marcellus Shale, Mr. McClendon said. But until natural gas exporting begins or gas prices rise generally, interest among potential partners — which Chesapeake hopes will help fund its drilling — in dry gas production might not increase, he said. The company hopes to find such a partner, but that probably won’t happen until 2013, he added.

Chesapeake did not give an update on its efforts to sell a substantial portion of its Utica lease holdings.

The company has been marketing mineral rights for 337,000 acres in the Utica region since last summer.

Demand is likely to remain strong for Utica acreage because it has the mix of hydrocarbons that drillers still want most, especially natural gas liquids, said Houston-based energy analyst Allen Brooks, publisher of the blog “Musings from the Oil Patch.�

Chesapeake isn’t the only U.S. energy company looking to spend its money more wisely, Mr. Brooks said, and more disciplined spending across the industry could benefit the Utica. “If people start prioritizing their spending, the Utica is going to be near the top of the list or at the top of the list of places they want to be,�

Mr. Brooks said.

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multitude of nonprofits, Mr. Klonk said. “It’s exciting to be a 120-year-old company planning for the future and making this kind of commitment to our city,� he said.

The space will be designed with “huddle rooms� where multiple employees can plug in their computers and conduct quick meetings to further the firm’s philosophy of collaboration, said David C. Jacobs, Oswald president. Mr. Jacobs and Joseph DuBois, Oswald’s chief financial officer, and their Jones Lang LaSalle tenant-representative consultants ran the site search and negotiations with the new landlord.

The move will allow the company to improve its technology significantly, Mr. Jacobs said.

Oswald has been at IMG Center and the Lincoln Building for 21 years.

When it moved in, the company had 80 employees — a little more than one-third the size of the current staff, Mr. Byrnes said.

On a recent tour, the office showed its age and reflected space constraints as a result of Oswald’s in-place expansion. It has a plethora of private offices ringing the windows of both buildings and a massive cubicle city jamming the larger Lincoln Building floor.

Where’s the food truck?

Oswald primarily will occupy space vacated by iron ore giant Cliffs Natural Resources Inc., which moved to

But, he added, the real limiting factor for drilling the Utica is the lack of pipelines to take gas and oil away from wells and to processors and end markets. Companies will need to be patient as that infrastructure develops over the next year or two, because without it, drillers have no way to bring their products to market and little incentive to drill.

Is slower better?

Still, in an era of low gas prices, a slowdown in development of the Utica region might not be such a bad thing — and might be inevitable, according to an analyst who requested anonymity. “The Utica will develop more slowly than the Marcellus, partly due to the need for infrastructure, partly due to lack of knowledge about how to work the formation, partly due to lack of money,� he said. “Actually, we believe this extended development period is a benefit of the formation.�

Mr. Allman noted that Chesapeake has not curtailed its capital expenditure budget for 2013, which is one indication of its plans for drilling next year — though he added “for now� to that comment to investors.

Mr. Brooks said he believes neither Chesapeake nor other drillers are going to curtail their ultimate plans for the Utica, especially when gas prices remain low for dry natural gas. “The pace of (drilling) may slow for various reasons — cash flow being one and the other being the (pipeline) take away capacity. But all things being equal, the Utica is going to be where people want to put their money. ... It tends to be oily and liquid — which is the best commodity to be targeting.â€? â–

200 Public Square, and will be the latest addition to 1100 Superior’s tenant roster.

Earlier in the year, the building landed as tenants Osborn Engineering from the nearby Penton Media Building, 1300 E. Ninth St., and the BrandMuscle Inc. marketing firm from Beachwood.

John Roeser, senior vice president and head of leasing at American Landmark, declined comment on the transaction.

The significance of Oswald’s move and expansion was emphasized by Michael Deemer, vice president of business development at Downtown Cleveland Alliance. “Oswald is an important company in downtown Cleveland. They have had a presence here for many, many years,� Mr. Deemer said. He noted the recent makeover of Perk Park, which is across Walnut Avenue from 1100 Superior and which has become destination for food trucks on “Walnut Wednesdays,� has aided efforts to rejuvenate the area.

Oswald executives cited both features as part of their decision to land at 1100 Superior.

Keeping employees happy at Oswald carries extra meaning for the insurance brokerage, which operates in multiple specialties and in risk consulting, because it is employeeowned. The company also operates five branch offices around the country.

Oswald will have room to expand at 1100 Superior as it grows, Mr. Byrnes said. He said the move will be an important part of the firm’s 120th anniversary next year, but also described it as “forward-focused.â€? â–

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9

Following default, Revol’s new owners revel in growth plan Under new owners, wireless carrier broadens target demographics

By CHUCK SODER csoder@crain.com

One year after being taken over by creditors, Revol Wireless is becoming a lot more aggressive.

The Independence-based wireless carrier is in the process of opening about 50 stores and has ramped up its marketing in an effort to broaden Revol’s customer base beyond “ultravalue� consumers, CEO Timothy Yager said. About half the new stores will be in Northeast Ohio, with the rest distributed across northern Ohio, Greater Columbus and Greater Indianapolis — the areas where Revol provides wireless voice and data service.

The moves are timed to take advantage of the company’s new 3G data network, which will allow Revol customers to surf the web at faster speeds.

Although Revol’s main selling point is its low-cost, no-contract

service plans, the 3G network should allow the company to compete for customers who otherwise might sign up with a bigger wireless carrier, said Mr. Yager, who took the CEO role a year ago when Revol’s new owners replaced its management team. “It really allows us to compete with anyone,� he said.

The company traditionally has targeted teenagers and people in urban areas. Revol’s new stores, most of which will be open before Thanksgiving, should help the company broaden those demographics; many of them will be in suburban areas, Mr. Yager said.

The sheer number of new stores also is a sign of Revol’s newfound aggressiveness.

The company previously sold phones on Revol plans through about 45 stores branded with its name, so the new stores would push that number into the 90s. Revol-

Sequoia: More new firms form, offsetting mergers continued from PAGE 3

throughout the financial advisory business as advisers, who on average are older than 55, seek to sell their practices, both to next generations and to external buyers, said Brad Bueermann, managing partner of FP Transitions. The Portland, Ore.-based firm assists financial advisory firms nationwide with valuation, buying and selling and succession planning.

This year, FP Transitions will do more than 1,000 valuations, up 30% from last year’s volume, Mr. Bueermann said. Those numbers indicate that people are eyeing their practices, thinking about what they’re worth and considering their future plans.

Indeed, the need for succession was cited as a motivating factor for other recent, local deals. They include the March 1 merger of Strongsville-based Buzek Wealth Advisors into Cedar Brook Financial Partners in Pepper Pike and the July 2 merger of Chapman & Chapman Inc., a Twinsburg-based employee benefits and insurance brokerage, into PJ Amos & Associates, a Sheffield Village wealth management firm.

Kevin Kroskey said he’s in talks with two local firms that his investment advisory firm, True Wealth Design LLC in Fairlawn, may acquire.

The leadership of both firms faces succession issues, he said. “They’ve had some level of success, so it’s too valuable to allow the internal successor to afford to buy them out,� Mr. Kroskey said.

The ultimate irony is that most financial advisers advise clients on succession issues and encourage them to put together plans, but don’t eat their own cooking, so to speak, said Azim Nakhooda, managing principal of Cedar Brook Financial.

To that end, Cedar Brook has required through a formal initiative that all its advisers have a formal succession and continuity plan in

“It sounds like they could do well if they market well.�

branded stores are accounting for a growing percentage of the company’s sales, Mr. Yager said, but he would not give sales figures or say what percentage of its revenue comes from independent stores that also sell phones on other carriers’ networks.

In the third quarter, Revol started to ramp up its marketing efforts through radio, TV, print and digital advertising as well as through social media and promotions with sports teams. The company likely will do even more advertising now that Nov. 6 has passed, he said. “We can’t wait until the election is over so we can afford to market again,� he said with a laugh just before Election Day.

Break from the past Revol, which employs about 125 people in Independence and about 350 people throughout its footprint, already has seen an uptick in demand from its latest efforts, Mr. Yager said.

The company needs the business: In December 2010, Revol missed a deadline to pay off $150 million in debt that it took on five years earlier,

– Jeff Kagan, Atlanta-based consultant and analyst who follows the wireless industry shortly after the company was started.

Although Revol’s creditors gave it extra time to refinance the debt, they took control of the company after it failed to do so.

Today, Revol’s biggest shareholders are private equity firms DDJ Capital Management LLC of Waltham, Mass., and Guggenheim Partners LLC, which is based in New York and Chicago. They control a minority stake in the company, which technically is called Cleveland Unlimited Inc. Before the ownership transfer, Revol primarily was backed by M/C Venture Partners in Boston and Columbia Capital of Alexandria, Va. Revol has had to cut costs in the past, but its new owners are “very committed� to expanding the company, Mr. Yager said.

Revol’s relatively low prices, combined with its 3G data service, should help it compete for business, especially given the down economy, Mr. Yager said. The company charges $35 a month for unlimited voice service and texting, and its packages

place for their own advisory practices by December, Mr. Nakhooda said.

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Bigger not always better While there has been an uptick in acquisitions among wealth managers, FP Transitions’ Mr. Bueermann said it doesn’t reflect a trend toward consolidation because there also has been an increase in the formation of new firms. Formation is driven by the “enormous unprecedented wealth transfer going on right now� as baby boomers retire and transfer money to the next generation, he said.

Those firms involved in recent M&A deals face opportunities and challenges, industry sources said.

For one, larger firms have resources to spend to develop younger professionals with mentoring and training programs that smaller boutiques often do not, Mr. Nakhooda said. And larger firms can set up better succession plans, he said.

One risk, though, is that wealth advisers folded into a larger firm are going to be trained in that larger firm’s way, “so you start to lose a little bit of diversity of ideas,� Mr. Nakhooda said.

Many companies that are acquiring firms have been running into trouble integrating the various cultures of the acquired firms, according to Eric N. Wulff, managing director and principal of Aurum Wealth Management Group in Mayfield Village, which is looking to do acquisitions.

Another big issue? Paying a huge premium to acquire a book of business that may not prove profitable in the long run as clients who were acquired pass away or leave assets to a next generation that doesn’t do business with the existing firm, Mr. Wulff said. “Customer service is also an issue as the bigger you get, the more things fall through the cracks,â€? he wrote in an email. â–

that include unlimited data max out at $50 a month for customers who buy Android smart phones.

Plus, the 3G network should help Revol appeal to mid-tier buyers who watch what they spend but also want to surf the web on their phones, he said, noting that consumer expectations for fast data service continue to rise. “It was clearly something we had to do to stay competitive,� he said.

Though bigger wireless carriers are in the middle of upgrading their networks so they can provide faster 4G data service, there is room for smaller carriers with 3G networks, as long as their prices are lower, said Jeff Kagan, an Atlanta-based consultant and analyst who follows the wireless industry.

Though he wasn’t familiar with Revol, Mr. Kagan noted that the company’s low prices and its addition of 3G service should help it compete. “It sounds like they could do well if they market well,â€? Mr. Kagan said. â–

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Advisers: Exemption expiration fuels action

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STEPHEN HERRON PHOTOS

Nov. 16.

When the lifetime exemption amount was raised to more than $5 million on Jan. 1, 2011, a number of Barbara Bellin Janovitz’s wealthier clients gifted the amount right then.

Now, people who weren’t as comfortable releasing such large chunks from their estates are feeling the pressure to do it, said Ms. Janovitz, who chairs the estate planning group at Reminger Co. LPA. Ms. Janovitz said she is advising an unprecedented number of clients on planning and gifting. “This whole group of people is saying, ‘Now, I’m getting worried,’� she said. “A lot of people are deciding they better do it.�

That was especially true last Wednesday, Nov. 7, when Reminger received a “slew of phone calls from people ready to do it� the day after the presidential election, Ms. Janovitz said.

Many clients’ perception is that Congress “won’t get its act together� to provide for a more favorable exemption, she said, and that Democrats favor a lower exemption and higher tax rate — though President Barack Obama has said he supports a $3.5 million exemption,

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“I think the attorneys and appraisers will be super busy in December. It will be hard to find an attorney to pick this up. You’ve got to get in touch with them now.� – Jim Komos, tax partner, Ciuni & Panichi Ms. Janovitz noted.

Ending 2012 with a bang

Anyone seen Superman?

Given all the uncertainty, it’s hard to tell clients what they should do, Sequoia’s Ms. McCauley said.

Some of her clients have been taking advantage of the $5.12 million exemption before it’s gone. Others are doing nothing. “When the rules keep changing ‌ it’s very difficult for clients to plan,â€? Ms. McCauley said. “As an estate planning practitioner, though, we have a responsibility to inform our clients that this could be a onetime opportunity.â€?

Reminger’s attorneys are busier both with people who want to pull the trigger on gifts before the year is up and with clients who have decided, given the publicity surrounding the issues, that they need an estate plan, Ms. Janovitz said. She estimated the number of clients for which the firm is doing planning is up at least 50% over a typical year. “I normally don’t work evenings and weekends starting in September,� but she did this year, Ms. Janovitz said. “We’re worried if we’re going to be able to fit everybody in,� she added.

Jim Komos, a tax partner with Beachwood-based accounting firm Ciuni & Panichi Inc., said the estate and trust plans and business ownership transfers his firm has been drafting in the second half of 2012 are double those in a typical half. “I think the attorneys and appraisers will be super busy in December,â€? Mr. Komos said. “They have to draft all the stuff, need to work out all the details. It will be hard to find an attorney to pick this up. You’ve got to get in touch with them now.â€? â–

Of course, no one knows definitively whether Congress will act before the end of the year, or even after, to maintain the current exemption. But many estate planning professionals doubt it will.

If no action is taken, a couple that gives away $10.24 million in gifts would go as of Jan. 1 from seeing none of the transfer taxed to seeing the amount above $2 million taxed at 55%, said Annie McCauley, managing director of Family Office Services within Sequoia Financial Group LLC in Akron.

To be clear, this exemption is separate from the annual gift tax exclusion, which this year allows a person to gift $13,000 to as many people as they like, while still preserving the lifetime exemption.

(That annual amount increases to $14,000 on Jan. 1.)

Most local advisers say they expect Congress eventually to make the lifetime exemption more than $1 million, but not likely upwards of $5 million again. “If ‌ Superman comes in at the last minute and says, ‘Don’t worry about it, we’re going to keep these things in,’ no harm, no foul,â€? said Terry Fergus, president of FSM Capital Management LLC in Beachwood. Even if the exemption stays the same, “You probably needed to do estate planning anyway,â€? Mr. Fergus said.

Mr. Fergus’ firm serves small business owners and high-wealth individuals. It will execute 12 to 15 estate plans this year; it normally does two or three, he said.

$5 million question: How will that cash affect heirs?

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Those who feel under the gun to give money to family members and heirs this year because a historically high gift tax exemption is set to expire Jan. 1 don’t just have monetary concerns for themselves. “They’re grappling with, when you give money to beneficiaries too soon, what it’s going to do?� said Barbara Bellin Janovitz, who chairs the estate planning group at Reminger Co. LPA. “What is it going to do to their character? Are they not going to work hard?�

The issue is intensified when there’s reason to make the decision sooner than later — before, perhaps, you get to see where your children are in 20 years — and when there’s pressure to gift several million to take advantage of an exemption that may never be available again, Ms. Janovitz said.

That’s because more money means more potential impact on those receiving it. “When people could do $1 million, people didn’t feel that they were passing too much to their kids,� said Annie McCauley, managing director of Family Office Services within

Sequoia Financial Group LLC in Akron. “When the exemption is $5 million ‌ they question whether it will have a negative impact on their children’s independence and selfmotivation.â€?

Jim Komos, a tax partner with Beachwood-based accounting firm Ciuni & Panichi Inc., agreed that the deadline is forcing people to make “rather complicated family decisions.� “The tough decisions are how to keep everybody happy,� Mr. Komos said. He said some business owners “know in the back of their mind that they shouldn’t give part of the family business to one of their sons or daughters, but yet, they don’t want to cause the friction.�

Often, Ms. Janovitz said she suggests placing money into a dynasty trust for heirs and naming an individual or institution as trustee that will have discretion to distribute the money to the heirs. If drafted properly, the trust is not taxed when the heirs die, too, so the government doesn’t “get a piece of the pie every generation,� she said. — Michelle Park

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CRAIN’S CLEVELAND BUSINESS

NOVEMBER 12 - 18, 2012

INSIDE

13 TAX TIPS: CONSIDER NEW STRUCTURE FOR BUSINESS.

11

SMALL BUSINESS Holiday sales forecasts rosy, so hiring follows In some cases, workers opt to sign on with smaller local retailers

By JENNIFER KEIRN clbfreelancer@crain.com

O

home.

The opportunity to buy the 100-acre Sugar Pines Farm in Chesterland, known for its award-winning Christmas trees, presented not only a chance for the couple to fulfill their interest in developing a family business but preserved a holiday tradition for customers.

“We fell in love with it,” Ms. Neubauer said.

“It’s a nice business to be in because you’re making people happy and helping them create memories.”

The Neubauers acquired the farm in August for $1.1 million from Carol and Glenn Battles, who began selling Christmas trees 32 years ago but have since retired to California, where most of their children and grandchildren reside.

ver her 35-year retail career, Barbara Strom has seen all of the ups and downs of holiday shopping seasons — the hot products, over-the-top sales gimmicks and incessant speculation about holiday profits and seasonal hiring.

So when Ms. Strom eyes the latest projections for increased holiday sales and hiring from the National Retail Federation, she brings a cautious optimism borne from experience in national and local retail.

“All of these retail numbers, I’ve played with them before in chain retail,” says Ms. Strom, the 10-year owner of La Bella Vita in Little Italy who this month opened a second location at Eton Chagrin Boulevard.

“It’s one thing to say your numbers are up, but what about your profits?”

“It’s one thing The National Retail Federation to say your predicts that holiday sales will rise numbers are 4.1% to $586.1 billion. The organiup, but what zation expects between 585,000 and 625,000 seasonal hires nationabout your ally, as compared to 607,500 in profits?”

2011.

– Barbara Strom, Ms. Strom is expecting sales at owner, La Bella her Little Italy store, which speVita cializes in fine gifts and tableware, to be up about 5% over last year.

She also expects sales at her new Eton location to top her Little Italy sales by 25%.

“My business is so geared toward gift-giving, and that’s not necessarily something that’s cut back on (during a tough economy),” she says.

In Northeast Ohio, other local small businesses are expressing a similar level of optimism for the holiday shopping season. With forecasts of sales growth this year, many are hiring or recalling small seasonal staffs.

At The Learned Owl Book Shop in Hudson, owner Liz Murphy has just hired two new employees in preparation for the holidays, bringing her all-part-time staff to 19. She’s also been able to give back hours to employees who previously had hours reduced with the potential to carry those on beyond the holiday season.

See SEEDS Page 12

See HOLIDAY Page 14

JASON MILLER

Sugar Pines Farm owners Fritz Jr. and Jane Neubauer

FROM SEEDS F TO SALE

By KATHY AMES CARR clbfreelancer@crain.com

Newest owners of Chesterland Christmas tree farm relish opportunity to play part in families’ holiday memories

ritz Jr. and Jane Neubauer could see the forest for the trees upon exploring the sale of a business located a few minutes away from their Munson Township

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SMALL BUSINESS

Seeds: Planting, upkeep a long process Despite seedling losses, continued from PAGE 11

“If I could’ve stayed young forever, I would’ve stayed in the business forever,” joked Mr. Battles, whose trees have earned state and national awards. “I think the transition is going very well. We’re happy the Neubauers are carrying on the tradition.”

The Battles will be returning this week to assist the new owners with the launch of the year’s selling season, which begins the day after Thanksgiving and continues seven days a week through the weekend before Christmas. The farm sells cut-your-own, pre-cut and liveballed trees, including Fraser firs, Canaan firs and blue spruce.

“The Battles have been such good mentors. I don’t think we would’ve bought the property had it not been for their help,” Ms. Neubauer said.

The Battles purchased the farm in 1977 and began selling Christmas trees in 1980. The crop has grown from 3,000 to about 22,000 trees, which are in varying stages of their life cycles and spread over 30 acres.

Taking care of business Despite its growth in both productive acreage and sales — the last five years of which have experienced year-over-year increases — the founders knew their interest had an expiration date. They mulled parceling out the property or selling it to developers, but ultimately were able to keep the farm and business intact.

The venture satisfies the new generation of owners’ love of the outdoors and their desire to inte-

FIELDS OF GOLD Consumers in 2011 were three times more likely to purchase a real tree over an artificial tree, according to the National Christmas Tree Association. That year, about 9.5 million people bought artificial trees, compared with about 30.8 million who purchased live trees.

The mean average spent on an artificial tree was $70.55, for a retail value of $670 million, compared with $34.87 spent on a real tree, creating an overall retail value of $1.07 billion. About a third of the population bought trees at farms, followed by chains, garden centers, retail lots and nonprofits. grate a family business that they hope sons Fritz III, 8, and Sam, 4, will nurture as they get older. The operation also is a logical business extension for Mr. Neubauer, a certified arborist and owner of Neubauer Land Management Co. Ms. Neubauer previously owned Maple Alley Market Research.

“This place met both needs, from a personal and business angle.

Right now, it’s more of a hobby but will be a nice part-time income,” said Ms. Neubauer, who is hoping to sell about 2,500 trees this season.

Still, operating a Christmas tree farm is not limited to a few weeks during holidays, but is a fairly laborious year-round responsibility.

Tree maintenance is a seasonal requirement at minimum and requires planting, shearing, mowing, insect and pest control and watering throughout their life cycles, which at

Sugar Pines Farm can average six to eight years before a tree is harvested.

“There’s a common misperception that you just plant seedlings and wait for them to harvest,” Mr. Neubauer said. “That can’t be further from the truth.”

Another common misconception is that Christmas trees are unsustainable because they are cut down for decorative purposes.

“We’re more of the tree-hugger type, and we had to think about what this business means,” Ms. Neubauer said. “In reality, this is a crop like any other. We will plant at least one new tree for every tree we harvest.”

Once its function as a decoration is over, the tree then can be recycled and chipped into mulch.

“Its life doesn’t end in your living room,” she said. “We’re still being kind to the environment.”

The more the merrier As with starting or acquiring any business, proprietors have a certain expected learning curve to master.

The Neubauers have been benefiting from the collaborative nature of Northeast Ohio Christmas tree farm operators, who strategize on growing practices and work to encourage customers to eschew fake trees for their real counterparts.

Members have been coaching the Neubauers to help ensure a seamless ownership transition, said Dan Garey, president of the Northeast Ohio Tree Growers and coowner of MorningStar Meadow Christmas Tree Farm in Thompson, which is in Geauga County.

“We’re more than happy to share our secrets,” Mr. Garey said.

■

choices await tree buyers Planted in rotations, inventory remains strong

L

ast year’s mild winter and subsequent dry weather in spring and summer sapped the life out of many area growers’ Christmas tree seedlings, although don’t expect this year’s inventory to see any impact. Christmas tree farms plant in rotations, so the seedling loss represents a fraction of overall inventory, which includes older, more mature varieties ready to harvest.

Local growers say the damage to this year’s young crop likely won’t be felt for six to eight years from now, if at all, said Dan Garey, co-owner of MorningStar Meadow Christmas Tree Farm in Thompson, where about 300 of 600 seedlings were lost on the 10-acre farm.

“Next year, we’ll double up on seedlings,” he said.

Based on anecdotal conversations, Mr. Garey estimates area growers similarly lost about 50% of their seedlings, or even more, and will augment the loss with additional plantings.

Tree farm operators likely will not install sophisticated irrigation systems moving forward because most farms tend to be part-time, supplemental income ventures rather than full-time businesses, said Ken Reeves, partner at Mountain Creek Tree Farm in Concord, which grows about 20,000 trees.

Expensive system upgrades wouldn’t be the best investment for a part-

time venture that doesn’t yield a hefty profit margin, he said.

Mr. Reeves’ farm lost about two-thirds of his 4,000 seedlings, although the number may have been higher had it not been for using a special soil moistener and manual watering every four or five days last spring and summer.

“I had a 50-gallon tank on the back of my tractor, and I’d fill it up with water,” Mr. Reeves said. “I’d water, count to 10, then move on to the next tree, water and count to 10.

“I’d go through 200 to 400 gallons of water an evening to water those trees,” he said.

Mr. Reeves said he plans to make up for the forecasted dip in inventory years down the road by buying larger seedlings and better managing current stock to boost their growth.

Phil Londrico, owner of Valley View-based Londrico’s Christmas Trees, which distributes trees throughout 14 states, said he won’t know until spring the extent of the damage to the seedlings planted throughout acreage he farms or leases in Michigan and South Carolina. He said he expects about 80% of the seedlings to be impacted in some way, and if they don’t make it, he’ll order them mowed down.

“It’s a little tough, especially when you’re paying $10,000 an acre in South Carolina compared to $2,000 an acre in Michigan,” he said. — Kathy Ames Carr

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■ BIGGER DIGS: SC Fastening Systems LLC, a distributor of hardware and industrial supplies, has moved to Macedonia. After about 14 years in Oakwood Village, the company said its growth and expanded product line required a larger home. Its new building on South Freeway Drive has 23,000 square feet, which allows for expansion, and it houses the office, warehouse and a new showroom.

SC Fastening Systems, which has 12 employees, supplies such products as fasteners, abrasives, concrete anchors, cutting tools and safety supplies.

■ SPECIAL CARE: Rockport Independent & Assisted Living has expanded its services to offer elder day care at its Rocky River facility. Elder day care provides a safe, supportive environment for impaired seniors, allowing them to remain as independent as possible, while staying in their own homes.

The service also provides respite care for families. Seniors arrive between 8 a.m. and 9:30 a.m. and can stay until 4 p.m. Seniors participate in activities and receive assistance with medication administration and personal care.

“We strive to provide entertaining, therapeutic and stimulating daily activities for seniors, in a safe and nurturing environment,” says program administrator Amy Zauner.

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As valuations recover, M&A activity picks up

By GINGER CHRIST gchrist@crain.com

A

sea change is occurring in the small business world, and it’s one that’s helping local mergers and acquisitions activity surge.

Baby boomers, many of whom held off on retirement during the recession, are ready to call it quits now that their business valuations have recovered, local industry representatives say. “It’s inevitable, once you turn 65, (that) you really have to start thinking about transitioning your business. I think we’re going to see a continued pickup,� said Chris Snider, founder and president of Aspire Management Inc., a business consulting firm in Brunswick.

Mr. Snider said his company, which deals with businesses valued at less than $25 million, has seen a 10% to 20% increase in business activity so far compared to 2011.

Mr. Snider and financial advisers expect that volume to continue to increase for a number of reasons.

Business valuations are on the rise; owners are looking for new, younger successors; and they are worried about the expiration of Bush-era capital gains tax cuts at the end of the year. All of those factors are leading to a perfect storm for across-the-board exiting by older generations, Mr. Snider said. “If somebody was leading up to selling within the last three to five years, they probably didn’t go to market unless they had something really special. Valuations were down. Financing was difficult,� Mr. Snider said. “All of those people that had been holding back are now coming to market.�

While M&A activity in the United States through August was down 7% from the like period of 2011, activity in the small business market this year has fared better. Small business deal volume through June remained 1.2% above 2011 levels, according to BizBuySell.com, an online small business marketplace.

The market is ripe for a rebound but its recovery will depend on the economy, advisers say. “We’re on the cusp of that happening. We just need the economy to just hang in there with us,� Mr. Snider said.

Time is right Tony Kuhel, a partner in Thompson Hine’s corporate transactions and securities practice, said there’s a bubble in M&A activity because of the exodus of baby boomers and potential tax rate increases in 2013. “I think, at this point, there’s a certain segment of the population saying, ‘It’s better to be safe than sorry,�

Mr. Kuhel said.

Mr. Kuhel said the same type of uptick in activity occurred in 2010 when it also was unknown if the Bush-era tax cuts would be allowed to expire.

The 2010 Tax Relief Act, which capped taxes on capital gains at 15%, is set to expire at the end of the year, meaning business owners could be subject to 20% capital gains taxes if an extension isn’t put in place.

Coupled with that are changes to

estate taxes, said Dennis Medica, managing director of Medica LLC, a Cleveland-based public accounting firm. The maximum tax rate will rise from 35% to 55% and the exemption for estate taxes will decrease from about $5 million to $1 million unless changes are made to current tax law. “If you really talk to individuals and if individuals are properly planning their exits, obviously taxes are going to have a significant impact,� Mr. Medica said. “If there’s an opportunity to get out of a business and have a lesser tax bite, it may make more sense.�

Ready to sell While about 60% of business owners would like to pass on their business to a family member, only 30% actually do so, Mr. Snider estimates. The others are unable to identify a family member who can or wants to take the reins, he said.

For most, that means either turning to another executive in the ranks or selling the business. “I think most of the owners we’ve talked to would prefer to just get out if they don’t have a family member to transition the business to,� he said.

While a big part of succession planning involves finding the best way to conserve cash, maintain liquidity and minimize taxes, another element is ensuring the company will have proper management in place once the owner exits, Mr. Medica said. “Obviously, a business owner wants to maintain their legacy of that business so they want to get the right folks in place,� he said. “I think younger successors that have the energy and ability to move the company in the right direction is critical.�

Many owners will remain on as consultants or will work part-time during the transition, Mr. Kuhel said. “No one really wants to give away their business that they’ve been working on their whole life. I think they’re looking for that interim step before heading to full retirement,â€? he said. â–

Weigh post-election structure change

W

ith the election behind us, small business owners should keep a close eye on the White House for some significant changes in corporate tax policy that could inspire many to consider a change in their legal entity structure.

Pressure on corporate tax rates has been building for years. Studies show that U.S. corporate tax rates are the highest among the world’s industrialized countries, second perhaps only to Japan. Over the past decade, nearly 50 Fortune Global 500 companies have moved their headquarters off shore to countries where they enjoy lower tax rates.

Roughly 85% of global companies headquartered in the United States have operations in countries that U.S. authorities have identified as “tax havens,� or places where tax policy is friendlier than at home.

Tax law allows companies to forego paying U.S. tax on their foreign earnings when companies say those earnings are permanently reinvested offshore, and U.S. authorities are taking note of the growing number of companies that are building significant resources outside the United States as a result.

Our elected leaders in Washington, Republicans and Democrats alike, have come to recognize that those mounting offshore earnings could do a great deal to stimulate the economy at home. They’ve also come to realize that perhaps the biggest reason those earnings are kept offshore is because companies do not want to suffer the consequences of steep U.S. corporate tax policy.

It was a point of debate through the election season, with both parties conceding that tax policy needs to change to produce some economic stimulus. This is one campaign promise that will be hard to set aside when new presidential and Congressional terms get under way.

The prevailing thinking on corporate tax reform is that the topline tax rate on C corporations will drop from its current rate of 35% to perhaps as low as 28%. For small

PETERDEMARCO

ADVISER businesses that currently are organized as an S corporation, or even a partnership or limited liability corporation, a change of this type could make it appealing to reorganize as a C corp.

True, most small business owners like the pass-through tax approach that comes with S corps, LLCs and similar arrangements, in which income is not taxed at the entity level. Rather, it is taxed only at the individual level when the income is distributed to the shareholders in the business. Any business owner taxed at a rate lower than the 35% currently charged on C corp income ultimately will pay less tax under such a scenario.

However, if the C corp tax rate were to drop to 28%, that rate might well be lower than many small business owners or shareholders are paying on an individual basis.

Suddenly, the idea of taxing that income at the entity level might pique a business owner’s interest.

Consider an example: Assume a small, family-owned business has taxable income in a given year of $1 million. As an individual taxpayer, the business owner is in the 35% tax bracket. As an S corporation, the

Business is always

earnings are distributed to the owner and recognized through the personal tax return for a tax liability of $350,000.

Now assume the top corporate tax rate for C corps is reduced to 28%, as most experts predict will soon occur. If that same business were organized as a C corp, the total tax liability would be $280,000.

If the business owner receives a dividend of $100,000 in the tax year, which is taxed at 15%, that would increase the tax liability by $15,000 for a total tax bill of $295,000, still a bargain compared with the $350,000 to be paid as an S corporation.

A more thorough analysis also would assess the tax impact even further down the road, when the owner is prepared to perhaps sell the business one day as part of an exit or retirement strategy. At that point, the benefits to being a C corporation under a reduced corporate tax rate may be outweighed by the double tax associated with selling the business’s assets and then distributing the proceeds to the owners in liquidation.

Of course, with all things political, Washington is impossible to predict.

However, there’s a great deal of momentum behind this particular movement.

Small business owners should be aware of it and be prepared to consider their course of action. â– Mr. DeMarco is vice president and director of the tax services group at the regional accounting and business consulting firm of Meaden & Moore, headquartered in Cleveland.

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Bruce Lieber, a parent, grandparent and former educator, said the website is currently geared to the young child but will be expanded to include items for older children as the business grows. Mr. Lieber has selected toys for the site that are made with sustainable, natural contents, including plush toys that are asthma and allergy friendly.

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KING INSURANCE & FINANCIAL SERVICES 181 W. Bagley Road Berea 44017 www.kinginsurancefs.com King Insurance & Financial Services has opened an office in Berea, offering a full range of personal and commercial insurance products. Owned by

Phone 440-243-5555 Fax 440-973-4646 info@kinginsurancefs.com

FLUX METAL ARTS 8827 Mentor Ave., Suite A Mentor 44060 www.fluxmetalarts.com Flux Metal Arts was formed by Kim Baxter and George Catavolos, who originally were part of a four-member co-op that shared an 800-square-foot studio space in Grand River. Over time, the co-op encountered students and professionals who were looking for classes and studio access in Lake County. Flux Metal Arts was created to fill those needs. By moving its jewelry/metal-working studio into a larger space with greater visibility, the business now is able to offer classes, workshops, open studio time, supplies and tools for those looking to learn, and create jewelry and small-scale metal-working. A boutique gallery also is on site.

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Classes are designed to strengthen, shape and lengthen the body, leading to long, lean muscles and overall body benefits such as long-term posture improvement and deep muscle conditioning without joint damage.

The workout is presented in a small group setting in a private, female-only boutique fitness studio.

Alexian Partners, under the direction of principal Stephen Massien, is a new marketing agency providing services to clients in all parts of the mortgage banking industry. The company offers a complete suite of business-to-business marketing services, including consultation, research, sales acquisition strategies, fully integrated marketing campaigns, sales support and training, content development and public relations.

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To submit information about a new business, opened within the past six months, send the following information for publication to Crain’s Cleveland Business sections editor Amy Ann Stoessel at astoessel @crain.com: business name; address; city and ZIP; web site address; brief description of the business; business phone number; business fax number; and business e-mails.

Holiday: Some stores have tough hiring standards continued from PAGE 11

“Some really want as many hours as possible, and it’s a positive sign that I have hours to give them,� Ms. Murphy said.

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After opening in June 2011, Vegan Sweet Tooth owners Tiffany O’Neill and Rebecca Bryan saw about 2% growth each month as they prepared for their first holiday season last year at this vegan bakery in Woodmere. “(Last) December blew everything out of the water ‌ with a jump of at least $5,000 over the two to three months before,â€? Ms. O’Neill says. “I’m expecting this December to be the same. I’m actually kind of scared, in a good way.â€?

She’s now training two new staff to help out during the holiday season — positions that could extend past the holidays — and is considering a third.

Even with projections for seasonal hiring up nationally, these local retailers don’t expect to have difficulty competing against big boxes for workers. “One girl left her big-box job because she wanted to work at a local business,â€? Ms. O’Neill says. “I can’t offer what Best Buy can walking through the door. ‌ Some people are willing to take a financial sacrifice to support a local business.â€?

Even if more workers are looking local for holiday jobs this year, they may find tough hiring criteria. “We’re not just cashiers here,â€? says Michael Ziegenhagen, president of PlayMatters, a toy store with five Northeast Ohio locations. “We’re advising parents and grandparents toward choosing the right toy for their child. ‌ This isn’t a job that just anyone can do.â€?

“Given an even playing field, the local company has a strong advantage (in hiring).� – A.J. Petitti Petitti Garden Centers Mr. Ziegenhagen expects to boost his work force about 10% this holiday season. Most are college students who have been hired back from the summer, or who have worked at PlayMatters since high school.

At Petitti Garden Centers, the hiring peak is during the spring planting season, and head counts taper off through the summer and fall. To accommodate holiday traffic, A.J. Petitti says he hires back about 20 to 30 of his summer staff.

He also sees growing preference toward choosing seasonal jobs with local companies. “You still have to be competitive,� he said, “but given an even playing field, the local company has a strong advantage.�

Owner preference Back at La Bella Vita, Ms. Strom has added six part-time new employees to man her new Eton store’s first holiday season. She requires a high level of expertise among sales associates, but uses seasonal hires to help with tasks like gift-wrapping. “People who buy these products, if they have a choice to buy from an owner versus a part-time college student who doesn’t care, they will,â€? she says. “Everyone is working very hard for their money. ‌ They will work with someone they know is breaking their back to help them. â–

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create unnecessary hardship or not be according to our wishes. he Estate Planning One of the reasons that we don’t Council of Cleveland, in review or finalize our plans may conjunction with Crain’s be that we are not sure what to Cleveland Business, is do or how it will actually work. pleased to present our annual Plus, we have to face the fact that Estate Planning section. we are not immortal.

Our goal is to offer The only thing that is constant our community valuable in our world is change, information and resources and we have seen plenty related to financial, insurof changes in estate and ance, business succession, gift tax laws, as well as and estate and charitable economic performances planning. The following — both domestic and inarticles and commentaries ternational. How one percannot answer all your son can keep track of the questions, but may spark changes is a mystery to MARIE an idea or thought that me, but you can surround MONAGO you may want to review yourself with people that with your trusted advisers. are knowledgeable about If you are looking for an adviser, different parts of the income, gift the articles and listings may help and estate tax laws as well as upyou identify a few candidates to to-date information in the investconsider. ment world. These are the profesEstate planning is an area that sionals you should consult with is often overlooked. Studies show when it comes to preserving that less than 50% of Americans assets for the benefit of your have an up-to-date estate plan family, heirs and charities. and/or medical directives. Why They can help you evaluate is this important and what is how your personal goals are keeping us from finalizing or affected by the ongoing changes updating our plans? By not in laws and market conditions. having an updated plan, we are They can assist with methods, allowing others to decide for us, techniques and documents that which may cost a lot of money, will help you reach your personal

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Look beyond impact on savings accounts for benefits

M

any people only think of how little interest off the mortgage, or refinance to obthey receive tain a much lower monthly from their savpayment. Alternatively, inings account when faced vestors may instead choose with low interest rates. to use an investment portHowever, the current low folio to collateralize a line interest rate environment of credit, with interest rates may provide significant potentially lower than opportunities to manage current mortgage rates. personal debt, efficiently Often, estate planning MICHAEL transfer wealth and fulfill techniques are based on MATILE charitable intentions. interest rates issued by the Now is a good time to review IRS. For many of these strategies, personal debt and to consider the lower the rate, the greater the making adjustments to your perpotential benefit to families. The sonal balance sheet. For instance, current low IRS interest rates a homeowner with a mortgage provide another unprecedented may be able to refinance the mortopportunity for wealth planning. gage to a shorter term, cutting years For instance, the IRS requires

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that loans from one family member to another must charge at least a certain amount of interest to avoid having them be deemed a gift and subject to the gift tax rules. This minimum interest rate is called the applicable federal rate and is based upon the length of the loan term and the month in which the loan is established.

For example, if in October 2012 a parent were to loan $100,000 to a child, with the agreement that the loan is to be paid back in five years, the applicable federal rate would be only 0.93%. Each year, the child will pay $930 in interest to the parent. In the fifth year, the child would pay back not only the interest, but the full $100,000.

Here’s the interesting part. If, at the time the loan is made, the child invests the $100,000 and earns more than 0.93% (ignoring any income tax that might be due), the child gets to keep any return in excess of the 0.93% — with no gift tax implications.

This technique may be particularly powerful when combined with trust planning. For example, Mr. and Mrs. Smith, a married couple, could transfer $10.24 million (their combined lifetime gift exemptions under 2012 law) to a trust created for the benefit of their children and future generations. An additional amount could be loaned to the trust with a promise to pay back the full amount of the loan at the expiration of the loan term. Furthermore, Mr. and Mrs. Smith could

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(GRATs) and sales to defective grantor trusts, that work well when interest rates are low and the agree to be responsible for paying assets being transferred appreciate all income taxes owed by the trust. faster than the IRS interest rate While Mr. and Mrs. Smith imposed on such transactions. would receive the full loan People who are charitably amount back at the end of five years, inclined also can take advantage of if we use the terms of the loan excharitable giving techniques that ample earlier, any return above the work well when paired with low 0.93% would pass to the trust, not interest rates. only income tax-free because Mr. A Charitable Lead Trust, for exand Mrs. Smith ample, pays a would pay the fixed annuity Low interest rates can income tax, but stream to a charity gift tax free. These be incredibly meaningful for a trust’s term, in helping to achieve additional assets, then distributes resulting from personal wealth planning the remainder to the earnings the trust benefiobjectives. above the interciaries estate tax est rate, would free. The amount increase the value of those transpaid to charity each year is calcuferred assets, thereby creating a larger lated, in part, by IRS imposed innest egg for Mr. and Mrs. Smith’s terest rates. children and later descendants.

When interest rates are low, less The low rates could be a boon will be paid during the trust term to a child who needs to borrow and, therefore, more should be money from a parent for a down available to the beneficiaries free payment on a house. Families that of estate and gift tax. own businesses are also using loans Low interest rates may not be from parents to allow children to buy advantageous to one’s savings shares in the business or to allow account, but they can be meaningchildren to purchase equipment ful in helping to achieve personal or real estate (perhaps in an entity wealth planning objectives such as an LLC) to then lease to through debt management, estate the business. The lease payments planning and charitable giving. ■ could then, in turn, be used to Michael Matile is a senior wealth planner repay the loan to the parents. at PNC Wealth Management. He can There are many other estate be reached at (216) 222-5885 or planning techniques, such as michael.matile@pnc.com.

Grantor Retained Annuity Trusts

Give your investment portfolio a wellness check Suitability: Does the investment match your goals and ealth professionals will objectives? tell you to to get a Risk: Can you tolerate the checkup at least investment’s volatility? once a year. Your What types of risks are financial situation needs you taking on by owning one as well. At least annuthe investment? ally you should review Relative performance: your existing holdings and How has the investment determine whether there is performed in relation to a gap between your curits peers? rent situation and your Asset allocation: How MARY EILEEN ability to reach your goals. well is your wealth alloVITALE This will enable you to cated among various nondevelop a plan that can correlated asset classes? most effectively meet both your Specific investment detail: short- and long-term needs.

Have there been any changes To determine whether or not an in fund management? Does the investment is “good,” most peoinvestment yield match your ple look at its returns. They may income needs? compare the performance of the Investors often make investinvestment to an appropriate ments at one point in their lives benchmark or index. But this perbut fail to sell them when they no formance check analysis is longer make sense. What’s more, almost always insufficient. it is not uncommon for investors In terms of adding value to to form emotional attachments your account, an investment to certain investments. You need is a wise one if its role in your to assess what your portfolio is portfolio can be justified. For doing well and what it lacks. example, there must be a reason Put your goals and your holdyou own the position that can be ings side by side so you can start explained by process and methodto make determinations about the ology; the position must be connext step — developing a plan that sistent with your short- and longis specific to your needs.

■ term financial goals and needs; and you must feel comfortable Mary Eileen Vitale, CPA, CFP, is princiowning it. pal with Howard, Wershbale & Co. Consider the following when Contact her at vitale@hwco.com or evaluating your portfolio: (216) 378-7210.

By MARY EILEEN VITALE

H

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NOVEMBER 12 - 18, 2012

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Clock ticking on higher exemptions and lower tax rates This impending change provides a window of ome commentators opportunity through the are referring to 2012 end of 2012 to take as the greatest year advantage of the high ever for estate planexemptions and low rates ning. This is because the before this window is so-called “Bush tax cuts” potentially closed for good. enacted in 2001 and 2003, ELLEN K. The exemption and extended by Congress MEEHAN amount is currently $5.12 in 2010, expire on Dec. million per person for es31. On Jan. 1, 2013, if Congress tate, gift and generation-skipping does not act, the current transfer transfer tax (GST) purposes, tax exemptions will dramatically while the tax rates are 35%. decrease with a corresponding Moreover, in 2010, Congress enincrease in the transfer tax rates. acted the concept of portability,

By ELLEN K. MEEHAN

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state planning in 2013 may be much less attractive than estate planning in 2012. By now you’ve likely heard about the “fiscal cliff.” The phrase is a euphemism for big tax hikes scheduled to take place in 2013.

Absent a change in federal legislation before the end of the year, the top federal estate and gift tax rates will jump from 35% to 55% and the current lifetime estate and gift tax exemption amount will drop from $5.12 million to $1 million.

Federal income taxes also will increase. In 2013, the top CHRISTOPHER federal income P. BRAY tax rate for dividend 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 from 35% to 39.6%. Also, the new 3.8% Medicare surtax on net investment income related to the Patient Protection and Affordable Care Act will take effect in 2013.

With the federal gift tax exemption dropping to $1 million next year, individuals planning on making gifts larger than $1 million during life to reduce federal estate tax exposure at death should consider making these gifts prior to the end of the year. This significant estate planning opportunity will no longer be available in 2013.

Estate planning in 2013 will be more difficult because of substantial legislative uncertainty. Regardless of the outcome of the elections, many experts believe that some type of change in federal tax law will occur in 2013. Any anticipated change in tax law might not take place until well into 2013 (consider the retroactive estate tax changes that occurred in December 2010), making any planning difficult until such certainty is resolved. Don’t put off until 2013 what can be done in 2012.

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Christopher P. Bray, JD, CPA is a managing director for Willow Street Advisors, LLC, Private Wealth Management. Contact him at cpbray@willowstreetadvisors.com.

rate increase to 55%.

The GST exemption amount for 2013 is expected to be $1.36 million (because of an inflation adjustment) with a tax rate of 55%.

Finally, the portability feature that has been effective in 2011 and 2012 will no longer be available to surviving spouses.

In addition, a number of other transfer tax-friendly provisions will expire Dec. 31, including rules relating to the GST tax, estate tax installment payments and

conservation easements.

Given the impending increase in tax rates, coupled with the decrease in exemption amounts, individuals should make the most of this opportunity to make gifts of up to $5.12 million, including GST gifts, before the window closes on Dec. 31.

■

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

THE ESTATE PLANNING COUNCIL OF CLEVELAND

Beware 2013’s fiscal cliff

By CHRISTOPHER P. BRAY

which permits a surviving spouse to use the deceased spouse’s unused exemption amount in a future year to make additional gifts, or to transfer more wealth at the surviving 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 tax rate will increase to 55% (with a 60% top rate for estates in the $10 million to $17 million range).

Likewise, the gift tax exemption also decreases from $5.12 million to $1 million with a tax

President Marie L. Monago

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Tanzie D. Adams Kelly G. Adelman Christopher P. Adkins Charles F. Adler, III Richard A. Ahrens Thomas D. Anderson Graham T. Andrews Oakley V. Andrews Gordon A. Anhold Gary S. Archdeacon Kemper D. Arnold Rosanne J. Aumiller James S. Aussem P. Thomas Austin Charles J. Avarello Molly Balunek Peter Balunek Alexander D. Barclay Albert J. Barnabei Lawrence C. Barrett Ronald E. Bates Russell Bauman Stephen Baumgarten Maureen K. Beaver Edward J. Bell Steven Berman Gina Marie Bevack-Ciani Mohammed J. Bidar Gary B. Bilchik John J. Bindas Michelle M. Bizily Alane Boffa Jason Bogniard Daniel L. Bonder Nicole Bornhorst Aileen P. Bost Christ Boukis Laura Bozell Jill A. Branthoover Herbert L. Braverman Christopher Paul Bray David J. Brown C. Richard Brubaker Robert M. Brucken Bethany J. Bryant Armond D. Budish Martin J. Burke, Jr. Eileen M. Burkhart Amanda M. Buzo J. Donald Cairns Peter H. Calfee Carl Camillo William G. Caster Sal A. Catalano James R. Chriszt Trevor R. Chuna Mark A. Ciulla R. Michael Cole Warren Coleman Jeffrey P. Consolo David E. Cook James I. W. Corcoran Heather A. Cornell Barbara J. Cottrell Greg S. Cowan Steven Cox Thomas H. Craft Joseph Crea M. Patricia Culler Cheryl A. D'Amico Jason S. Damicone Dana Marie DeCapite Holly N. Denham Thomas A. DeWerth Carina S. Diamond David S. Dickenson, II James G. Dickinson

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Immediate Past President Lisa H. Michel Arthur K. Sobczak, III Michael L. Solomon James Spallino, Jr. Richard T. Spotz, Jr. William L Spring M. Randal Stancik Daniel N. Steiger Kimberly Stein Laurie G. Steiner Saul Stephens E. Roger Stewart John M. Stickney Beverly A. Stiegele Robin R. Stiller Robert H. Stock Diane M. Strachan Thomas B. Strauchon Thomas E. Stuckart Lori L. Sullivan John E. Sullivan, III Linda DelaCourt Summers Scott E. Swartz Joseph N. Swiderski Yeshwant K. Tamaskar John R. Telich, Sr. Mark M. Tepper Barbara Theofilos Donald A. Thompson Donna Thrane Philip Tobin Eric Tolbert Floyd A. Trouten, III Mark A. Trubiano Patrick J. Tulley Diann Vajskop Robert A. Valente Missia H. Vaselaney Joseph Frank Verciglio Catherine Veres Anthony Viola Mary Eileen Vitale Michael A. Walczak Kimberly A. K. Walrod Kittie Warshawsky Robert W. Wasacz Neil R. Waxman Ronald F. Wayne Michael L. Wear Stephen D. Webster David G. Weibel Paul A. Weick Jeffry L. Weiler Richard Weinberg Katherine E. Wensink Katherine Werre Elizabeth Wettach-Ganocy Marcia J. Wexberg Terrence B. Whalen Sharon Kai Whitacre Frederick N. Widen Erica K. Williams Geoffrey B.C. Williams Scott A. Williams J. Mark Wipper Teresa M. Wisniewski Matthew D. Wojtowicz Carol F. Wolf Brenda L. Wolff Alan E. Yanowitz James D. Yurman Jeffrey M. Zabor Michael J. Zeleznik David M. Zolt Jack Zugay Shawn D. Zurat Gary A. Zwick Donald F. Zwilling

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Evaluate portfolio by year’s end

By STEVEN BERMAN

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Income, capital gains and qualified dividend tax rates are set to increase in 2013 without new tax legislation. There may be an advantage to accelerate the recognition of these income items at the 2012 rates.

any significant provisions of the landmark 2001 “Bush-era tax cuts� are scheduled to expire at the end of 2012, which may result in substantial income tax rate increases and reductions in the fedIf tax rates increase in eral estate tax exemptions.

2013, your deductions If this seems like dĂŠjĂ vu, for charitable contribuit is. The same thing was tions, state and local taxes, scheduled to occur in business expenses, etc.

2010, but Congress voted could become more valuto extend most of the able in 2013. You may STEVEN affected provisions. Will want to delay these deducBERMAN Congress extend them tions until 2013. again? We don’t know.

That’s why you should consider A new 3.8% Medicare tax will taking steps before year’s end apply to married/joint taxthat could dramatically improve payers with incomes over your financial picture: $250,000. This is in addition to the potential increase in income With the estate tax exemption and capital gains taxes. There due to drop to $1 million, you may be steps you can take to remay want to explore steps to duce the impact of this tax. move assets out of your estate while the lifetime gift tax exempRoth IRA conversions become tion is at historic highs. more attractive in 2012 if tax

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rates increase in 2013. Conversions completed in 2012 are subject to the current rates and the 3.8% Medicare Tax does not apply; taxes paid this year reduce the estate for federal estate tax purposes; and Roth IRAs are not subject to required minimum distributions or future income taxes on distributions for you and your beneficiaries. You can even make Roth conversions of your 401(k) plan.

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Currently married taxpayers with incomes under $70,700 do not pay dividend or capital gains taxes. Fully utilize strategies to maximize this benefit while it remains.

7

With interest rates at historic lows, review financing on homes, vacation homes, interfamily loans, etc.

8

If you are still planning to make charitable contributions, consider making them with appreciated stock. You may

save the capital gains taxes and receive the tax deduction — and if you still want to own the stock, repurchase and establish a higher cost basis.

9

Some effective strategies such as grantor trusts, dynasty trusts and GRATs are facing limits under the administration’s proposals. Highnet-worth families may have limited time to utilize these strategies.

The potential expiration of the tax cuts and proposed changes may affect you in different ways.

How you should respond to this uncertainty depends on your view of what steps Congress may take.

Talk with your financial, legal and tax advisers to understand the full impact of these provisions. As a team, you’ll want to develop a plan to take advantage of any opportunities.

If you don’t plan, you may not be prepared to act and could lose out on valuable tax-saving strategies. â–

Steven Berman, CFP, is first vice president/investment officer for The SpainBerman Financial Group of Wells Fargo Advisors. Contact him at steven.berman@wfadvisors.com.

SUCCESSION PLANNING

Should an ESOP be part of your exit strategy?

Family is only one option for future

By JOSEPH M. MENTREK

O

ne of the most vexing propositions facing the aging owner of a closely held business today involves how to design and execute his transition to retirement.

An Employee Stock Ownership Plan (ESOP) is an effective, but often overlooked, strategy that may warrant more serious consideration when a transfer by gift or sale to interested family members may not be a viable transition alternative. continued on next page

SUCCESSION PLANNING

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What makes a good succession plan?

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By ROBERT NEMETH

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n effective succession plan isn’t just a plan to hand over your business. Whether you want to sell outright or transfer the business to the next generation, one objective is the same — have the business prosper for years to come. It’s rare that today’s business owner walks away without any future financial or emotional entanglements, so actions that improve the future viability of the business are a critical part of any succession plan.

An effective succession plan includes an analysis of strategies to minimize income taxes and future estate taxes and provide ROBERT planning for the next NEMETH generation of leaders and owners. Plans also need to use basic financial analysis techniques and a SWOT analysis to give additional insight into a company’s operations and identify positive and negative trends affecting the company. Timely information can allow management to act swiftly, correct any negative trends and focus on the important financial issues.

A succession plan should also address the human resource side of the business and include an assessment of the current management team. The assessment

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will help identify potential leaders and/or owners of the company as well as assess its strengths and weaknesses. An assessment allows the owner to see more clearly whether the current management team and possibly a group of employees could be a realistic option when considering transition strategies.

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 a part of the solution.

Although simple in concept, the future value of your business and the ultimate success of your succession plan can be enhanced by implementing a SWOT analysis, conducting management assessments, identifying key indicators, and developing a follow-up plan. â–

Robert Nemeth, CPA/ABV, CVA, CDFA, CFE, is a principal at Apple Growth Partners. Contact him at rnemeth @applegrowth.com.

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employee participant accounts based on their compensation. In Why consider some instances, the owner may implement what is commonly an ESOP? known as a “leveraged ESOP,” using borrowed capital to fund Utilizing an ESOP as the the ESOP, thus enabling the centerpiece of a transition strategy ESOP to immediately purchase a allows the business owner a relalarger quantity of stock than tively high degree of control over would be possible by simply the outcome. The company conusing the annual contributions tinues to be operated by the to the plan. management team he carefully In that case, the comput in place, and the pany borrows funds from employees feel a sense of a commercial lender and, employment security and in turn, loans the funds a higher level of committo the ESOP. The ESOP ment to the goals of the purchases the shares of business. In addition, the exiting owner and there are significant tax holds those shares in a advantages that can be suspense account until enjoyed by the selling it receives employer conowner, the employee-ben- JOSEPH M. tributions to the plan to eficiaries of the ESOP, and MENTREK allocate to the employees. even the company itself.

When the company makes its annual tax-deductible contribuWhat is an ESOP, and tion to the ESOP, the ESOP uses how does it work? the contributed funds to repay principal and interest on the An ESOP is fundamentally loan from the company. The a qualified employee benefit company then uses the ESOP (retirement) plan that invests prirepayment to satisfy its obligamarily in employer stock. The tion to the lender. As the ESOP employer establishes the ESOP repays the loan, shares are reand makes an annual taxleased from the suspense account deductible contribution in stock and allocated to participants. or cash to the plan for the benefit of the covered employees.

What are the benefits Cash contributions will ultimately be used by the ESOP to purof an ESOP? chase company stock from the There are several advantages owner. The stock acquired by the that make an ESOP attractive.

ESOP is allocated among the

A glimpse of the Employee Stock Ownership Plan

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Develop an idea of the type of plan that will best serve the company’s interests. Companies have created ESOPs as an employee retirement plan, for purposes of business continuity, financing, enhanced employee motivation or as a combination.

2

A qualified consultant can help you design the specifics of the ESOP. The actual feasibility of an ESOP needs to be established. Such issues that need to be addressed include who will participate, how the stock will be allocated, what vesting schedule should be adopted and how voting rights will be handled.

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Put the ESOP in place.

The company will typically have an attorney prepare a formal plan document, which will set forth the specific terms and features of the ESOP. An appraiser will prepare a finished and formal evaluation report, based on data preferably no more than 60 days old at the date the ESOP is created.

SOURCE: THE ESOP ASSOCIATION

For certain selling shareholders of a C corporation, capital gains can be deferred on the sale of shares to the ESOP if the proceeds are invested in qualified replacement property, and avoided altogether if the replacement property is held until death, when a basis step-up may occur.

For covered employees, there is no taxable income recognized by the participant in the year of the contribution. The taxable event occurs when a distribution is made from the ESOP to the employee due to retirement, death, disability or termination, depending on the terms of the plan.

For the company that facilitates a leveraged ESOP

transaction, the debt is paid with pre-tax dollars since the repayment stream starts with a taxdeductible contribution to the ESOP. Finally, if the ESOP company is a Subchapter S corporation, the shares owned by the ESOP will escape income taxation, and instead the company may commit the funds to future growth because the ESOP itself is a tax-exempt entity under the Internal Revenue Code.

Conclusion The decision to utilize an ESOP as part of a business owner’s exit strategy is not one to be taken lightly. Generally speaking, the company should have a fair mar-

ket value of at least $3 million, eligible payroll of at least $800,000, and a minimum fiveyear history of profitable business operations. Perhaps most important, the company must have capable successor management in place.

Finally, the owner and the company should plan carefully and support a comprehensive feasibility study to ensure that the desired results may be obtained. In appropriate situations, a properly conceived and executed ESOP can be the centerpiece of a very successful business transition strategy.

■

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

Setting a steady course for the future When you are mapping a path for the future of your family or your business, the Estate and Succession Planning Group at Calfee can help you make some of the most important decisions of your life.

We assist our clients in developing and implementing sophisticated estate plans that carefully balance personal goals with tax and administrative concerns. We also provide comprehensive probate and trust administration, litigation services and asset protection planning counsel.

Calfee, Halter & Griswold LLP 1405 East Sixth Street, Cleveland, Ohio 44114

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Calfee.com 216.622.8200

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GLOBAL GIVING

International philanthropy requires adherence to U.S. laws Balance donor’s goals with best strategies for tax planning

By ELLEN E. HALFON

Direct contributions

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Income tax charitable deductions: In the absence of an applicable tax treaty, a contribution by a U.S. individual or other taxpayer will only qualify for a charitable income tax deduction if the recipient is a charity created or organized in the U.S. A contribution to a U.S. charity that supports or conducts charitable activities in a foreign country, however, will qualify for a charitable income tax deduction, so long as it is not “earmarked” by the donor for use by a foreign charity such that the domestic charity functions as a mere conduit.

lobalization and world media have increased awareness of international issues as well as the desire of U.S. taxpayers to fund charitable needs beyond U.S. borders.

U.S. tax laws, however, impose certain hurdles for individuals, corporations and charities that wish to support charitable activities in foreign ELLEN E. countries in a tax HALFON advantageous manner. This article provides a brief overview of tax issues relating to international philanthropy, and addresses some useful tax-advantaged strategies for international giving.

Gift and estate tax charitable deductions: Gift and estate tax charitable deductions are generally allowed for direct gifts to foreign charities, including foreign gov-

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ernments, provided the gifts are designated exclusively for charitable purposes. Tax treaties may also apply.

Direct grants by private foundations or donor advised funds Grants by private foundations: Private foundations (charitable entities generally funded and controlled by individuals or corporations) are subject to special rules that can make grant-making to foreign charities challenging.

For instance, “minimum distribution” rules under Section 4942 of

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the Internal Revenue Code (IRC) require a private foundation to distribute 5% of its investment assets annually as “qualifying distributions” to charity. A grant to a foreign charity, however, will generally only count for this purpose if the private foundation either: (1) makes a good faith “equivalency determination” that the foreign charity is the “equivalent” of a U.S. public charity; or (2) exercises “expenditure responsibility” with respect to the grant.

Similarly, under IRC § 4945, a grant by private foundation to a foreign charity will be a “taxable expenditure,” subject to excise taxes (and correction requirements), unless the private foundation makes either an equivalency determination or exercises expenditure responsibility.

An “equivalency determination” requires (a) diligent review of the grantee’s organizational and financial documents and an affidavit from the grantee regarding its “equivalency;” or (b) an opinion of legal counsel as to equivalency. “Expenditure responsibility” requires (1) documented pre- and post-grant due diligence to confirm the proposed grantee’s organization/operations ensure granted funds are used for the intended charitable purposes; (2) a grant agreement; and (3) reports by the grantee to the private foundation detailing how grant funds have been spent.

Because both equivalency determinations and expenditure responsibility can be burdensome and costly, many private foundations only make foreign grants, if any, through “intermediary” U.S. public charities that carry out or support charitable activities abroad (see below).

Donor advised funds: A donor advised fund (DAF) is a component fund of a U.S. public charity, with respect to which the donor (and/or a designee) may make recommendations for distributions to other charities; however, the public charity must have exclusive authority over distributions. IRC § 4966. A DAF can provide a donor with many of the same consolidated grant-making benefits as a private

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foundation, without the administrative burden of maintaining a separate entity. Like private foundations, however, grants to foreign charities from a DAF are subject to the taxable expenditure rules under IRC § 4945, and excise taxes can be imposed on the fund and fund managers unless expenditure responsibility is exercised or an equivalency determination is made.

International giving through public charity intermediaries Cross-border charitable activities can be carried out through contributions/grants to U.S. public charities that conduct or fund charitable activities outside the U.S. (including to so-called “Friends of” charities that support designated foreign charities).

If properly structured, grants/ contributions to such an intermediary can be a practical and efficient way for individuals, private foundations and DAFs to further international giving. The intermediary domestic charity, however, must have and exercise exclusive control over the contributed funds, and cannot function as a mere conduit for funds earmarked by the donor for use by a foreign charity.

Conclusion Support for the charitable activities of international organizations will continue to be a priority for many in the philanthropic community. Effective tax planning for charitable giving outside the U.S requires a working knowledge of the various alternatives, options and potential pitfalls, as well as the particular donor’s goals and options. While there is no one size fits all solution, with careful planning, international philanthropy can be accomplished in a manner that accomplishes intended charitable goals in a tax advantageous manner.

■

Ellen E. Halfon is counsel in BakerHostetler Cleveland’s Private Wealth Group. Contact her at ehalfon@ bakerlaw.com or call (216) 621-0200.

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E-9

GIFTS TO FAMILY

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

By JEFFRY L. WEILER

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hether the exemption from gift tax is the current $5.12 million, $1 million (effective in 2013) or another amount, avoiding payment of gift tax when transferring a hard-to-value asset is a cause for concern.

For the past 68 years, the IRS has objected to the use of formula clauses to avoid unexpected gifts; however, it has been losing court decisions for the past nine years over its attack on transfers made through the use of these formula clauses.

A formula clause sets the amount that is being transferred. For example, the document making the gift could state that the gift is for a specific dollar amount, and if the value of the assets transferred exceeds this JEFFRY L. amount, then the excess WEILER is deemed not to have been transferred. This approach helps avoid an unexpected gift when hard-to-value assets are being transferred. Examples are interests in partnerships or LLCs, minority interests in businesses,

Valuation issues as 2012 comes to a close

By RADD RIEBE

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s the leaves in Northeast Ohio turn, the annual guessing game begins as to how severe our winter will be. This year, the unknowns of the winter season are competing with the uncertainties surrounding the estate planning landscape after Dec. 31. Will the estate, gift and generation-skipping tax exemption drop from $5.12 million to $1 million after the ball drops at Times Square? Will family entity discounts be curtailed? Will grantor trusts be includible in the grantor’s estate?

The answers to each of these questions are unknown and unlikely to be known before year’s end.

The only solid ground for estate planning is that the answers to these questions are known today. Most importantly for valuation purposes is that meaningful valuation discounts for properly structured transactions involving family entities are in effect and sustainable.

Lack of control discounts from 5% to 20% are empirically supportable today. Discounts for lack of marketability from 20% to 45% continue to exist. It is expected that our economy and the real world will continue to support such discount levels next year. However, Congress has the

power to overrule real-world conditions by statute. Sections of the tax code currently require certain valuations for transfer tax purposes to ignore the market and apply pre-ordained valuation requirements only found in the tax code.

Proposals are now floating around to legislatively “fix” the tax code by taking away certain valuation discounts for family entities.

Current low interest rates (Section 7520 rate of 1.0% for November), coupled with existing valuation discounts for passive illiquid closely held interests, provide the environment for turbocharged transfer planning involving grantor retained annuity trusts, sales to grantor trusts, and intra-family loans. The ability to transfer a significant amount of assets at discounted values today and have your heirs benefit from future appreciation free from your estate taxes has never been better than the fourth quarter of 2012.

Not knowing what may happen to the amount of available exemptions in the near future and whether certain valuation discounts will exist in the IRS world makes 2012 the year for estate planning.

■

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

This approach helps avoid an unexpected gift when hard-tovalue assets are being transferred.

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

Recent court decisions have rejected the IRS position that these formulas are contrary to public policy.

In Wandry v. Comm., T.C. Memo 2012-88, a gift was made subject to a formula stating that if the value of the assets transferred exceeded a fixed amount, then the assets comprising the excess value were deemed not to have been transferred. The court held that the formula clause was valid. This is the third consecutive decision in which the U.S. Tax Court has stated that formula clauses are valid and not contrary to public policy. The IRS filed a notice of appeal in the Wandry

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

Based on the taxpayer successes in the U.S. Tax Court concerning the use of formula clauses, people transferring hard-to-value assets by gift or by sale will want to consider the benefits associated with using this technique.

■

Jeffry L. Weiler is an attorney with Tucker Ellis LLP in Cleveland. Contact him at (216) 696-5044 or email jeffry.weiler @tuckerellis.com.

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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 mccannn@ccf.org.

Same-day appointments available.

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In some situations forming a partnership is a better option than creating and funding a trust. the highest income tax bracket hits at around $12,000 of trust income, and with the addition of the 3.8% surtax imposed on trust net investment income by the Affordable Health Care Act, avoiding trust level income tax is an important consideration.

For plans involving real estate held for development or rental, partnerships offer the advantage of early losses flowing to the members to offset against other sources of income. Net losses from real estate activities held in a trust are suspended at the trust level, and not currently usable by the trust beneficiaries to offset other income.

Partnerships have their advantages in the right situations ‌ and then there are those valuation discounts. â–

Scott E. Swartz is of counsel to the Business Succession Planning and Wealth Management Practice Group of Benesch, Friedlander, Coplan & Aronoff LLP. Contact him at (216) 363-4154 or email sswartz @beneschlaw.com.

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artnerships (and limited liability companies) have long had their place in business formation and estate planning. For estate planning, that use is often tied to certain tax advantages — such as valuation discounts when transferring wealth to younger family members — while maintaining control over access to the partnership’s assets by spendthrift family members, or exposure of family assets to creditors and third parties.

The usefulness of partnerships extends further, and in some situations forming a partnership is a better option than creating and funding a trust.

Consider the typical situation in which there is an immediate need to transfer assets away from exposure to estate taxes, but also a need for long-term controlled management of assets for the family.

Using an irrevocable trust for these goals carries the burden of a document that is difficult to change. An irrevocable trust that cannot be amended later can cause the trust terms to not fit updated family circumstances.

Partnership agreements, however, can be amended by vote of the partners.

Partnerships have complete flow-through tax treatment, meaning that the partnership income is allocated to the partners, whether or not the income is actually distributed. With many trusts, the income must be distributed to the beneficiary to avoid trust level taxation.

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t’s possible that when you first stepped into your attorney’s office to discuss the drafting of your estate planning documents, you did not know there were so many decisions to make.

Who should benefit, when, why and how?

Upon your death, who should be the executor, the guardian and trustee? While LINDA some decisions DELACOURT were probably SUMMERS easy, others may have been challenging. If you have a trust as part of your estate plan, your choice of trustee should not be taken lightly.

Trustees must make all investment and distribution decisions.

They must prepare federal and state income tax returns and accountings. They must know what is required of them pursuant to the Ohio Trust Code and common law fiduciary standards. Even if unaware of a violation, a trustee can be sued by your beneficiaries if laws are violated.

Who to choose?

There are times when it is entirely appropriate to name family members as trustees since they are able to handle these duties on their own or with the appropriate advisers assisting them. The benefit of a family member serving as trustee is the personal relationship to you and the personal knowledge of the beneficiaries’ needs. Because of this, family members generally do not charge for their services.

Alternatively, there are times when an independent trustee, such as a bank, trust company or unrelated third party should be named since they have trust administration knowledge and experience. Such a trustee will also take a non-emotional approach to decisions related to the trust, but they generally charge a fee. Or, you can also choose a blended approach: You can have family members serving as trustees, followed in succession

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

There is no right answer.

Naming a trustee is a personal choice and your decision will depend upon many factors. Carefully consider the value of the trust and the complexity of the trust provisions. The higher the value and/or the complexity, the less a family member should serve as sole trustee.

Also, think about the beneficiaries. If there is discord in the family, one family member should not serve as sole trustee. Estimate the length of time the trust will operate. If it is intended to span multiple generations, you should consider a corporate trustee.

Whatever decision you ultimately make will depend upon your personal circumstances. â–

Linda DelaCourt Summers is of counsel for Ulmer & Berne LLP. Contact her at (216) 583-7212 or email ldelacourt@ulmer.com.

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E-11

GIFTS TO FAMILY

Roth IRA conversions: The gift that keeps giving

By DORIS SEIFERT DAY

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Delaware trusts offer exceptional advantages

By ANNE MARIE LEVIN

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sset protection, tax savings, control, privacy.

These are a few of the reasons Delaware trusts are so popular among affluent individuals across the country.

Delaware has a tradition of leadership in personal trust laws that offer extraordinary estate, tax and financial planning benefits not available under the laws of most other states.

Business owners, doctors and other successful individuals create Delaware trusts to protect their hard-earned assets, including business interests, from future creditors. Delaware law permits you to create a trust for your own benefit that protects your assets from future creditors, ex-spouses and disastrous lawsuits. You can retain control of investment decisions, enjoy confidentiality and appoint special advisers to personalize and add flexibility to the trust.

Most advisers are unaware that a Delaware asset protection trust may be used to save state income tax on the sale of a closely held business in certain circumstances.

For premarital planning, a Delaware trust created prior to marriage should protect premarital assets in the event of a future divorce. It offers an alternative to

a prenup that avoids financial disclosure, emotional discomfort and the notorious ineffectiveness of prenups in many divorce situations.

Today, wealthy individuals are making 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 in transfer taxes.

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

In my experience, today most individuals do not want their children or grandchildren to know about the trust. Another fact most advisers don’t know: You can make a completed gift to a properly structured Delaware trust, but still receive discretionary distributions from the trust. This gives you a safety net, just in case you need the assets in the future.

A Delaware trust is a powerful tool to help you fulfill your goals.

Let it work for you.

■

oth IRA conversions offer benefits to both the account owner and beneficiaries. Conversions in 2012 will be subject to the tax rates currently in effect, which are quite low. The account owner is in complete control of when and if to take withdrawals. The Roth IRA funds, including earnings, will not be subject to tax. If early distributions are taken, penalties may apply. Beneficiaries will receive the funds tax free over a period of up to their life expectancy, with no tax on the earnings of the funds that remain in the Roth.

The funds used to pay the income tax on conversion will reduce the account owner’s gross estate.

The maximum income tax bracket in 2012 is 35%, and is scheduled to increase to 39.6% in 2013. Effective in 2013 there will be additional tax on net investment income and on wages in excess of $250,000. While distribu-

tions from qualified plans are not included in the definition of investment income subject to additional tax, it will increase modified adjusted gross income, used in determining its application.

Once the funds have been converted, annual required minimum distributions (RMDs) no longer will be required during the account owner’s lifetime. If the account owner does not need these funds, the earnings can accumulate for future tax-free withdrawals.

The earnings are tax-free rather than tax deferred. This advantage continues for the beneficiaries, although they will be subject to RMDs upon inheriting. A surviving spouse inheriting the Roth may roll it over and continue with the same advantages as the original account owner. A conversion could be the best gift, for yourself and your family.

■

Doris Seifert Day, CPA, is director of taxation for Walthall, Drake & Wallace LLP CPAs. Contact her at (216) 573-2330.

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GIFTS TO FAMILY

Assisted reproductive technology and your estate plan

By FRAN MITCHELL SCHAUL

You may be unintentionally disinheriting your grandchildren

W

e live in a world in generations below that of a child. which advances in Both terms are old ones, and have the science of reprohistorically been underductive techstood to mean “of the nology have made possible body” (bloodline). “Chilthe creation of children in dren” also typically inways never anticipated by herit, yet the term is ofour system of laws that deten used in a will or trust fine who is a “descendant” without definition other or “issue” and is thus entithan that relating to the tled to inherit under a will inclusion/exclusion of or trust. The resultant FRAN MITCHELL adopted children. problem is the possibility SCHAUL As a result, of a “mismatch” between when chilwhat you think your estate dren are conceived plan provides and how the law via Assisted Reprowill interpret it, in the event any ductive Technoloof your children or other descengy, there often dants have been conceived emerges the potenusing some form of Assisted Retial for significant productive Technology (ART). injustice, the exclusion ART refers to conception of a in a will or trust of children child not by the “usual means” or grandchildren who are but rather by use of a method in beloved family members. which the sperm, the egg or both To make this a bit more are handled outside the human concrete, let’s consider a few body. increasingly common examples The most common methods are involving Assisted Reproductive artificial insemination, in which Technology children and a trust sperm are inserted into a woman’s set up by parents for their chilbody by means other than sexual dren and other descendants. intercourse; and in vitro fertilization, which involves extracting a An infertile son and his wife woman’s eggs, collecting the conceive a child via artificial sperm, combining them in a laboinsemination, using donor sperm. ratory setting and transferring the This grandchild may not inherit. fertilized embryo into a woman’s Though recognized as a child of uterus. the son under Ohio law, he/ The term “descendants” (or she may not be a “descendant” of “issue”) is commonly used in a the son’s parents as not “of the trust instrument (without further body” because the grandchild is definition) to delineate those who not genetically related to them. are entitled to inherit one or more

1

2

An infertile daughter and her husband arrange for in vitro fertilization using a donor egg and the husband’s semen. The resultant embryo is implanted into the daughter’s uterus.

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

3

Prior to undergoing chemotherapy (which he has been advised may render him sterile), a son arranges for the cryopreservation of a quantity of his sperm.

Two years after his death from cancer, his widow, following his wishes, conceives via artificial insemination and gives birth to their child.

This grandchild also may not inherit. Though probably not recognized as the son’s child under Ohio statutory law, this grandchild may nonetheless be a “descendant” of the deceased son’s parents, due to the genetic relationship with them.

It is likely that the grandparents of each of these children expected them to inherit in the same manner as their other grandchildren (conceived in the customary manner). Some courts — seemingly intent upon avoiding

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an injustice — have bent over backward to construe trust instruments to include children such as these as “descendants” or “issue” by finding that the creator of a trust intended to include them (notwithstanding the fact that the technology employed to conceive the children had not been developed when the trusts were established).

The need for judicial construction of a trust instrument is not a desirable option, nor is it necessary, especially where the problem is reasonably foreseeable and can thus be dealt with in the trust instrument.

What to do?

Update the provisions of your estate plan, including or excluding the children of the new biology, as appropriate. If you are setting up a dynasty trust — one that is designed to continue for generations — be aware that the use of Assisted Reproductive Technology is increasing and that it may affect your family in a future generation, even if it does not do so presently.

■

Fran Mitchell Schaul is a senior counsel in Calfee, Halter & Griswold LLP’s Estate and Succession Planning group. Contact her at (216) 622-8351 or at fschaul@calfee.com.

Bloodline trusts protect unintentional transfers the assets to his or her spouse. Naturally, it is any times, in assumed that the spouse an initial will leave these assets to the client meeting grandchildren, but that may to review exnot happen if the spouse isting documents, a disremarries. The spouse may cussion occurs pertaining intentionally leave the assets to a client’s wishes regard- MISSIA H. to a new spouse, or through ing the ultimate disposipoor estate planning, cause VASELANEY tion of his or her assets. the wealth to spin sideways Generally, most older estate planto unintended beneficiaries. ning documents provide for an A way to help ensure that this outright distribution of assets to does not happen is to establish a the children.

Dynasty Trust, in which the In discussing these provisions, assets are held in trust for the clients are sometimes operating child’s life and pass to the grandunder the misimpression that children (or possibly the client’s their documents guarantee that other children where a child does the assets will ultimately pass to not have his or her own children) their grandchildren. They read either in further trust or outright. the standard provision, which The child can serve as trustee states that if a child predeceases or co-trustee if the trust is structhem, then that child’s share will tured correctly. The child can be pass to the child’s children. They given the power to appoint a life do not realize that only applies in interest to the child’s spouse. This the unlikely event that their child structure can bolster a child’s predeceases them. prenuptial or serve as a substitute Even parents who love their in instances when a child has few children’s spouses may have a assets and does not want to raise concern about their wealth passing the issue with a future spouse.

■ “sideways.” If a child receives his Missia H. Vaselaney is a partner in the or her inheritance outright, those Private Client group at Taft. Contact her assets will be controlled by the at mvaselaney@taftlaw.com or (216) child’s estate planning documents.

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CHARITABLE GIVING

Making gifts to young children

By TINA MYERS

A

s part of estate and income tax planning, parents and grandparents often consider making gifts to minors. Before making transfers, several factors should be considered: Can investment income be shifted to a lower tax bracket?

Beware of the “kiddie tax� rules. Currently, children younger than age 19, and dependent fulltime students under age 24, TINA MYERS having investment income over $1,900 are taxed at the parents’ marginal rates. If trusts are used, income may be taxed at higher trust rates due to compressed tax brackets, or if income can be used to satisfy a grantor’s “parental obligations,� income would be taxable to the grantor,

not the child.

Should access to the property be restricted beyond age 21? Transfers to Uniform Transfers to Minors Act (UTMA) accounts become the unrestricted property of the child upon reaching age 21 (varies by state).

Transfers made in trust can be held past age 21.

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

However, transfers to trusts qualify only if the trust is drafted to give the child a present interest or in a way that qualifies it for the GST annual exclusion.

Will the gift impact financial aid eligibility? Assets held in UTMA accounts, and certain trusts for the benefit of a child, will be considered the child’s assets. A custodial 529 college savings plan is considered an asset of the parent, not the child.

Is the purpose of the gift limited to education? If so, consider funding tax-advantaged 529 accounts or paying tuition directly.

For more flexibility, a trust may be a better choice.

Gifting to minors can be beneficial, if structured properly. Consult a financial or tax adviser before making such gifts. â–

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Tina Myers, CPA, MTax, AEP, is tax manager for estate, gift & trusts for Zinner & Co. LLP. Contact her at (216) 831-0733 x 108 or email tmyers@zinnerco.com.

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To learn more, please call Linda Olejko for a personal conversation at 216-514-7876. ˜˜2˜˜ ˜˜2˜˜ ˜ ˜˜2˜˜

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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

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GIFTS TO FAMILY

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CHARITABLE GIVING

Charitable lead trusts a good Beyond the bequest: What’s your plan? option in today’s economy

By LAURA MALONE

By KATHERINE COLLIN

W

hat makes today’s economy so attractive for lead trusts?

The answer is the low IRS discount rate, which is a measure of the annual rate of return the IRS assumes that gifted assets will earn during the gift term.

The discount rate is an integral part of the calculation when determining a donor’s charitable deduction for making a gift. When there is a low discount rate KATHERINE and the charity COLLIN receives an asset from a donor at the beginning of a gift term, such as with a lead trust, the deduction available will be higher because the donor forgoes the use of that asset in favor of the charity.

With a charitable lead trust, a donor transfers assets into the trust, which pays a percentage or fixed dollar amount of trust assets to the favorite charity for a set term. The trust term can be up to a maximum of 20 years, or it can be established for one or more lifetimes. Once the trust term is complete, assets remaining in the trust are usually returned to the donor’s designated beneficiaries.

Although there is no income tax charitable deduction for a

WAYS TO SET UP LEAD TRUSTS Annuity trusts: These vehicles provide a fixed, annual gift to the charity for the term of the trust.

Unitrusts: This option provides a fluctuating, annual gift to charity for the term of the trust.

donor who creates a charitable lead trust, the donor still has the prospect of substantial savings on gift and estate taxes, while passing along trust growth to heirs tax-free. Income earned by the trust is not attributed to the donor.

Instead, the trust is taxed according to trust rates. It is the trust that is entitled to an income tax deduction for the amount paid out annually to the donor’s chosen charity. This type of trust allows donors to meet philanthropic objectives while both they and their heirs achieve tax savings.

Lead trusts can be established with one of two payment methods.

Annuity trusts provide a fixed, annual gift to charity for the term of the trust. The amount payable to the charity each year is determined by the donor’s initial funding amount placed in the trust — commonly, 5% to 8% annually of that initial amount.

Due to the structure of annuity

trusts, no additions can be made to the trust corpus. To increase philanthropic support, a donor would need to establish another gift vehicle for the charity.

Unitrusts provide a fluctuating, annual gift to charity for the term of the trust. The trust is valued on the last day of the year to determine payment for the following year. Again, the charity could receive 5% to 8% annually, but it is equal to that percentage of the trust’s calculated year-end value. Additions can be made to the trust corpus that will increase both the annual gift to charity and the amount returned to heirs at the end of the trust term.

Ultimately, giving through charitable lead trusts is a win-win option, allowing donors to support their favorite charities while realizing tax savings.

■

50

Katherine Collin, Esq., is assistant director, gift planning, for Cleveland Clinic.

Contact her at (216) 444-1245.

th Anniversary Gala

A

mericans are a naturally charitable society, and most people judge their giving capacity by what is in their checkbook. Often, bequests are considered the most common type of planned gift because the assets are considered to no longer be needed. However, other giving options allow individuals and families to assist their favorite charities without compromising their financial security.

tion could create significant benefit.

Donor advised funds or private foundations can create long-term legacy to help support charities or serve as a conduit if charities do not have the capacity to accept more intricate gifts.

Gifts that pay income Charitable remainder trusts and charitable gift annuities can create income to the donor while providing a charitable deduction up front and potentially defer or eliminate capital gains tax.

Gifts anyone can make

Gifts that protect assets

Life insurance purchased with the charity as both owner and beneficiary of the policy can create an amplified gift that costs “pennies on the dollar.” Gifting an existing policy for the charity to sell or surrender can create immediate impact instead of waiting for a death benefit.

Qualified retirement plans (IRA, 401k, etc.) may be taxed up to 60% when passed on to heirs, yet can transfer tax free to a charity.

Lifetime withdrawals can be made because the charitable deduction typically offsets the taxable income.

Appreciated securities, closely held business interests or real estate gifted in advance of sale can mitigate capital gains taxes for the owner while creating a meaningful gift. Since business interests and real estate often have little to no basis, the fair market deduc-

Charitable bargain sales, charitable lead trusts and retained life estates can maintain the benefits of an asset or transfer assets to heirs at a reduced cost or tax free while making a gift to charity at the same time. Taxable rates on charitable lead trusts are very low, making it more likely that the family will receive the assets back tax free at a higher appreciation than if gifted without the trust.

Leveraging assets other than cash in a planned gift can create significant benefits to both the donor and their favorite charities.

These strategies can be complex, so always consult trusted professionals throughout the process. ■

Laura Malone is director of gift planning for The American Endowment Foundation. Contact her at (877) 599-8903 or email lauramalone@aefonline.org.

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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.

A BANK INVESTED IN MORE THAN YOUR BALANCE. At Huntington, we do things a little differently.

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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 if you’re ready for a bank that’s interested in more than your balance, call Chris Cwiklinski at 216-515-6547 or Era Griffin at 216-515-0259.

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NOVEMBER 12 - 18, 2012

E-15

CHARITABLE GIVING

Foundations offer their own opportunities Appropriate vehicle depends on goals

By CAROL F. WOLF

C

reating a charitable foundation is a major decision for donors, particularly given that they must choose between establishing a private foundation or a supporting foundation. As with all planned gifts, the donor’s goals are of utmost importance and advisers must understand and review the similarities and differences when considering which foundation is appropriate for a donor.

Every foundation, whether private or supporting, is a separate nonprofit entity. A supporting foundation qualifies as a public charity because of its legal control by a public charity (e.g., Jewish Federation of Cleveland) and thus is free of the limitations applicable to private foundations.

Private foundations can be structured to give donors total control over grantmaking and investments. In contrast, supporting foundations cannot be completely controlled by donors. Family members may be on the governing body, but the supported organization (public charity) must elect or

Consider donor advised funds to combat potential tax increases and get a bigger income tax benefit today while maintaining flexibility regarding who receives the donation, how much and when.

They are particularly useful when you have a spike in income (e.g., business sale, options exercise), if you believe your future tax rate will go down (e.g., after retirement) or if you believe Congress will reduce the charitable deduction in the

By MATTHEW S. OLVER

appoint a majority of the trustees.

Private foundations have a minimum distribution requirement — their annual grants and administrative expenses must be at least 5% of the value of their investment assets annually. Supporting foundations have no minimum distribution requirement.

Private foundations are responsible for their own recordkeeping and IRS and state filings. A supporting foundation’s recordkeeping and filings can be handled by the supported organization, often at a reduced cost.

Private foundations pay an excise tax of 2% on their investment income (reduced to 1% if certain distribution requirements are met). Supporting foundations pay no excise tax on their investment income.

Private foundations have ceilings on deductibility of gifts that are lower than the ceilings applicable to gifts to a supporting foundation, which are the same as those for gifts to a public charity.

As with most charitable gifts, there is no best choice, but by understanding the features of each type of foundation, donors can make the appropriate choice and achieve their philanthropic and financial goals.

■

Carol F. Wolf is senior development officer for the Jewish Federation of Cleveland. Contact her at (216) 593-2805 or email cwolf@jcfcleve.org.

B

y the time this article goes to print, we will know the outcome of the U.S. elections.

Ongoing political rancor and a lame-duck Congress make trying to predict how they will address the potential tax increases MATTHEW pure speculation.

OLVER What we do know is that under current law, beginning in 2013, a new future.

3.8% Medicare contribution tax will be “A donor advised fund is similar to a priimposed on the unearned income (including vate foundation but requires less money, capital gains) of higher income individuals. time, legal assistance and administration to Further, there is a possibility that the longestablish and maintain,” says Kara Downing, term capital gains tax rate will go from portfolio manager at Spero-Smith Invest15% to 20%. ment Advisers, Inc. When you donate an If you itemize deductions on your tax asset to your fund, the sponsoring organireturn, one opportunity to harvest some zation liquidates it and transfers the protax savings is through charitable donaceeds into investments you select from tions. within the donor advised fund’s available However, the tax benefit can be magnioptions. You can then use these funds to fied by donating appreciated assets held make cash gifts to charitable organizations more than one year, as you may be able to over several years. deduct the full market value of the asset Many community foundations, financial and avoid paying the capital gains tax you institutions and some public charities would have otherwise paid by selling that sponsor donor advised funds. Consult your asset. Not only do you get to offset ordiqualified tax professional to help you denary income (taxed up to 39.6% in 2013) termine what makes the most sense given but you also avoid paying capital gains your goals and financial situation.

■ taxes (up to 23.8% in 2013).

What if you want the biggest tax benefit Matthew S. Olver, CFP, is senior vice president and now but aren’t yet ready to give the money a wealth adviser for Spero-Smith Investment Advisto charity? Donor advised funds can help ers, Inc. Contact him at (216) 464-6266 or email you remove assets from your taxable estate matt@sperosmith.com.

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CHARITABLE GIVING

Deciding to give is the first of many choices Matching financial goals with charitable motivations and timing must be considered

By SUNNY MASTERS

C

have several, or a desire to explore new community needs and opportunities as they arise.

omfort. Love. Respect. At Hospice of the Western Reserve, everything we do comes back to those Impact. What kind of impact three important words. would you like to make with your This is especially true when we charitable gift? speak with others about their final legacies, regarding how they want Perpetuity. Should your gift last to be cared for and how they want forever? You can endow your gift so to be remembered. that only the income is spent and Many people come to a point in the principal becomes a growing their lives where they feel inclined source of community capital. Or, to give back. They do so for a num- SUNNY you can choose to spend all of your ber of reasons, all very personal to MASTERS charitable assets. What is your them. What motivates you? preferred timetable?

Perhaps you feel strongly about a cause. Perhaps an organization has What are your financial goals? touched your life or the lives of loved ones.

Maybe you want to create a legacy and set Assets and taxes. Most large gifts an example that inspires others to give. present the opportunity for significant tax Or your giving is a way to get your deductions. Some people choose to give family together and pass along your values during high-income years to defray their to younger generations. taxes with deductions. You may wish to For as many motivations as there are to donate appreciated securities or real estate give, there are as many ways of giving. The to avoid taxes on the sale of these assets. key to having a rewarding giving experiAnd charitable bequests can play a role in ence is finding the best fit — for your estate planning for your heirs. Your profescharitable priorities, financial goals and sional adviser can help you assess the finanpersonal preferences. This checklist is cial and tax implications of giving assets. designed to help you and your professional adviser determine the custom giving soluTransitions. Major life events often tion that’s right for you. drive changes to an estate plan and prompt charitable gifts.

What are your charitable priorities?

Charitable interests. You may have a single charitable interest — an important cause or organization. Or you may

Timing. Maybe you would like to start giving now, so you can get involved and potentially see the results of your gift.

Or perhaps you’d like to give through your estate. Most philanthropists do a

combination. What is your preference?

charitable interests, we’ve produced a brochure called Deciding to Give. It is yet another tool Hospice of the Western Reserve provides to offer our patients, families and donors the opportunity to give others the comfort, love and respect they received while in our care.

Planned gifts are an important source of funds that enable Hospice of the Western Reserve to provide comprehensive end-of-life care regardless of ability to pay. â–

Income. Some people give in a way that provides them — or a loved one — a stream of income for life.

Your professional adviser can help you select a giving vehicle that suits your time horizons, tolerance of risk and income requirements.

What kind of income would you like your estate to provide?

What are your personal preferences?

Sunny Masters is chief development officer for Hospice of the Western Reserve. To receive a complimentary copy of Deciding to Give, please call or email Staci Lowell at (216) 383-6678 or slowell@hospicewr.org or visit www.hospicewr.org/donate.

Recognition. Some people like a tasteful level of recognition for their good work. It attracts attention to their cause, generates awareness, and may inspire others to give. Some people prefer anonymity.

What level of recognition do you prefer?

Control. Is control over assets you give to charity important to you? Some people are glad to let go of control, once they’ve made some guiding decisions. Determining the range that’s comfortable for you will help your adviser recommend appropriate giving vehicles.

Knowledge. Would you like more information regarding establishing a philanthropic plan and/or evaluating charitable giving options?

To help people identify their particular

Hospice of the Western Reserve is a community-based, non-profit agency providing comfort and emotional support to patients and their families. The agency cares for people in a variety of settings, including David Simpson Hospice House overlooking Lake Erie, in patientsš homes, in hospitals and long-term care facilities, and at Ames Family Hospice House in Westlake. Headquartered in Cleveland, Hospice of the Western Reserve provides hospice services, palliative care and bereavement support to patients and families throughout Northeast Ohio including Ashtabula, Cuyahoga, Geauga, Lake, Lorain a nd Summit counties with offices throughout, and outreach, into Medina, Portage and Stark counties.

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Securities offered through Lincoln Financial Advisors Corp., a broker-dealer. Investment 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 afďŹ liates and other ďŹ ne companies. It is not our position to offer legal or tax advice. We encourage you to seek the advice of an attorney or accountant prior to making tax-related investment and/or insurance decisions. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its afďŹ liates. CRN200809-2020241

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CHARITABLE GIVING

Giving during retirement

Before starting the charitable or many Americans, giving giving process, determine what money to charity — during your passion is and who you their lifetime or in their want to help the most. Charity will — is an important does truly begin at home, financial goal. But common and you should make sure sense says you shouldn’t you have enough assets to do so at the expense of maintain your standard of other goals — for inliving in retirement. Work stance, educating your with your financial adviser children or funding your from the beginning to make own retirement. By thinking sure you have sufficient ahead it’s possible to discretionary assets to coninclude charitable giving JEREMY tinue making charitable in the comprehensive ficontributions in retirement. nancial planning process. DITULLIO Computer modeling can help gauge what any financial Beyond taxes decision — including large gifts to charity — will mean 10 or 20 When you integrate charitable years in the future, and they can giving with your other goals, the determine whether gifts may be most important question to ask possible in the future after you’ve yourself is: “Do I have a heart for met your other financial goals. charity?” Don’t make donations just to get a tax deduction. While you get a tax deduction, people Charitable bequests tend to be bitter about money they There are generally three places gave away if they don’t have your money can go when you die enough assets in 10 or 15 years — to family members, to charity when they retire. The bottom line or to estate taxes. An estate plan is that charitable contributions may can help you control who gets reduce your tax liability, but make your money at the lowest possisure those dollars are truly discreble tax cost. In their wills, people tionary before giving them away. often list charities and the dollar Charitable contributions can amount each will receive. But, take many forms. Most people are make sure your estate can afford familiar with giving cash or the bequests. If you make specific checks. But it’s also possible to bequests and the market declines, donate stock or other securities. there might not be enough left to The advantage is you may not take care of family members. have to pay capital gains taxes on How you phrase things in your any appreciation in the value of will can make a big difference. the publicly traded securities — Consider, for example, a $2 million and you may receive an income estate that makes five $100,000 tax deduction for the current bequests to individual charities. If market value. Note that your the estate shrinks to $1 million, the choice in charitable beneficiaries charities now get 50% of the estate may affect your allowable charitainstead of 25%. Instead, consider ble deduction. leaving beneficiaries a specific More sophisticated strategies, percentage of your estate. With a such as family foundations, are $2 million estate, $100,000 is 5%. also available. Although the assisIf the estate shrinks to $1 million, tance of an attorney is needed, you 5% is only $50,000, but more is and your family members can use left for family members. the foundation to make gifts to your favorite charities. Other commonly Future legacy used charitable vehicles include: ■ A charitable remainder trust.

Oftentimes, people’s charitable You retain an income interest for interests often expand as retirea period of time. Then the assets ment nears. They have a greater go to the named charity. The sense of their mortality and wondonor gets the income plus an der about their legacy. Giving to available income tax deduction charity can help add meaning to based on the present value of the their liVES. With proper estate interest going to charity. planning, you and your spouse ■ A charitable lead trust. It opnot only can have a comfortable erates in reverse, with payments retirement but also leave a charifirst going to charity. After a period table legacy that will continue of years the assets go to a noneven when you’re gone.

■ charitable beneficiary you select.

This strategy works best for indiJeremy DiTullio, CFP is a registered repviduals who don’t need the inresentative and investment advisor repcome the assets will generate in resentative of Lincoln Financial Advisors retirement but want to control Corp. Contact him at (800) 466-7150 who gets the property. ext. 7450 or Jeremy.DiTullio@LFG.com.

F

E-17

Don’t delay during this season of giving

Integrate retirement planning with charitable giving

By JEREMY DITULLIO

NOVEMBER 12 - 18, 2012

This is the year to take advantage of opportunities

By J. DONALD CAIRNS AND KYLE B. GEE

I

J. DONALD CAIRNS

f one of your goals is to make gifts while minimizing taxes, you should consider acting before 2012 draws to a close.

Currently, each year an individual may give up to $13,000 ($14,000 in 2013) to any number of recipients free of federal gift tax.

Gifts in excess of this annual exclusion are subject to gift tax, but the good news is that for 2012 there is a lifetime gift tax exemption of $5.12 million.

However, if Congress does not act before the end of 2012, this exemption will drop dramatically to $1 million on Jan. 1, 2013.

Further, the highest tax rate on gift and estate taxes will climb from 35% to 55%.

This means that if the combined value of your lifetime gifts

KYLE B. GEE

(in excess of annual exclusions) and the value of your estate at your death exceeds $1 million, estate taxes may take from 41% to 55% of the value of the assets over $1 million, leaving significantly less to your family or other beneficiaries.

Utilizing the $5.12 million exemption while it is still here can help you pass greater wealth to your descendants and others. A lifetime gift also removes from your taxable estate all post-gift income and appreciation on the gifted property.

There are diverse gifting strategies that should be tailored to each unique circumstance. Strategies include making outright gifts of cash, securities or other assets; funding an irrevocable life

insurance trust (ILIT) so the trust can pay life insurance premiums on policies that will not be taxable in your estate; funding Section 529 college education plans; gifting limited partnership interests; establishing dynasty trusts; and creating a qualified personal residence trust (QPRT).

Also, with interest rates currently at historic lows, this is an optimal time for grantor-retained annuity trusts (GRATs); charitable lead unitrusts and annuity trusts (CLUTs, CLATs); income/power of attorney trusts for non-citizen spouses; and the creation, refinancing or forgiving of intrafamily loans.

Such gifting opportunities should 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 taxation and planning, estate and trust administration, fiduciary representation, and charitable giving. Contact them at (216) 696-4700 or visit www. spiethbell.com.

Your legacy can truly make a difference.

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: s To Heal – enhancing patient care, experience and access s To Teach – training future generations of physicians and scientists s 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.

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E-18 NOVEMBER 12 - 18, 2012

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CHARITABLE GIVING

Life Insurance gift options

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To ensure a college education for your children‌ a comfortable retirement‌ or a legacy for your loved ones, you need to invest that money wisely.

Gift Options

Immediate tax deduction

Ongoing tax deduction

Estate tax deduction

Charity named as beneficiary of life insurance policy

Donor remains owner of policy. Income tax deduction is not applicable.

No ongoing income tax deductions since donor remains owner of policy and pays insurance premiums to insurance company.

Life insurance is included as part of estate assets. Estate tax deduction for amount transferred to charity.

Transfer ownership of existing policy to charity

Income tax deduction equal to lesser of net premiums paid or policy’s fair market value.

Paid-up policy: No premium payments required (ongoing income tax deductions are not applicable).

Partially paid-up policy: If additional premiums are required, donor receives income tax deductions for contributions to charity.

Life insurance is not included as part of estate assets.

Deductions during life (estate tax deduction not applicable).

Obtain new policy and transfer ownership to charity

Income tax deduction equal to lesser of net premiums paid or policy’s fair market value.

Donor receives ongoing income tax deductions for contributions to charity covering premium payments.

Life insurance is not included as part of estate assets.

Deductions during life (estate tax deduction not applicable).

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Life insurance offers donors I M P O R T A N T creative gift opportunities BUSINESS M AT T E R S P each donor or adviser to understand individual cirhilanthropy is percumstances and find the sonal. Each donor best way to structure each is motivated by a gift. unique history and Life insurance may be individual reasons for supused to creatively achieve porting a charitable orgathe donor’s philanthropic nization. In addition, each PATRICIA and financial goals. Degift may be made in varipending on the donor’s FRIES ous ways and some opage and health, life insurtions may be more appealing or ance can be an excellent and appropriate for a donor’s situacost-effective way to provide tion than others. We work with future support for a charity.

By PATRICIA FRIES

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Current support may be provided through other means. The chart above summarizes life insurance gift options and tax advantages.

Given financial and tax uncertainties for the foreseeable future, it is important to understand the various gift options to determine the best way to support a favorite charity. â–

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

COLLECTIBLES AND FINE ART

Reappraise high value personal property Markets still favorable for collectibles

By JAMES CORCORAN

D

espite weak economic conditions, various classes of collectible personal property have escalated substantially in value in the national and international market — up to and beyond 100% over

the last five years. hedge against currency The classic example of devaluation. Such highsuch an increase in value quality collectibles have is probably the gold and risen dramatically in value silver market, where prices as a result of increased per ounce have increased market demand. more than 250% in the For example, top quality last five years. works of art, especially Flight from paper curimpressionist, modern and JAMES rency (Euros and even the CORCORAN contemporary works, have U.S. dollar) has signifireached record prices cantly increased market demand within the last two years. This for certain collectibles. As with trend does not show any signs of gold and silver, these collectibles abating. High-quality Chinese art are perceived as a solid and tangiand antiques and contemporary continued on next page ble way to lock in value as a

Crain’s Cleveland Business Custom Publishing

20121112-NEWS--33-NAT-CCI-CL_--

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11:33 AM

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ESTATE PLANNING

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NOVEMBER 12 - 18, 2012

E-19

CHARITABLE GIVING

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replacement value appraisal will address this issue.

Insurance purposes. Does the present insured value adequately reflect current market value? Is the present insurance value too low or unrealistically high?

(There are collectible categories that have fallen 30% or more over the past five years). A

Charitable donations. This may be a particularly valuable tool for wealth management and estate planning purposes when values have increased dramatically.

Partial annual charitable gifts of a single item are sometimes desirable.

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Top-quality collectibles are sustaining increases continued from previous page Chinese art are in nearly parabolic markets at present – even the Chinese prefer tangibles to paper yuan, it seems.

Among others, the following categories of collectibles including books, firearms, antique automobiles and boats, have also shown sustained increases in market prices for top quality items.

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in income tax deductions make such gifts much more advantageous to the client than ever.

Inter vivos gifts. Gifts of tangible personal property to family or friends should also be considered, depending on current fair market value data and client objectives.

Use of partial gifts and annual gift tax exemptions should also be considered.

Things to remember. Use a nationally certified appraiser in good standing. Is your appraiser a member of any of the three major national appraisal organizations: AAA (Appraisers Association of America), ISA (International Society of Appraisers), ASA (American Society of Appraisers)? Check the Appraisal Society websites.

The IRS now requires an “IRS Qualified Appraiser” for charitable gifts. Does your appraiser meet the IRS requirements? And, importantly, does your appraiser have adequate Errors and Omissions Insurance?

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ESTATE PLANNING

E-20 NOVEMBER 12 - 18, 2012

Advertisement

CHARITABLE GIVING

Donor stewardship is helping you help others Families should seek guidance to shape philanthropic legacy

By KAYE RIDOLFI

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or many, Thanksgiving is the rare time of year when family members put aside their busy schedules and gather to spend time together.

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Crain’s Cleveland Business Custom Publishing

20121112-NEWS--35-NAT-CCI-CL_--

11/9/2012

2:22 PM

Page 1

NOVEMBER 12 - 18, 2012

GOING PLACES MANUFACTURING

ARCHITECTURE

TRANSMOTION MEDICAL: John Dieterich to sales director, eastern U.S. region and international markets.

FINANCE FIRSTMERIT CORP.: Greg P. Mulach to senior vice president and Erie Shores Market president.

OHIO COMMERCE BANK: Steven D. Skaggs to senior vice president, chief credit officer; Michael J. Zavosky to banking specialist.

FINANCIAL SERVICE CEDAR BROOK FINANCIAL PARTNERS LLC: Linda Parker to executive assistant to firm principal, William Glubiak.

CIUNI & PANICHI INC.: Reggie Novak to senior manager; Amanda Kollman, Jerad Locktish and Daniel Reilly to managers.

CORRIGAN KRAUSE: Sheri L. Terens to assurance service manager; Jill A. Petz to bookkeeping department.

MARKETING

CAMPUS DISTRICT INC.: Bobbi Reichtell to executive director.

TRANSACTION REALTY: Willie Patton to sales associate.

SERVICE EXPERIENT: Bryan Earley to Experient national account manager.

PARAGRID: Jay Schoolcraft to account manager.

INSURANCE WILLIS OF OHIO INC.: Keith Hartzell to placement specialist.

LEGAL DREYFUSS WILLIAMS & ASSOCIATES LPA: Dennis F. Rusch to chief strategy officer.

MCDONALD HOPKINS: Chad Arfons to member.

TAFT STETTINIUS & HOLLISTER LLP: Tracy A. Turoff to partner.

BOARDS HANDSON NORTHEAST OHIO: Adam Fuller (Brennan, Manna & Diamond LLC) to president; Jen Zuckerman to secretary; Mike Ferkovic to treasurer.

NATIONAL ORGANIZATION OF SOCIAL SECURITY CLAIMANTS’ REPRESENTATIVES: Debra S. Shifrin (Shifrin Newman Smith) to president.

AWARDS INFOCOMM INTERNATIONAL: Raymond A. Kent (Sustainable Technologies Group LLC and Westlake Reed Leskosky) received the 2012 Sustainable Technology Award.

NATIONAL CANCER INSTITUTE: Dr. Afshin Dowlati (University Hospitals Case Medical Center, Comprehensive Cancer Center) received the 2012 Michaele C. Christian Oncology Development Lectureship and Award.

OHIO COUNCIL OF BEHAVIORAL HEALTH AND FAMILY SERVICES PROVIDERS: Nelson W. Burns (Coleman Professional Services) received the 2012 Mary E. Pettus Excellence in Public Policy Award.

PREVENT BLINDNESS OHIO: Brent M. Buckley (Buckley King) received the 2012 People of Vision Award.

COMING UP Crain’s Forty Under 40 event set for Nov. 19 In 21st year, section honors best, brightest young business leaders

Crain’s Cleveland Business will hold its annual Forty Under 40 awards ceremony next Monday, Nov. 19, at Executive Caterers at Landerhaven in Mayfield Heights.

Each year, the newspaper takes nominations for the region’s best young business leaders and honors 40 of the brightest.

For more information and to buy tickets, visit http://crainscleveland .com/section/40under40. Or you

can call Jessica Snyder at (216) 7715388.

Get a sneak preview of this year’s class by visiting our Facebook page at http://tinyurl.com/cbkey4f.

For an archive of past classes, including last year’s 20th anniversary group, and for past coverage of our Forty Under 40 awards events, including videos and photo slideshows, visit http://crainscleveland .com/section/40under40_Past.

N.E. Ohio Manufacturer Annual Energy Savings FirstEnergy Rebate Accelerated Tax Deduction Brighter Facility

110K sq. ft. $30,658 $18,015 $22,910 170%

Upgraded HID & T-12 fixtures to Energy Efficient T-8 & T-5’s Wolfe

Hartzell

Arfons

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ROI Energy www.ROI-Energy.com

REAL ESTATE

RETIREMENT SOLUTIONS: Kristine Charkosky to assistant vice president, operations; Matthew Korber and Christopher Bush to associate financial consultants.

UNIVERSITY HOSPITALS CASE MEDICAL CENTER: Honor Wolfe, M.D. named to the inaugural Mary D. Fergus Endowed Chair in MaternalFetal Medicine.

Parker

CLEVELAND MUSEUM OF ART AND BON APPETIT MANAGEMENT CO.: Ian Thompson to executive chef; Michael Huff to general manager; Mark Kroner to director of operations.

OVERDRIVE: Don Fabricant to general manager, education and chief sales officer.

METROHEALTH SYSTEM: Geoffrey Himes to vice president, chief accounting officer.

Mulach

NONPROFIT

TECHNOLOGY

HEALTH CARE

Marshall

SIMPSON COMMUNICATIONS LLC: Mike DiLorenzo to account coordinator.

PAYTIME: Whitney Stacho and Jill Malone to client service representatives.

WINER+BEVILACQUA INC.: Brian Liddle, Kimberly Williams and Jennifer Schumacher to senior tax accountants.

LIGHTING CASE STUDY

DONER: Shelby Rauen to vice president, strategic planner.

MCMANAMON & CO.: Daisy Yu and Clayton Ingalls to associates.

SKODA MINOTTI: Juliana Hanea, Karilyn Mader, Matt Muccio and Will Palmer to staff accountants.

35

Attn: Manufacturers & Warehouses

JOB CHANGES CEDARWOOD ARCHITECTURAL: Robert Marshall to president.

CRAIN’S CLEVELAND BUSINESS

WWW.CRAINSCLEVELAND.COM

330-931-3905 Turoff

Rauen

Reichtell

RETIREMENT FIRSTMERIT CORP.: Bill Lamb, after 38 years of service.

Send information for Going Places to dhillyer@crain.com.

20121112-NEWS--36-NAT-CCI-CL_--

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11/9/2012

11:13 AM

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CRAIN’S CLEVELAND BUSINESS

WWW.CRAINSCLEVELAND.COM

NOVEMBER 12 - 18, 2012

HIGHEST PAID NONPROFIT EXECUTIVES RANKED BY COMPENSATION

Name Title Rank Organization

Address, phone, website

Compensation from organization ($)

Other compensation ($)

Revenue ($)

Assets ($)

Fund balance ($)(1)

Description

990 filing year

Fiscal year end

1

Stephen H. Hoffman president Jewish Federation of Cleveland

25701 Science Park Drive Cleveland 44122: (216) 593-2900 www.jewishcleveland.org

644,518

29,256

66,400,700

413,343,432

348,720,867

Social services

2010

6-30-2011

2

Steven Raichilson executive director Menorah Park Center for Senior Living

27100 Cedar Road Beachwood 44122: (216) 831-6500 www.menorahpark.org

638,326

20,140

67,969,450

54,560,814

8,949,937

Social services

2010

6-30-2011

3

Ronald B. Richard president, CEO Cleveland Foundation

1422 Euclid Ave., Suite 1300 Cleveland 44115: (216) 861-3810 www.clevelandfoundation.org

487,718

87,472

76,506,809

1,545,496,123

1,465,061,100

Grantmaking foundation

2010

12-31-2010

4

Terry Stewart president, CEO The Rock and Roll Hall of Fame and Museum Inc.

1100 Rock and Roll Blvd.

Cleveland 44114: (216) 781-7625 www.rockhall.com

442,128

34,376

24,434,116

98,872,845

93,239,206

Museum

2010

12-31-2010

5

Art Falco president, CEO PlayhouseSquare Foundation

1501 Euclid Ave., Suite 200 Cleveland 44115: (216) 771-4444 www.playhousesquare.org

428,783

183,615

56,960,863

147,437,942

89,046,979

Theater

2010

6-30-2011

6

Gary Hanson executive director The Musical Arts Association

11001 Euclid Ave. Cleveland 44106: (216) 231-7300 www.clevelandorchestra.com

414,668

4,861

57,124,107

222,814,558

162,100,585

Orchestra

2010

6-30-2011

7

James J. Lawrence president, CEO Oriana House Inc.

P.O. Box 1501 Akron 44309-1501: (330) 535-8116 www.orianahouse.org

408,273

135,966

34,362,595

12,696,097

(887,743)

Corrections and chemical dependency

2010

12-31-2010

8

John E. Harvan Jr. CFO Hospice of the Western Reserve

17876 St. Clair Ave. Cleveland 44110: (800) 707-8922 www.hospicewr.org

389,801

16,710

93,900,534

67,821,107

52,319,557

Hospice

2010

12-31-2010

9

Raymond T. Leach CEO JumpStart Inc.

6701 Carnegie Ave., Suite 100 Cleveland 44103: (216) 363-3400 www.jumpstartinc.org

378,871

14,844

12,479,008

19,576,490

16,217,273

Economic development

2010

6-30-2011

10

Cynthia H. Dunn president, CEO Judson

2181 Ambleside Road Cleveland 44106: (216) 791-2969 http://judsonsmartliving.com

328,275

16,685

30,563,773

45,063,744

(15,030,770)

Senior services

2010

12-31-2010

11

Brian S. Kenyon executive vice president, CFO The Rock and Roll Hall of Fame and Museum Inc.

1100 Rock and Roll Blvd.

Cleveland 44114: (216) 781-7625 www.rockhall.com

314,047

26,306

24,434,116

98,872,845

93,239,206

Museum

2010

12-31-2010

12

Lauren B. Rock president, CEO Montefiore

One David Myers Parkway Beachwood 44122: (216) 360-9080 www.montefiorecare.org

313,435

14,762

27,956,779

33,406,630

15,480,066

Senior services

2010

6-30-2011

13

W. Michael Knight, M.D. medical director Menorah Park Center for Senior Living

27100 Cedar Road Beachwood 44122: (216) 831-6500 www.menorahpark.org

312,393

20,140

67,969,450

54,560,814

8,949,937

Social services

2010

6-30-2011

14

Thomas A. Waltermire CEO Team NEO

737 Bolivar Road, Suite 2000 Cleveland 44115: (216) 363-5400 www.teamneo.org

305,843

20,593

3,266,527

512,111

0

Economic development

2011

12-31-2010

15

Charles V. Wellman, M.D. chief medical officer Hospice of the Western Reserve

17876 St. Clair Ave. Cleveland 44110: (800) 707-8922 www.hospicewr.org

302,644

16,892

93,900,534

67,821,107

52,319,557

Hospice

2010

12-31-2010

16

Joseph D. Roman president, CEO Greater Cleveland Partnership

1240 Huron Road East, Suite 300 Cleveland 44115: (216) 621-3300 www.gcpartnership.com

298,648

0

8,807,012

12,915,693

10,857,337

Business membership

2010

12-31-2010

17

Richard Browdie president, CEO Benjamin Rose Institute

11900 Fairhill Road, Suite 300 Cleveland 44120: (216) 791-8000 www.benrose.org

286,258

56,092

10,408,146

129,952,848

113,071,207

Senior services

2010

12-31-2010

18

Richard Schwalberg administrator Menorah Park Center for Senior Living

27100 Cedar Road Beachwood 44122: (216) 831-6500 www.menorahpark.org

284,523

20,140

67,969,450

54,560,814

8,949,937

Social services

2010

6-30-2011

19

Claire M. Zangerle president, CEO Visiting Nurse Association of Ohio

2500 E. 22nd St. Cleveland 44115: (216) 931-1300 www.vnaohio.org

280,361

0

6,468,755

3,270,508

0

Health care

2010

12-31-2010

20

David T. Abbott executive director The George Gund Foundation

45 Prospect Ave. West, Suite 1845 Cleveland 44115: (216) 241-3114 www.gundfoundation.org

277,672

0

34,386,905

295,757,787

295,757,346

Grantmaking foundation

2010

12-31-2010

21

Sharon Sobol Jordan president, CEO The Centers for Families and Children

4500 Euclid Ave. Cleveland 44103: (216) 432-7200 www.c4fc.org

266,011

27,331

21,749,646

39,134,254

36,052,804

Social services

2010

12-31-2010

22

Robert E. Comben Jr. president, CEO Vocational Guidance Services

2239 E. 55th St. Cleveland 44103: (216) 431-7800 www.vgsjob.org

263,871

0

10,722,299

19,737,886

12,985,847

Vocational rehabilitation

2010

12-31-2010

23

Anne Connell-Freund executive vice president, operations Oriana House Inc.

P.O. Box 1501 Akron 44309-1501: (330) 535-8116 www.orianahouse.org

248,082

22,484

34,362,595

12,696,097

(887,743)

Corrections and chemical dependency

2010

12-31-2010

24

Terry Davis president, CEO Our Lady of the Wayside

38135 Colorado Ave. Avon 44011: (440) 934-6007 www.thewayside.org

243,839

13,286

15,760,112

6,805,878

1,256,049

Developmental disabilities

2010

12-31-2010

25

Barry Reis senior vice president, CFO Jewish Federation of Cleveland

25701 Science Park Drive Cleveland 44122: (216) 593-2900 www.jewishcleveland.org

243,130

24,313

66,400,700

413,343,432

348,720,867

Social services

2010

6-30-2011

26

Mitchell Balk president Mt. Sinai Health Care Foundation

Allen Med. Library Bldg., 11000 Euclid Ave. Cleveland 44106-1714: (216) 421-5500 www.mtsinaifoundation.org

240,251

76,500

5,679,434

133,605,176

129,179,370

Grantmaking foundation

2010

6-60-2011

27

Rebecca O. Bagley president, CEO NorTech-Northeast Ohio Technology Coalition

737 Bolivar Road, Suite 1000 Cleveland 44115: (216) 363-6883 www.nortech.org

239,477

0

5,400,315

2,886,435

2,384,324

Economic development

2010

12-31-2010

28

David T. Dombrowiak president, CEO Community West Foundation

20545 Center Ridge Road, Suite 448 Rocky River 44116: (216) 476-7060 www.communitywestfoundation.org

238,227

10,942

6,131,529

76,846,282

64,625,339

Community foundation

2010

12-31-2010

29

William T. Hiller executive director Martha Holden Jennings Foundation

1228 Euclid Ave., Suite 710 Cleveland 44115: (216) 589-5700 www.mhjf.org

234,740

0

1,583,256

65,495,830

65,495,830

Grantmaking foundation

2010

12-31-2010

Source: Form 990 SEC filings. The list includes nonprofits and foundations. The list does not include hospitals, health systems, colleges or universities. Crain's Cleveland Business does not independently verify the information and there is no guarantee these listings are complete or accurate. We welcome all responses to our lists and will include omitted information or clarifications in coming issues. Individual lists and The Book of Lists are available to purchase at www.crainscleveland.com.

(1) Net assets or fund balances are total assets minus total liabilities as reported on line 22 of the 990.

RESEARCHED BY Deborah W. Hillyer

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NOVEMBER 12 - 18, 2012

CRAIN’S CLEVELAND BUSINESS

WWW.CRAINSCLEVELAND.COM

Assistance: Groups’ presence helps lure startups continued from PAGE 3

THE ENTREPRENEURIAL HELPERS

with good ideas who need both advice and cash. Many said the programs are just specialized enough to avoid overlapping too much.

Jim Cookinham, founder of the Northeast Ohio Software Association, said he likes the grassroots way many of the programs were started.

Only one of the programs was created by the state or federal government: The ONE Fund portion of Shaker LaunchHouse’s for-profit business accelerator was started with a grant from the Ohio Third Frontier economic development program.

Mr. Cookinham also is glad many of the programs provide services to entrepreneurs who are just getting started, regardless of what field they’re in. “This is the kind of infrastructure that I think is great,” said Mr. Cookinham, who is retired.

Over the last year or two, at least 16 new programs designed to help entrepreneurs have cropped up in Northeast Ohio.

We couldn’t squeeze details about every program into the story, so here are a few more: ■ Bizdom U — Participants hash out their ideas with experienced entrepreneurs, then the nonprofit makes small investments in some of the companies in exchange for an 8% stake. Those who are selected remain in the program for another three months, working on their businesses full time.

■ Goldman Sachs 10,000 Small Businesses — The investment bank announced in May that it would commit $15 million to expand the program into Northeast Ohio.

The money is used to provide loans

So hot right now A growing national interest in entrepreneurship is one driving force behind the creation of this latest generation of initiatives, according to Mark Hauserman, director of the Muldoon Center for Entrepreneurship at John Carroll University.

“Entrepreneurship’s hot. It’s a hot item,” Mr. Hauserman said.

Several of the new programs began in other cities before expanding to Northeast Ohio.

For instance, the charitable foundation created by the private equity group Blackstone announced last November that it would bring its Blackstone LaunchPad program to Northeast Ohio. The program provides local college students with business advice and connects them with local

business leaders who can serve as mentors. It’s backed by $3.2 million from the Blackstone Charitable Foundation and the Burton D. Morgan Foundation of Hudson, which promotes entrepreneurship.

Local interest in entrepreneurship has increased significantly over the last few years, too. The drive to create jobs in the region led to the creation of local nonprofits such as JumpStart Inc., BioEnteprise Corp. and NorTech, all of which work to promote entrepreneurship and grow the region’s high-tech economy.

JumpStart, which assists and invests in local startups, was directly involved in attracting or creating a few of the 16 programs. For instance,

to small businesses and to finance a free business management program at Cuyahoga Community College.

■ LeanDog Labs — LeanDog Inc. of Cleveland specializes in developing software using “agile” development techniques. Now the company offers a service that aims to help entrepreneurs apply those principles to their companies. It’s a paid service, but, on its website, LeanDog says that, for the right company, it will charge less “in exchange for equity, royalties … or dog treats.”

■ Summit County Revolving Loan Fund — This $400,000 program plans to provide loans ranging from $1,000 to $50,000, starting early next year. Businesses could use the money for startup capital, physical expansions and other purposes. with JumpStart’s help, Akron, Barberton, Canton and Wooster each have formed funds that make small loans or grants to entrepreneurs in those municipalities.

Venture for America started thinking about expanding into Northeast Ohio after a chance encounter its president, Andrew Yang, had with JumpStart CEO Ray Leach.

Now Venture for America plans to identify 10 to 15 Cleveland-area startups that are interested in hiring interns who are recruited and trained by the nonprofit. Venture for America also plans to start recruiting students from colleges in Northeast Ohio. The organization’s goal is to lure promising students

into entrepreneurship while helping strapped startups find affordable talent, Mr. Yang said.

Of the six cities Venture for America operates in — the others are New Orleans, Detroit, Las Vegas, Cincinnati and Providence, R.I. — Cleveland has the most resources for entrepreneurs, Mr. Yang said. And the area has a lot of interesting startups.

“There’s a genuine battery of companies that are creating value,” Mr. Yang said. “That is not really the case everywhere.”

‘Take that leap’ The work of organizations such as JumpStart and the Lorain County Community College Foundation’s Innovation Fund, which provides small grants to startups, has many other people thinking about what they can do to help entrepreneurs, said Mr. Hauserman of John Carroll’s Muldoon Center.

“It takes a JumpStart, (or) an Innovation Fund to get people thinking, ‘Why don’t we do this?’” he said.

Some of the new programs, such as Bad Girl Ventures and ECDI Cleveland, make “microloans” to entrepreneurs, a trend that has been growing in popularity. Others, such as Bizdom U and the LaunchHouse ONE Fund program, make small investments in startups and provide them with boot-camp style assistance made popular by high-tech business accelerators in other regions.

Northeast Ohio has room for all the new programs, as well as the ones that already existed, according to JumpStart president John Dearborn.

There are plenty of entrepreneurs with good ideas that need help, he

37

said, noting that the number and quality of startups that ask for JumpStart’s help is “very, very, very healthy.”

Mr. Dearborn added that people who have an idea for a business are more likely to “take that leap into the deep end of the pool” if they know there are programs and organizations that can give them advice and financing.

The availability of such programs also can help the region lure entrepreneurs from other areas, said Jim Phipps, executive director of TECHudson. For instance, a Hudson native who lives in Seattle is thinking about moving back home to raise his family and start a software business in the TECHudson building on Executive Parkway, Mr. Phipps said. The incubator is financed by the city of Hudson and focuses on software companies, particularly those that serve businesses.

Intellectual property lawyer Dan McMullen agreed that programs for entrepreneurs could create a “virtuous cycle” that encourages more people to start companies in Northeast Ohio or bring their businesses here.

Mr. McMullen said he doesn’t know whether the region now has more programs for entrepreneurs than it needs. But, in his view, that’s a minor issue when compared to the importance of helping local entrepreneurs start innovative new companies, which he said is “key to the future economic success of our city and region.”

And if a program isn’t working, the people supporting it financially in time will figure that out, said Deborah Hoover, president and CEO of the Burton D. Morgan Foundation.

“They’ve got to produce results or they won’t be around very long,” she said.

■

Volume 33, Number 44 Crain’s Cleveland Business (ISSN 0197-2375) is published weekly, except for combined issues on the third week of May and fourth week of May, the fourth week of June and first week of July, the third week of December and fourth week of December at 700 West St. Clair Ave., Suite 310, Cleveland, OH 44113-1230. Copyright © 2012 by Crain Communications Inc. Periodicals postage paid at Cleveland, Ohio, and at additional mailing offices. Price per copy: $2.00. POSTMASTER: Send address changes to Crain’s Cleveland Business, Circulation Department, 1155 Gratiot Avenue, Detroit, Michigan 48207-2912. 1-877-824-9373.

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CRAIN’S CLEVELAND BUSINESS

WWW.CRAINSCLEVELAND.COM

NOVEMBER 12 - 18, 2012

THEINSIDER REPORTERS’ NOTEBOOK BEHIND THE NEWS WITH CRAIN’S WRITERS

NOVEMBER 5 - 11

The award-winning John Kasich

The big story: President Barack Obama won

■ Gov. John Kasich’s revamp of Ohio’s economic development program has won an award — the Governor’s Cup — from Site Selection magazine.

The cup is awarded annually to the state with the greatest success in attracting new major capital investment projects that create at least 50 jobs.

“A re-engineered approach to business development with a return-on-investment focus is already bearing fruit in Gov. John Kasich’s new administration,” the magazine said. “Leadership in the new JobsOhio office is behind much of the Buckeye State’s success.”

The leader of JobsOhio until recently was Mark Kvamme, a California venture capitalist and friend of Mr. Kasich.

Mr. Kvamme, who had been president and interim chief investment officer of JobsOhio, left that post Nov. 1 to return to the private sector.

Site Selection recorded 498 qualifying projects in Ohio in 2011, a jump of more than 30% from 2010’s 376 projects. Ohio last year finished second to Texas, which this year is second to Ohio, with 464 projects. Pennsylvania (453 projects), North Carolina (310) and Virginia (273) round out the top five.

Ohio’s total included 200 manufacturing expansions and 83 new manufacturing projects, with distribution centers, headquarters buildings and research and development

■ Real estate owner and developer Weston Inc. in Warrensville Heights likes its first foray into developing apartments so much that it has made a new business out of it.

The new Weston Builders LLC launches today, Nov. 12, and will be at the Affordable Housing Finance Live Conference, a trade show for builders of moderate and low-income housing, Nov. 14-16 in Chicago.

Weston Builders will serve as a contractor for marketrate apartments, rentals developed using the low-income housing tax credit, and senior citizen and student housing for third-party customers.

T.J. Asher, Weston CEO, said the drive takes advantage of the company’s existing skills, resources and lender relationships in a new segment of property investments and developments. Weston’s core asset includes more than 10 million square feet of industrial property in 10 states.

To beef up its staff for multifamily ventures and contracting, Weston Builders hired as a vice president Christopher Gellin, 38, a fourth-generation builder. He was a senior project manager for the construction unit of Associated Estates Realty Corp., a real estate investment trust based in Richmond Heights that specializes in apartments.

WHAT’S NEW

BEST OF THE BLOGS

a second term, and Ohio, where voters backed him by 51% to 49%, played a key role in his re-election. Sen. Sherrod Brown, D-Avon, held off a challenge from state treasurer Josh Mandel and returns to the Senate for a second term.

Closer to home, Cleveland voters approved a levy that will make a school reform plan possible, but Cuyahoga County residents rejected a levy proposed by the Cleveland-Cuyahoga County Port Authority. (See editorial, Page 4.)

Here’s the information: Federal prosecutors filed a criminal information charging Thomas Newman, the last executive director of the defunct Flats Oxbow Association, with stealing $583,700 from the organization. Mr. Newman was charged with theft and embezzlement from a federally financed program and with money laundering. From 2006 to 2011, Flats Oxbow received $393,758 in federal Community Block Grant funds. The information says from 2006 to about March 31, 2011, Mr. Newman wrote Flats Oxbow checks payable to cash for personal use.

It also said he used the organization’s credit cards to buy materials for renovation of the Riverbed Street building that housed Flats Oxbow’s office, and that Mr. Newman’s wife had a personal interest in the building.

He’s a fraud: Pepper Pike financier Eddy Zai pleaded guilty to nine federal counts in a bank fraud scheme and agreed to forfeit $16.7 million. Sentencing is set for Feb. 5. Steven Dettelbach, U.S. Attorney for the Northern District of Ohio, said Zai significantly contributed to “one of the largest credit union collapses in U.S. history.” Zai, 44, of Pepper Pike, pleaded guilty to one count of conspirZai acy to commit bank fraud and bank bribery, two counts of bank fraud, three counts of money laundering, one count of bribery and two counts of making false statements.

Good Advize: Information technology services firm AdvizeX Technologies LLC of Independence was acquired by the American division of an Indian IT company in a deal that could reach $32 million in value. The buyer, Rolta International Inc. of Alpharetta, Ga., has no plans to cut employees or replace existing management.

AdvizeX employs roughly 75 at the company’s Rockside Road office. It has nearly 250 employees and more than 2,500 customers.

In the zone: Crocker Park can gain more upscale apartments after Westlake voters approved a zoning issue by a 76%-24% margin. The suburb’s charter requires a referendum on zoning changes that increase residential density. The site is at the Promenade side of the mixed-use Crocker Park complex. Plans call for converting part of a one-story building that formerly housed a Borders bookstore to a structure with first-floor retail below three floors, or 22 units, of residential rentals.

Weston builds new apartment business

One of Mr. Gellin’s first tasks will be adding 108 units to Weston’s first apartment venture. The 248-unit first phase of the Residences at Carronade opened last year in Perrysburg, Ohio. — Stan Bullard

Catch a whiff of this investment opportunity ■ Now there’s an easy way for you to help adorable, suffering children — but we promise not to judge you if you don’t.

A Cleveland company is using the web to raise money for a clinical trial that will test whether its aromatherapy packets can curb nausea in children.

Aeroscena LLC, which counts Cleveland Clinic wellness guru Dr. Michael Roizen among its investors, aims to raise $12,000 through Medstartr.com, a website that allows random people to donate to projects that aim to solve a medical problem. Donors get something out of it, too: For every nausea gel packet they buy for the trial, they’ll receive another packet of their choice. Under the Ascents brand, Aeroscena also sells gel packets designed to help people sleep, focus, eat less, calm down or feel energized.

The company has a long way to go: Aeroscena had raised just $60 as of last Friday morning. If it doesn’t raise $12,000 by Nov. 18, the project won’t be financed.

The trial will be conducted by Children’s National Medical Center in Washington, D.C., which already gives Ascents packets to children (adorable, innocent, helpless children!) who have nausea after operations. — Chuck Soder

Excerpts from recent blog entries on CrainsCleveland.com.

His motto: Be prepared

Power up: FirstEnergy Corp. and American Municipal Power Inc., a nonprofit that supplies wholesale power for municipal electric systems, agreed to build and operate a natural gas peaking plant on the grounds of FirstEnergy’s existing Eastlake Plant in Eastlake. The Akronbased electric company said the proposed project is subject to regulatory approval. FirstEnergy would supervise construction of four combustion turbine units that are capable of producing 873 megawatts. American Municipal Power would provide the construction financing and own 75% of the generation output upon completion. Plans call for the plant to be operational in early 2016.

centers comprising the rest. — Jay Miller

STEPHEN HERRON

THEWEEK

THE COMPANY: Media II Inc., Willoughby Hills THE PRODUCT: MediaMate mobile website conversion tool The business-to-business marketing communications firm has introduced a conversion tool designed to make existing websites compatible with mobile phone screens.

MediaMate “makes website text more readable and navigation easier on virtually all mobile phone types including iPhone, Android, Blackberry and Windows Mobile,” the company says.

The conversion tool “enlarges existing navigation buttons and text, and reformats graphic elements such as photos, logos or drawings to fit the screen format,” according to Media II. Features that can be added include click-to-call, maps, videos, selection aids and menus.

MediaMate conversions also feature synchronization with the main website, Media II says. When the main website content is updated, the mobile website is updated. This feature “reduces website maintenance costs and complexity while ensuring consistency of content,” the company says.

Most conversions using MediaMate cost $1,400.

For information, visit www.Mediaii.com /mediamate.

■ The devastation of Hurricane Sandy should prompt companies to take a fresh look at their policies related to extreme weather, according to a Workforce.com blog post from John Hyman, a partner in the Labor & Employment group of Cleveland law firm Kohrman Jackson & Krantz.

Mr. Hyman linked to a blog entry he wrote two years ago, offering suggestions for how businesses should handle issues such as attendance and telecommuting in the event of bad weather.

Among the issues to consider: ■ Communication: How will your business communicate to its employees whether it is open for business or closed because of the weather?

■ Early closing: If a business decides to close early because of a midday snowstorm, how will it account for the orderly shutdown of operations?

■ Telecommuting: Even if your business does not typically permit employees to work from home, exceptions could potentially save you lost productivity.

The road to growth ■ Officials at the Greater Cleveland Regional Transit Authority are becoming the nation’s pre-eminent ambassadors for the virtues of bus-rapid transit.

Nashville Public Radio reported transit designers there “have been looking to Cleveland for guidance on building a highspeed bus line connecting East Nashville to West End.” Cleveland officials “say the decision will require a leap of faith.” The leap here paid off, as the $200 million HealthLine has been a boon for development.

Joe Calabrese, RTA’s general manager,

tells Nashville Public Radio that it’s important to get the public behind such a disruptive project. “You need to get them to be on your side or they’re going to make your life miserable for you.”

One going up …

■ PolyOne Corp. is standing out of late from the crowd in the chemicals/plastics industry, according to Investor’s Business Daily.

The newspaper said that while Avon Lakebased PolyOne was announcing the $393 million purchase of Clayton, Mo.-based Spartech on Oct. 24, chemical giants Dow Chemical and DuPont announced layoffs.

“The Spartech acquisition shows PolyOne hustling to diversify operations and further its advance into value-added operations,” Investor’s Business Daily reported. It said Spartech is the country’s ninth-largest maker of sheet plastic, “moving PolyOne squarely downstream in that market.”

America’s pet cause ■ The pet business is proving to be one of America’s most recession-proof industries.

Forbes.com said the American Pet Products Association reported that spending on pet-related goods and services will hit $53 billion this year, up 22.6% from 2008.

One service category doing well, according to Forbes.com, is “outsourcing of picking up after our pets.” As an example, the story cited the growth of a Trumbull County company, the frankly named Wholly Crap, which for as little as $12 a week will clean your yard of dog waste.

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The Financial Community Honors its Best A capacity crowd of 600 gathered to recognize the nominees, finalists and award recipients at Crain’s 6th annual CFO of the Year awards program.

2012 CFO Award Recipients David Adante The Davey Tree Expert Company Lifetime Achievement

Russell Schabel The Philpott Rubber Co. Medium Private Company

Hilary Beatrez The Cleveland Hearing & Speech Center Small Nonprofit / Government Organization

Dave Hamrick InfoCision Management Corp.

Large Private Company

David Kuntz Michael Biehl Cleveland Metroparks Chart Industries Inc. Medium Nonprofit / Government Organization Small Public Company John Harvan Hospice of the Western Reserve Large Nonprofit / Government Organization

Darren Wells The Goodyear Tire & Rubber Co. Large Public Company

Brian Gorris Stripmatic Products Inc. Small Private Company

Rick Fearon Eaton Corp.

Community & Industry Impact

from top-bottom: (1) Sold Out - 600 attendees!, (2) John MacIntosh, KPMG, (3) Carolyn Hightower, Kaiser Permanente and (4) David Adante, The Davey Tree Expert Co., Lifetime Achievement award

Event video, photos and finalist coverage: CrainsCleveland.com/cfoevent

Thank You Sponsors PRESENTED BY

CO-PRESENTED BY

VIDEO SPONSORED BY

COCKTAIL SPONSOR

IN PARTNERSHIP WITH

SUPPORTED BY

20121112-NEWS--40-NAT-CCI-CL_--

11/9/2012

11:14 AM

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