Crain's Cleveland Business

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Crain’s Cleveland Business Custom Publishing

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ESTATE PLANNING

S-2 November 16-22, 2009

TABLEOFCONTENTS PERIODIC REVIEW Regularly review your estate plan and adjust it, if necessary, according to any economic or familial changes.

S-4

CULTURAL BENEFACTORS

S-6

Rules governing the donations of valuable personal property like art and furniture to nonprofits has changed.

ON THE COVER S-6 Converting from a traditional to Roth IRA S-9 Funding college education S-12 Charitable gift annuities

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Planning for the future critical

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he Estate Planning Council of Cleveland, in conjunction with Crain’s Cleveland Business, is pleased to present our annual Estate Planning Section. For more than a decade, it has been the Council’s goal with this publication to offer the community valuable information related to financial, retirement, insurance, business succession, estate and charitable planning. The articles and commentary on the pages that follow have been provided by some of Northeast Ohio’s most experienced professionals in these fields.

As we look back over the year since the Council’s Estate Planning Section last appeared in November 2008, a myriad of events have occurred that continue to shape the financial world in which we live. From the performance of global markets to financial issues facing our state and cities, the need to be ever-observant of our personal “economic” picture is greater than ever. It is essential to evaluate how your personal needs, values and goals for leaving a legacy have been affected and to consult with professionals to advise you on

A myriad of events have occurred that continue to shape the financial world in which we live. the methods, techniques and documents available to ensure that each is being met.

Whether you are concerned about transitioning a family-owned business, planning for retirement, creating a legacy for your family or fulfilling philanthropic goals, the articles in this section will illustrate the complexities of these issues and the benefit of having comprehensive, well-developed tax and estate planning advice as part of the planning process.

The primary purpose of the Estate Planning Council of Cleveland is to provide a forum for our members to receive ongoing education and up-to-date information on the laws and policies affecting our clients and their personal plans.

Our goal is to provide our members with the resources they need to effectively counsel their clients and to ensure that they have the

tools to deliver a well-crafted and thorough plan to provide for your family, your legacy and yourself.

As you consider your personal and estate planning needs, the Estate Planning Council can serve as a valuable resource. The Estate Planning Council of Cleveland is comprised of some of the most experienced professionals who work in the personal, estate, charitable and financial planning industry. Our members are ready to provide you with thoughtful, taxeffective and value-based planning.

Our web site (www.epccleveland.org) can be a useful resource to locate those local professionals to assist you with your planning needs.

We are pleased to be able to share the insights and commentary of our members and other area practitioners with you in this annual publication. Whether you are reading these articles as a client or as a professional, we hope that you will find the information insightful, helpful and valuable. ■

Erica E. McGregor, Esq., is president of the Estate Planning Council of Cleveland and an attorney at Tucker Ellis & West LLP in Cleveland.

TRUSTS AND GIFTS S-4 S-7 S-8 S-11 S-13 S-14 S-15 S-15

Live for today.

Plan for tomorrow.

Special Needs Trusts Supporting foundations Fixing a broken trust Grantor Retained Annuity Trusts Charitable bequests Intentionally Defective Grantor Trusts Community foundation giving

For all the time and effort you’ve put into building your wealth, you deserve peace of mind in return.

The kind that comes from knowing your assets are protected, your wealth will be distributed as you wish, and your future is as secure as you can make it.

Gary B. Bilchik, Partner Chair, Estate Planning and Probate Practice Group Licensed to practice law in Ohio and Florida

Donor-advised funds

LIFE INSURANCE

Whether you need to build an estate plan from scratch, or ensure your current plan is in sync with today’s rapidly changing laws, our attorneys can help.

We have the specialized knowledge and experience to manage all aspects of your estate.

S-5 “Dead peasant” life insurance S-14 Life insurance trusts

Have you considered how taxes will impact your wealth? Have you planned for charitable gifts… long-term care…incapacity? Do you have a living will?

Have you drafted a letter of instruction to guide your heirs when you’re gone?

OTHER FEATURES S-2 S-7 S-8,16 S-10

Estate Planning Council message

S-10 Buy-sell agreements Movie-style planning S-11 Leaving a legacy S-13 Powers of attorney Estate taxes Business succession S-16 Funeral planning

We can assist in these areas and help you manage your assets in ways that will minimize the probate process and simplify post-death administration.

Jeffry L. Weiler, Partner OSBA Board Certified Specialist in Estate Planning, Trust and Probate Law Licensed to practice law in Ohio and Florida

Having a solid plan in place for tomorrow makes enjoying today that much easier. Talk to us about how to get started.

Crain’s Cleveland Business Custom Publishing staff Editor: Mike Malley (mmalley@crain.com)

Cover design: Kristen Wilson (klwilson@crain.com)

Copy editor: Cheryl Higley

Page designers: Kathy Carr (kcarr@crain.com) Joel Hammond (jmhammond@crain.com)

Crain’s Cleveland Business Custom Publishing

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Investment Strategies

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2

Appropriate Insurance Coverage

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8

Lifetime Giving to Children and Descendants

You encounter the 13 Wealth Issues every day.

Now address them with an advisor.

Every day you have to make decisions regarding your wealth. And with a Key Private Bank advisor, you can make those decisions easier with our 13 Wealth Issues: a comprehensive way we look at your wealth and how to best manage it. Combined with our solid reputation, unbiased advice and personalized approach, this process makes sure we’re not just taking care of your every day, but taking care of your tomorrows.

To learn more about the 13 Wealth Issues call Louisa Guthrie, Key Private Bank Market Manager at 216-828-7877, or visit key.com/kpb.

Investment Management

Private Banking

Trust Services

Banking products and trust services provided by KeyBank National Association, Member FDIC and Equal Housing Lender. Insurance products offered through KeyCorp Insurance Agency USA Inc. (KIA). KIA is affiliated with KeyBank National Association (KeyBank). Investment and insurance products are: /05 '%*$ */463&% t .": -04& 7"-6& t /0 #"/, (6"3"/5&& t /05 " %&104*5 t /05 */463&% #: "/: '&%&3"- 03 45"5& (07&3/.&/5 "(&/$: KIA and KeyBank are separate entities, and when you buy or sell securities and insurance products you are doing business with KIA, and not KeyBank. Key.com is a federally registered service mark of KeyCorp. ©2009 KeyCorp. CS94033

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ESTATE PLANNING

S-4 November 16-22, 2009

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Regularly review estate plan Changes in life, assets and tax law can make an impact

I

s your estate plan up to date?

Your financial needs and personal situation are likely to change over time. A regular checkup of your estate plan can remind you to take care of important details — such as revising your will or changing beneficiary designations — and help prevent unintended consequences.

Here are some situations that may prompt an estate plan review: CHANGE IN ASSET VALUES: Your estate may include assets that have grown in value since you established your estate plan.

Perhaps you have acquired more property or sold your business.

Your present plan may no longer accomplish the objectives you originally intended, such as protecting particular assets and minimizing taxes. If that is the case, you may want to give more to charity and/or increase the amount you

Although your retirement may not have an immediate impact on your estate, it will eventually. plan to leave to loved ones.

You also should review your estate plan if the value of your estate has decreased or if you’ve made specific gifts in your will of assets that you no longer own.

You don’t want to leave your beneficiaries empty-handed.

CHANGE IN FAMILY SIZE: Births, deaths, marriages, divorces — any of these events can change how you want your assets distributed.

While a birth or marriage may add a potential beneficiary to your estate, a death or divorce is likely to have the opposite effect.

FAMILY BUSINESS CHANGES: Your estate plan may well determine the future of your business.

A tax-efficient transfer of ownership will require careful planning with professional help. Changes in management, size, legal form and other conditions may require different terms in your estate plan to meet your future objectives.

RETIREMENT: Although your retirement may not have an immediate impact on your estate plan, it will eventually. For example, instead of adding to your retirement savings, you may begin withdrawing assets for income.

Knowing your retirement income resources can help you decide when, and if, it is possible to transfer property to your family and other beneficiaries.

RELOCATION: Estate and death tax laws differ from state to state. If you move to another state, find out the rules and revise your plan accordingly.

TAX LAW CHANGES: It is crucial to stay abreast of tax law developments. Many new provisions in the federal tax law are being phased in over the next several years. Make sure your estate plan is compatible with current law and that it adequately reflects your wishes.

Major life events and changing tax laws make it a priority to

have your estate plan reviewed by a professional on a regular basis.

It’s your money. Plan, protect and pass it on.

■

Tom Danford and Dan Miltner are investment solutions specialists for Key Private Bank in Cleveland.

Contact them at 877-634-2968 or visit www.key.com.

Special Needs Trusts protect assets for disabled

University Hospitals Makes the Difference.

Siegals’ Gift to Advance Cure for Pediatric Cancer

Michael and Anita Siegal

Strong believers in the medical possibilities of stem cell research, philanthropists Anita and Michael Siegal are making a difference in the lives of pediatric cancer patients and their families. In 2008, the Siegals gave a leadership gift to establish the Anita H. and Michael D. Siegal Chair in Pediatric Experimental Transplantation and Stem Cell Biology at University Hospitals Rainbow Babies & Children’s Hospital.

“Stem cell biology is the future of medicine, and children are the future of our world. This gift is meant to help cure disease and provide a more promising outlook for sick children,” says Anita Siegal.

S

SNTs can be living trusts or pecial Needs Trust (SNT, testamentary, stand-alone or part sometimes called a “suppleof a will or trust. They may be mental needs trust”) is a self-settled (“d4A” trusts or “Medtrust designed to suppleicaid Payback Trusts,” or the local ment the means-tested governCFMF Pooled Trust). At the benement benefits of a beneficiary ficiary’s death, any remaining with a disability. funds go to reimburse the state. A By maintaining eligibility for third-party SNT (usually wholly cash income and health insurdiscretionary, with no ance, a family may payback provision) is typstretch its collective ically set up by a parent resources to care for the or grandparent to hold a individual with disabilidisabled beneficiary’s ties over time. share of the estate.

What would prompt Finding the right Spesomeone to establish an cial Needs Trust can preSNT? For example: serve government bene■ A father is planning fits so that the beneficiary JANET his estate and he has a experiences a net gain LOWDER child with a disability; and the funds (whether ■ A successful plaintiff their own or from another person) in a personal injury action has a make a real difference in their permanent disability and will lose life, instead of simply relieving his employer-provided health the government of its responsibility insurance; to pay benefits.

■ ■ A spouse or child in a divorce case has a disability and support payments will reduce his Janet Lowder is a principal with Hickor her SSI; man & Lowder Co., L.P.A., with offices ■ An aged or disabled widow is in Cleveland and Elyria. This article was trying to become eligible for adapted from a presentation at the Medicaid.

2009 Stetson University College of Law Not all benefits are “meansSpecial Needs Conference. Contact her tested” — just Medicaid and SSI. at 216-861-0360.

At University Hospitals, the Diamond Legacy Society recognizes and celebrates individuals, like Anita and Michael Siegal, who establish an endowed chair or make a planned gift in support of our mission – To Heal. To Teach. To Discover.

For more information on the Diamond Legacy Society at UH, call 216.983.2200 or visit uhgiving.org.

Crain’s Cleveland Business Custom Publishing

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ESTATE PLANNING

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November 16-22, 2009

S-5

The end of ‘dead peasant’ life insurance New regulations designed to end abuses of employer-owned policies

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In the past, “dead peasant” policies usually covered rank-andfile employees.

■ With the Pension Protection Act of 2006, Congress tried to end the perceived abuse of this insurance.

a highly compensated any compa■ In June 2009, the IRS issued a employee; nies insure notice detailing the implementation ■ the amount received the lives of of the 2006 Act. by the employer is paid employees in to a member of the order to fund stock employee’s family, a trust purchase agreements or to What happens if a dispute arises terms of the sale of the stock. or his estate; or replace key employees. The According to Dickinson: “I ■ the proceeds are used between the company and the employment relationship heirs of a deceased owner? Estate have been involved in litigation to purchase ownership JAMES creates an “insurable planning attorney James Dickinson that has taken years to resolve. interests in the employer DICKINSON interest,” and the death of Cavitch, Familo & Durkin notes Just because there is a buy-sell by the due date, including benefits received by the that there are often disputes between agreement in place does not extensions, of the tax return for company are generally free from the company and the family of a mean that the new owners of the the taxable year in which the income taxes. An employer owns late shareholder over the value and stock will sell without a fight.” company received a death benefit. the policy, pays the premiums and collects the death benefit.

In the past, employers purchased insurance even on the lives of rank-and-file employees.

This practice led to the term “dead peasant” life insurance, from which the employee’s heirs received no benefits.

President Vice President Secretary Treasurer Program Chair In the Pension Protection Act of Erica E. McGregor Radd L. Riebe Lisa H. Michel Marie L. Monago Beth M. Korth 2006, Congress tried to end this perceived abuse. In June 2009, the Joseph M. Mentrek George A. Jacobs Gary L. Dinner Tanzie D. Adams IRS issued a notice detailing the Bruce Merrell Paula Jagelewski Jeannemarie DiPadova Charles F. Adler, III implementation of the 2006 Act.

The new law only covers employer-owned life insurance. If a company owner is not an employee, the provisions of §101(j) apparently do not apply.

INFORMATION RETURN: The employer must report on form 8925 information each year to the IRS. The law requires that a return be filed by every employer owning one or more insurance contracts issued after Aug. 17, 2006.

■

James Dickinson is a partner with Cavitch, Familo & Durkin and is a certified specialist in estate planning, trust & probate law.

Contact him at 216-621-7860.

THE ESTATE PLANNING COUNCIL OF CLEVELAND

NEW LAW: Code §101(j) changes the general rule of tax-free treatment for an employer of the insured. The new rule states that the amount of death benefit exempt from income tax is equal to the sum of the premiums and other amounts paid by the owner for the contract. Excess amounts will be subject to taxation.

The law applies to contracts issued after Aug. 17, 2006. A contract is also treated as new if it was issued before that date and there is any material increase in the death benefit.

Any corporation, limited liability company, partnership or even sole proprietorship engaged in a trade or business is subject to the new rule. The definition of an employee is quite expansive and can include directors and consultants.

NOTICE AND CONSENT: Before the issuance of a contract, the employee must be notified in writing that the company intends to insure his life and include the maximum face amount being sought. The employer must receive written consent from the employee as well as an acknowledgement that the company will be the beneficiary of any death proceeds.

These notice and consent requirements must be in place before the issuance of the life insurance policy. If the notice and consent requirements are contained in a buy-sell agreement executed after the purchase of a life insurance policy, they are not effective. The notice and consent requirements must be satisfied even if the employee is the sole shareholder of the company.

EXCEPTIONS: If the notice and consent requirements are met, the death benefit received by an employer will continue to be tax-free if: ■ the employee was working at any time during the 12-month period prior to death; ■ at the time the contract was issued, the insured is a director or

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ESTATE PLANNING

S-6 November 16-22, 2009

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Mull financial goals, merits of switching to a Roth IRA New year ends some conversion restrictions

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s we reach the end of 2009, there is a significant tax planning opportunity available beginning in 2010. It is the ability to convert a traditional IRA to a Roth IRA. Since 1998, taxpayers could make such a conversion; however, tax laws only allowed individuals whose adjusted gross income (AGI) were less than $100,000 and whose filing status were not “married filing separately� to convert. Effective Jan. 1, 2010, these restrictions are removed and anyone with a traditional IRA will be able to convert it to a Roth IRA. Should you make a conversion?

The downside of the conversion is the income tax due on the amount converted.

Before we look at how the conversion works, let’s review the basics of Roth IRAs: â– Contributions are not taxdeductible; â– Earnings grow tax-free; â– 70½ required minimum distribution rules do not apply during the IRA owner’s lifetime; and ■“Qualifiedâ€? distributions are tax-free. In general, qualified distributions are those made after age 59½ and where the Roth IRA has existed for at least five years.

For individuals who can live off other savings and allow for Roth IRA assets to accumulate past 70½, this can be a powerful estate planning asset to pass on to one’s heirs.

MAKE A CHANGE? More individuals will be able to convert from a traditional IRA to a Roth IRA in 2010. ■Individuals whose AGI were less than $100,000 and whose filing status were not “married filing separately� were eligible to make a conversion. Effective Jan. 1, the restrictions end; but a conversion might not be right for everyone.

The problem is that income tax must be paid on the conversion — and the taxes can be significant. The projected highest federal rate is 35% for 2010, plus up to an additional 6% state tax for an Ohio resident.

Special tax treatment applies to conversions made in 2010. The conversion amount is not included in 2010 income; instead, the tax is paid over a two-year period — half the income is reported in 2011, and the remaining half in 2012.

Alternatively, the taxpayer can elect to tax all of it in 2010. Conversions made after 2010 will be taxed in the year of conversion.

After the conversion, the Roth IRA will grow tax-free, and future qualified distributions are made taxfree — unless funds are withdrawn within five years of conversion or before the owner reaches 59½. The 10% early distribution tax does not

apply to Roth IRA conversions, but it applies to distributions from Roth IRAs before age 59½ unless one of the exceptions is met. “From an estate planning standpoint, the ability to defer lifetime distributions beyond age 70½ and pass the IRA to children and grandchildren with tax-free distributions over their life could outweigh paying tax on the conversion today,â€? explains David O. Reyes, a shareholder with Maloney + Novotny, LLC. “Keep in mind that an individual does not have to convert everything at once; you can elect to convert only a portion of your IRA or do it over a period of years.â€?

When the Roth IRA owner dies, minimum distribution rules apply to the beneficiary, but distributions are not taxable. The rules serve to limit the beneficiary’s tax-free accumulation of wealth. “An IRA owner should consider implementing a trust to assure that his beneficiaries will not withdraw more than the required amount except for need,� says Roy A. Krall of Weston Hurd LLP. “This concern is magnified with a Roth IRA, because there is no tax in the year of withdrawal to serve as a disincentive.�

Finally, if a Roth conversion is appropriate in 2010, it may also be appropriate to consider some charitable planning in 2010 to offset the income recognition. â–

David O. Reyes, CPA, CEBS, is a shareholder with Maloney + Novotny LLC. Contact him at 216-363-0100. Roy A. Krall practices in the Cleveland and Akron offices of Weston Hurd LLP. Contact him at 216-241-6602.

The art of bequeathing your personal property Rules have changed for donations, valuations

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example, a donor could re you considering use the tax deductions for donating arther painting’s donation work, furniture, while maintaining possesantiques or other sion of and displaying the personal property to a painting in her house. university, museum or a Now, the museum must nonprofit organization as take physical possession part of your estate planof the gift for a substantial ning? Recent changes in JAMES period of time each year IRS regulations, particuCORCORAN and use the gift for the larly with regards to fracmuseum’s primary purpose. tional donations, may affect your Finally, the rules for valuations donation. of fractional gifts have changed.

Donations of personal property Under the old rules, valuations items such as fine art, antiques could be adjusted for each fracand furniture to nonprofits can tional gift; thus if the fair market provide the donor with substanvalue of a donated painting tial tax benefits and give the increased, the tax deduction nonprofit a valuable and usable would increase for each further item to further its mission. fractional donation of the painting.

In recent years, the federal govThe new rules limit the valuation ernment has imposed limitations to the lesser of the fair market on fractional donations of pervalue of the work at the time of sonal property.

Donations of personal property items ... to nonprofits can provide the donor with substantial tax benefits.

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Previously, donors could transfer partial ownership of a work to a donee over a virtually unlimited period of time and could revalue the work (and therefore each fractional gift) in the year of each subsequent fractional gift. The new rules limit the amount of time a fractional gift can last; full transfer of ownership to the donee institution must be completed within 10 years of the date of the initial gift or the date of the donor’s death, whichever comes first. If full transfer of the item is not completed within the time limits, the donor could face a substantial penalty from the IRS. Previously, donors could transfer ownership of a work of art to a museum while retaining possession. This allowed the donor to have her cake and eat it, too. For

the initial gift, or the fair market value as of the date of the subsequent fractional gift.

The IRS also requires that charitable donations valued at greater than $5,000 be appraised by an IRS-qualified appraiser in order to obtain the tax deduction. These qualifications require the appraiser to have earned an appraisal designation (e.g., the right to use AAA, ASA or ISA), and for the appraisal to be consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice. â–

James Corcoran, AAA, ASA, ISA, FRICS, is an accredited senior appraiser and certified fraud examiner with Corcoran Appraisal Group International in Cleveland. Contact him at 216-7670770.

OHIO and FLORIDA ESTATE PLANNING and PROBATE

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Nancy H. Canary, Esq. CLEVELAND, OH - P: 216/226/7466 F: 216/226/7426 PALM BEACH, FL - P: 561/833/5900 F: 561/833/5951 E-mail: NACanary@cs.com

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November 16-22, 2009

Silver screen estate planning Movies tackle topics such as heirs and succession issues

W

e get our news and form opinions that affect our behaviors from a variety of sources, such as friends and family, web sites, Google, Twitter, cable news and entertainment stations like MTV and the E! Network to name a few.

But what about the important and not always openly discussed topic of estate planning?

Where are the popular influences for this?

Significant information about estate planning has been right MISSIA before our eyes VASELANEY from an unlikely source â&#x20AC;&#x201D; the movies â&#x20AC;&#x201D; for more than 50 years.

Hollywood sets the perfect stage for the multitude of issues involved in estate planning, given the dynamics portrayed between characters and plotlines in the movies.

With popcorn in hand, we are glued to the big screen as romance, family tiffs and secrets play out before us. Little did we realize that the movies were shaping our opinions and behaviors about three important life concerns: estate planning, guardianship/adoption issues and succession planning.

The following is just a small sampling of the many movies that address estate planning issues: ESTATE PLANNING AND FAMILY ISSUES: â&#x20AC;&#x153;CAT ON A HOT TIN ROOFâ&#x20AC;?

This 1958 classic starring Eliza-

1

beth Taylor, Paul Newman, Burl Ives and Madeleine Sherwood is a great study of a familyâ&#x20AC;&#x2122;s reaction to terminal illness and impending death. The drama illustrates the influence in-laws can have on such a situation. More importantly, it validates the statistic that 75% of Americans, at all levels of society â&#x20AC;&#x201D; especially entrepreneurs who often view themselves as immortal â&#x20AC;&#x201D; do not have a simple will.

GUARDIANSHIP AND ADOPTION ISSUES: â&#x20AC;&#x153;BABY BOOMâ&#x20AC;?

This film starred Diane Keaton and Sam Shepard in 1987 and underscores the fact that guardianship of children should not be left to chance. Sadly, the movie got some important issues wrong. First, just because a person is a distant heir of someone who dies with surviving children, it does not mean that person should â&#x20AC;&#x153;inheritâ&#x20AC;? the children, especially in an international family as portrayed in this film.

Parents need to be responsible for nominating a guardian and successor guardians for their children and should be responsible for providing for the security of their children.

Life insurance at the age most individuals become a parent is extremely cheap for the protection it provides. The other blunder of the movie? Speaking personally as a busy attorney, wife and mother, a

2

woman â&#x20AC;&#x201D; with the proper support â&#x20AC;&#x201D; can manage a high-pressure career while raising a child successfully.

3

SUCCESSION PLANNING: â&#x20AC;&#x153;SABRINAâ&#x20AC;?

Both the 1954 classic starring Humphrey Bogart, Audrey Hepburn and William Holden, and its 1995 remake starring Harrison Ford, Julie Ormond, Greg Kinnear and Lauren Holly demonstrate what is obvious in most families with more than one child.

Children are all different and demonstrate different strengths and weaknesses. On a positive note, the films reinforce the fact that we should not underestimate any child, because if push comes to shove, he or she may surprise you.

Surprises are fun in the movies but not in real life and the realities we all face. None of us will escape death, but we can make our demise easier and help our wishes be carried forward. Through thorough, comprehensive planning with a trusted professional counselor, our legacies will live on, just as they do in the movies. â&#x2013;

Missia H. Vaselaney is a partner with Taft Stettinius & Hollister LLP. Contact her at 216-706-3956.

OUR INDEPENDENCE IS YOUR PEACE OF MIND

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Affiliated charities benefit from supporting foundations

F

or individuals seeking to provide significant charitable support while leaving a legacy for their family and causes close to their heart, a supporting foundation may be a valuable philanthropic tool.

A supporting foundation is a nonprofit corporation with its own identity, corporate structure and tax-exempt status that receives the more favorable public charity status because of its affiliation with an overseeing public charity.

The supporting foundation is governed and operated by its own board of trustees, which is charged with investment decisions and making distributions to eligible nonprofit organizations that reflect the donorâ&#x20AC;&#x2122;s vision as well as the broader mission of the supported public charity.

There are many benefits to establishing a supporting foundation: â&#x2013; The donor may involve heirs

in the decision-making process, training them for future roles in the supporting foundationâ&#x20AC;&#x2122;s operation and the continued philanthropic vision and mission. â&#x2013; The donor receives a charitable income tax deduction for all lifetime contributions to the supporting foundation and a charitable estate tax deduction for contributions made at death. â&#x2013; The supporting foundation pays no tax on investment income. â&#x2013; The supporting foundation often receives administrative, professional and operational support from the affiliated public charity. â&#x2013; Costs to establish and operate a supporting organization are frequently substantially lower than the legal and accounting costs associated with a private foundation. â&#x2013;

Alan Gross is vice president of the Jewish Community Federation of Cleveland. Contact him at 216-566-6698.

CONTACT US For more information about Custom Publishing with Crainâ&#x20AC;&#x2122;s Cleveland Business, please contact advertising sales director Mike Malley at 216-771-5070 or mmalley@crain.com.

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S-8 November 16-22, 2009

Advertisement

Fixing a broken trust doable, but it is not always easy

E

very trust should be reviewed periodically to make sure it meets with the intentions and expectations of its maker. With unforeseen and inevitable changes in family relationships, tax laws and levels of wealth, trusts often donâ&#x20AC;&#x2122;t stand up well to the test of time. Fixing revocable trusts (one that is revocable and amendable) is easy.

A simple amendment to the trust, a complete restatement of the trust or just removing some or all of the assets from the trust fixes the problem.

Fixing a broken irrevocable trust â&#x20AC;&#x201D; since they are designed to be unamendable â&#x20AC;&#x201D; is not as easy. In addition, even revocable trusts usually change into irrevocable trusts on the death of its maker.

So what if changed circumstances make an irrevocable trust completely unmanageable or even just less attractive than it once was? â&#x20AC;&#x153;Fortunately,â&#x20AC;? says Ron Wayne, a board-certified probate trusts and estates lawyer with the Cleveland office of Buckingham, Doolittle & Burroughs, LLP, â&#x20AC;&#x153;both Ohio and Florida laws provide the tools to fix the problem, but you need to know where to find them.â&#x20AC;? Some of these fixes include: PRIVATE SETTLEMENT AGREEMENT: Under certain circumstances, all of the trustees and beneficiaries of a trust can enter into a written agreement

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DECANTING: If a trust canâ&#x20AC;&#x2122;t be terminated, sometimes it can be rendered harmless by moving the assets into another trust with more favorable terms.

Irrevocable life insurance trusts sometimes fit into this scenario.

that modifies the terms of the broken trust to obtain a result that all parties feel is more beneficial.

Such an agreement, however, may not result in an early termination and distribution of trust assets.

MODIFICATION OR REFORMATION: If a private settlement agreement is not obtainable because the desired result falls outside of the permissible uses of such an agreement, all or some of the parties to a trust can file an action in court to change the terms of an irrevocable trust to remedy a tax problem, repair the faulty language in a trust, or even restore a beneficiary who went unintentionally unmentioned as a beneficiary of the trust.

TERMINATION OF SMALL TRUSTS: Sometimes the assets of a trust are just too small to justify the fees and administrative costs associated, and the trust needs to be terminated and the assets distributed outright to the beneficiaries.

COMBINATION OR SEPARATION OF TRUST SHARES: Dividing the assets of a trust into two or more shares for differing investment objectives or combining the assets of separate trust shares for economies of scale may help fix a broken trust.

David Woodburn, trusts and estates practice group leader of Buckingham, Doolittle & Burroughs, LLP, says: â&#x20AC;&#x153;Usually, where thereâ&#x20AC;&#x2122;s a will thereâ&#x20AC;&#x2122;s a way to fix a broken trust and itâ&#x20AC;&#x2122;s up to the estate planning attorney to find the right tool to do the job. Even charitable trusts, which are the most difficult to modify, can usually be changed if the right process if followed.â&#x20AC;? â&#x2013;

Ron Wayne is a partner and member of the Trusts & Estates Practice Group of Buckingham, Doolittle & Burroughs, LLP. He is resident in the firmâ&#x20AC;&#x2122;s Cleveland office. Contact him at 216-615-7349 or rwayne@bdblaw.com. David Woodburn is a partner, chair of the Trusts & Estates Practice Group, and also serves on the firmâ&#x20AC;&#x2122;s Executive Committee. He is resident in the firmâ&#x20AC;&#x2122;s Akron office. Contact him at dwoodburn@bdblaw.com or 330-258-6506.

Time running out on EGTRRA; some changes are expected

O

n the horizon is ment for taxpayers and the sunset of could make redundant many of the tax some of the trust planreductions and ning done simply to preother changes implemented serve tax advantages. by the Economic Growth One of the proposals and Tax Relief Reconcilialikely to affect high-nettion Act of 2001 (EGTRRA) worth individuals is the and its progeny. The topic LINDA suggested repeal of the with the most immediacy OLEJKO state inheritance tax involves estate taxes. deduction and state death There are a number of reasons tax credit. we believe the status quo is likely Up until 2003, states were to persist. partial beneficiaries of the federal For one, a permanent and full estate tax system and pocketed repeal of estate taxes will cost too approximately 10% to 16% of the much for an administration federal estate tax imposed on desperate to preserve programs large estates under the â&#x20AC;&#x153;creditâ&#x20AC;? and minimize the deficit. At system. present, the federal tax is a flat This was replaced with a deduc45% and applies only to estates in tion for state taxes, requiring excess of $3.5 million. most states to modify their estate What other changes should we tax revenue statutes. With an expect? There appears to be strong increased burden on the states to support for the â&#x20AC;&#x153;portabilityâ&#x20AC;? of exraise revenue, it is possible a large emptions between spouses. That number will reinstitute the stateis, if the first spouse to die does level tax. â&#x2013; not fully use his or her $3.5 milFor related story, see Page 16. lion, which can pass free of federal estate tax, the surviving spouse Linda M. Olejko, CFP, is vice president may use the remainder to augand new business development ment his or her non-taxable esmanager in the Greater Cleveland office tate. of Glenmede. Contact her at 216-514This would be a great improve7876.

Crainâ&#x20AC;&#x2122;s Cleveland Business Custom Publishing

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ESTATE PLANNING

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How will you fund college education?

Ace the course by planning early and exploring tax advantages, aid opportunities

T

he annual cost of college attendance continues to rise. Per the 2008 Trends in College Pricing Report, the current annual cost (tuition, fees, room and board) of attending a four-year public college (out-ofstate) is $25,000 and for four-year private colleges, $34,132. The cost is expected to continue to outpace inflation. It is important to start saving for your child’s education as early as possible.

There are a number of options that can be utilized to fund college expenses; because there are many options, a number of factors should be considered to determine the best option to meet your needs. One such factor is tax advantages.

whether a child qualifies for financial aid besides family income, including assets, family size and number of household members in college at the same time, etc. If a child is expected to qualify for financial aid, parents should be aware of the formulas used and assets considered. Many college planning savings options are considered while others are not.

The time frame available for saving for college is an important consideration. The earlier the savings starts, the more aggressive the investments and options can be in order to take advantage of compounding. The closer to the need for funds, the more conservative the investment strategy could be.

The earlier the savings starts, the more aggressive the investments and options can be.

“Accumulation of funds on a tax-free or tax-deferred basis allows for faster growth of principal,” says Craig Petti of HW Financial Advisors. “For example, if money is put away each year that earns 8% but is subject to a 35% tax bracket, the actual after-tax return is 5.2%.

Assuming you save the same money in certain tax-deferred or tax-free savings plans with the same earnings, your account would grow at the 8%.”

Another consideration in college planning is the Kiddie Tax, if you transfer assets to your children to pay lower taxes. This option can present challenges since the Kiddie Tax rules now apply to older children. Essentially, under the “Kiddie Tax,” a child’s unearned income (interest, dividend, capital gains) can be taxed at the parents’ tax rates starting at low thresholds.

Financial aid considerations will also be a factor. Whether a child will qualify for financial aid (e.g., loan, grant, scholarship or work study) may affect the choice of savings option. Many factors affect

Petti explains: “Different options and strategies avail themselves better to varying time frames.”

Giving children control of assets is also a consideration.

Outright gifts transfer control of the assets to children, while options such as trusts or 529 plans would not. Discussing college funding with your older child will prevent unpleasant surprises and help parents and their child better plan for the expenses that await them.

Given that many today become parents in their 30s and 40s, they face the added dilemma of saving for children’s education and their own retirement at the same time.

The best option is to develop a plan that includes both objectives and determine the time frames and needs of both.

■

Mary Eileen Vitale is a CPA and CFP®, and Craig Petti is a registered investment advisor with HW Financial Advisors.

Contact them at 216-831-1200 or vitale@hwfa.com or petti@hwfa.com.

In today’s uncertain times, it’s more important than ever to stick together.

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November 16-22, 2009

FUNDING OPTIONS

There are a number of options that can be utilized to fund college expenses, including the following:

CONGRATULATES OUR COLLEAGUE

■ College savings or prepaid tuition plans

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■ Coverdell education savings accounts ■ Custodial accounts (UGMA/UTMA) ■ Gifting ■ Series EE bonds ■ Traditional IRAs and Roth IRAs

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■ Employer-sponsored retirement plans ■ Employee stock purchase plans ■ Cash value life insurance ■ 2503(c) trusts ■ Crummy trusts ■ Tax-deferred annuities

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■ Other taxadvantaged strategies ■ Prepay mortgage

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Planning for the Future Begins Now At Roetzel & Andress, we take the time to understand our clients’ estate planning priorities and objectives, and create customized plans to maximize our clients’ benefits.

We use a comprehensive planning approach, taking into account our clients’ investments, tax concerns, generational planning, and charitable goals. Our attorneys develop flexible estate and business plans that allow for unforseen circumstances, shifting economic climates, and changing laws and family situations.

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Crain’s Cleveland Business Custom Publishing

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ESTATE PLANNING

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Succeed at succession Elevating Financial Strategies Stratos Wealth Partners operates on one guiding principle, a principle that is the keystone of everything we do.

In all things, do what is best for the client!

Now, more than ever before, knowledge and experience, along with objectivity, perspective and trust are vital components of the relationship between a financial planning professional and their client. Here at Stratos Wealth Partners we embrace a strategic vision that elevates the advice and services we provide, as well as the relationships we form.

The name Stratos Wealth Partners is new to many of you; the services we provide are not. Many of our partners have been serving clients in Northeast Ohio for more than 20 years.

Stratos Wealth Partners is proud to operate throughout the United States and we are especially proud to operate our national headquarters right here in Solon, OH.

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Investment & Retirement Planning – Estate Planning Business Succession Planning – Charitable Planning National Headquarters: 30575 Bainbridge Road, Suite 100, Solon, OH, 44139 Securities Offered Through LPL Financial, member FINRA/SIPC

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istorically, roughly onethird of family businesses survived a transition to a second generation of owners. And the odds were markedly worse for a hand-off to the third generation, where the success rate was a mere 10%. How can you ensure that the business you sacrificed to build does not end up in the heap of failures?

According to Joseph M. Mentrek, vice president of Meaden & Moore Financial Consultants, the key to success in transitioning a family business is “not only careful planning, but an honest assessment of the complex business and family dynamics that will affect the outcome.”

Effective succession planning, Mentrek says, is best viewed as a process focused primarily on an orderly transition of three key objective components: ownership, management and finances.

Perhaps equally important is being able to effectively overlay and address the challenges posed by the family dynamic, as well as a variety of stakeholders. These stakeholders might include the senior generation owners; family members with varying levels of engagement in the business; employees; and even customers, suppliers and vendors.

To effectively manage the process and the expectations of all, careful

KEYS TO SUCCESSFUL TRANSITION ■ Assess the business and family dynamics.

■ The process examines ownership, management and finances. communication is paramount.

The family dynamic renders the succession planning process different in virtually every instance: What happens when the owner can’t let go, or if there is no one in whom he has the confidence to entrust the business? What happens when family members who are not contributing to the success of the business have become financially dependent upon it?

Do the future owners and managers have the skills to succeed?

What are the expectations of the family members? Is participation in the business a birth right or must it be earned? Should the business be given to children or sold? What are the economic consequences of a given course of action? Can the owner afford to retire? What are

■ Re-examine the interests of stakeholders.

■ Consider enlisting an adviser to manage the process. the tax consequences?

Sometimes the answers are clear; most of the time, however, they are not.

For that reason, Mentrek says it is critical to enlist the assistance of an adviser to orchestrate and manage the process. The key is to choose someone who can keep it on point and adapt to changes in circumstances, laws, etc. Look for experience, education, innovation, independence and objectivity.

Above all, look to someone you can trust, because the decisions you make are some of the most important decisions of your life, and you only have one chance to get it right.

■

Joseph M. Mentrek is vice president with Meaden & Moore Financial Services.

Contact him at (216) 928-5343.

Navigating a successful buy-sell agreement

B

uy-sell agreements are often used in a familyowned business succession plan as a relatively simple

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way to prevent the sale or transfer of stock outside of the family unit while providing a deceased shareholder’s family with a market for the decedent’s stock.

A buy-sell agreement CHERYL may take the form of a cross purchase agreement D’AMICO among the owners, a redemption agreement between an owner and the company or a hybrid. The agreement may mandate the sale, or it may be optional.

In either case, the agreement usually sets a purchase price or a formula for determining the price.

If the agreement is valid, the parties will be bound by the price terms. However, the IRS may not be bound by the price for purposes of setting the value for estate taxes.

The requirements for a buy-sell agreement to fix value for estate tax purposes are: ■ The price must be fixed and determinable under the agreement.

■ The agreement must be binding on the parties during life and after death and enforceable under state law.

■ The agreement must prevent the decedent from selling the stock during life at a price higher than that prescribed by the agreement.

■ The decedent must not have a unilateral right to alter or amend.

■ The agreement must be a bona fide business arrangement.

■ The agreement must not be a device to transfer the shares to the natural objects of the decedent’s bounty.

Courts look at the facts and circumstances to determine whether the agreement was intended as a substitute for a testamentary dispo-

Crain’s Cleveland Business Custom Publishing

sition such as: ■ Relationship of the parties; ■ Health and age of decedent; ■ Lack of negotiations among the parties before executing the agreement; ■ Lack of or inconsistent enforcement; ■ Failure to obtain comparables or appraisals to determine price; ■ Failure to seek professional advice in setting the price; ■ Lack of provision requiring periodic review and adjustment of price; ■ Exclusion of significant assets, like intangibles, from price; or ■ Acceptance of below-market payment terms for the purchase.

For agreements entered into or substantially modified after Oct. 8, 1990, the following additional requirement must be met: ■ The terms are comparable to similar arrangements entered into by people in an arms’ length transaction. The price must be comparable to what people with adverse interests dealing at arm’s length would accept. The price must bear a reasonable relationship to unrestricted fair market value.

These rules only apply to family controlled entities. They do not apply if at least 50% of the entity is owned by people other than members of the decedent’s family and if those owners are subject to the same buy-sell restrictions. ■

Cheryl A. D’Amico is a partner in the Estate and Succession Planning group of the law firm Calfee, Halter & Griswold LLP. Contact her at 216-622-8555.

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GRAT a win-win giving option

C

assets at the time the gift is made.

However, the gift of the GRAT remainder is not valued when the assets transfer to the beneficiary.

Rather, it is valued, for gift tax purposes, when the assets are first transferred to the GRAT. A formula is used to estimate and project the amount that will remain in the GRAT when the term ends.

The variables in the formula are influenced by economic conditions prevailing at the time assets are transferred to the GRAT. One of those variables is the “7520 Rate,” a market-sensitive interest rate the IRS adjusts monthly.

In general, the lower the 7520 Rate, the less is projected to remain in the GRAT, and thus the less is deemed gifted to the beneficiary.

The current 7520 Rate is astoundingly low.

The low rate, coupled with depressed asset values, creates an opportunity to transfer a significant amount of wealth with little to no tax cost.

For example, assume Mom wants to transfer stock that has depreciated to $1 million to a child. If she gifts the stock outright,

ertain estate planning techniques permit a transfer of wealth with no estate, gift or income tax cost to the transferor. These are particularly effective when asset values and interest rates are low. One such technique is a grantor-retained annuity trust (GRAT).

A GRAT is an irrevocable trust into which assets are transferred by someone who wishes to make a gift.

The grantor receives a fixed annuity payment each year from the GRAT. What remains when the annuity term ends is transferred to a beneficiary and is deemed a gift.

In general, a person can make gifts of $13,000 per year to an unlimited number of people, and can make additional gifts over one’s lifetime of $1 million. Additional lifetime gifts are subject to the gift tax and generally will require payment of a tax equal to 45% of the value of the gifted assets, based on the value of the

Mom nearly exhausts her lifetime gift tax exemption and cannot make any future gift-tax-free gifts to anyone (with few exceptions). If she sells the stock to her child, Mom will owe income tax on the proceeds.

If Mom transfers the stock to a GRAT when the 7520 Rate is 3.2% (October’s rate) and receives 12 annual payments of $101,655 from the GRAT, then, according to the formula, the amount projected to remain in the GRAT at the end of the term is $0. Thus, the value of the gift for gift tax purposes is deemed to be $0.

As a result, Mom uses none of her lifetime gift tax exemption to fund the GRAT. After 12 years, the stock transfers to the child gift taxfree. Mom pays no income tax on the receipt of the annuity or the transfer of the stock. The child receives the benefit of all future appreciation of the stock, and that appreciation is excluded from Mom’s estate for tax purposes.

If the GRAT assets appreciated beyond 3.2%, it has been a success; if not, there has been no harm done, no tax paid and no exemption wasted.

■

Rennie Rutman is an attorney in the Estates, Trusts and Probate Group at the law firm of Tucker Ellis & West. Contact her at 216-592-5000.

Can you afford to leave a legacy?

W

hile you may consider charitable giving as an important part of your estate plan, your first cause, of course, is your family. With a little planning, you can leave a legacy while providing for your heirs (even now).

There are many ways to leave your imprint on the world while gaining financial advantages to help make sure your heirs benefit.

Consider the following: EASY GIFTS & HIDDEN ASSETS: If you live in Ohio, consider an estate note, which serves to irrevocably communicate your charitable intent without the need to change your will.

Give a paid life insurance policy you no longer need or assign a charity as a beneficiary to a current policy.

Use your IRA, taking advantage of the charitable rollover legislation that is in effect until Dec. 31. Or, make a charity a beneficiary.

Save on capital gains taxes by using appreciated securities to fund your gift.

LIFE INCOME PLANS: Provide for family while reducing taxes using a trust that will meet your goals and needs.

Charitable gift annuities provide a fixed payment stream to the donor (and a second person, if desired) for life.

Village Retirement Community and Ohio Presbyterian Retirement Services Foundation.

DEPRECIATED ASSETS: A gift of real estate can provide helpful tax savings without the hassle of selling the property. Real estate can often be used to fund charitable gift annuities.

Depreciated securities can be used to fund various types of gifts, providing numerous tax advantages or even higher income, if you’re using them to fund a life income gift.

Explore your options before assuming that a gift is not in your best interests. Developing your charitable estate plan now can help safeguard your family’s future and support the causes you believe in, giving you greater peace of mind. ■

James R. Hickey, CFRE, CAP, is senior gift planning director for Breckenridge

Congratulations to Stephen H. Gariepy Hahn Loeser & Parks, LLP on receiving the

2009 Distinguished Estate Planner Award from

THE ESTATE PLANNING COUNCIL OF CLEVELAND

Crain’s Cleveland Business Custom Publishing

November 16-22, 2009

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A charitable gift annuity can be gift for all seasons Donor receives tax breaks, yearly payments while assisting others in times of need

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your lifetime payments unding a charitable will continue through gift annuity is a economic downturns. creative yet simple The annuity payment way to achieve rate offered by the charity personal, financial and depends upon the age of philanthropic goals. A the beneficiary or beneficharitable gift annuity is a ciaries — the older the useful tool for donors of recipient, the higher the modest means and PATRICIA payment. In this case, it donors of great wealth.

FRIES pays to be older. The gift Donors can guarantee annuity can provide for payments lifetime income for themselves or to the donor and/or spouse or a a dependent parent and simultaparent. neously support their favorite The payments can begin immecharity. diately or be deferred until retireA charitable gift annuity is a ment. The payment is fixed based contract between a donor and a on the age of the recipient when charity. In exchange for the payments start. A donor can donor’s gift of cash or property, the establish multiple gift annuities charity agrees to pay a fixed over a period of years so that the amount for life to a named benefipayment rate increases as the ciary or beneficiaries. donor ages (i.e. “laddering” Regardless of inflation or process). interest rate changes, annuity Charitable gift annuity rates payments are fixed and guaranare attractive compared with teed for life. Establishing a chariyields on U.S. Treasuries and table gift annuity with a wellother fixed-income investments. established, financially strong The rates are set by the American charitable institution ensures that

HOW A CHARITABLE GIFT ANNUITY WORKS A charitable annuity allows individuals to support a charity while receiving a cash reward for years to come. It is a great way to give a donation and pay yourself back over time, while reducing your tax bill. Following is a hypothetical example* of how an annuity works: ■ Mary, 68, wants to make a donation to her favorite charity.

She would also like to receive cash back every year.

■ Mary provides a one-time cash

donation of $5,000. Her Annuity Rate of Return, determined by the American Council of Gift Annuities based on her age, gift amount and other factors, is 5.5%. The rate is fixed over her lifetime.

■ Her tax deduction the first year is $1,847.

and reliable rate of return and allow donors to support their favorite charities at the same time.

Annuities are a solid investment in today’s economy while also providing a tax benefit,” says Kerry A. Mink, development manager of the Benjamin Rose Institute.

■ She will receive $275 every year ($180 tax-free, $95 ordinary income).

“Many donors are now realizing the benefits of charitable annuities. They provide a competitive

*Calculations are for illustrative purposes and should not be considered legal, accounting or other professional advice. Actual benefits may vary depending on the timing of the gift.

Kerry A. Mink, Esq., is development manager of the Benjamin Rose Institute, a Cleveland nonprofit that provides home health care, mental health and social work services to the elderly. The Benjamin Rose Institute includes the Margaret Blenkner Research Institute and the Katz Policy Institute, which focus on gerontology and advocacy for the elderly. Contact her at 216-373-1607.

Council on Gift Annuities. Rates are adjusted periodically based on expected returns and to assure that a meaningful amount of funds will remain to accomplish the donor’s charitable purpose.

Charitable gift annuities provide significant economic and tax benefits. In addition to the security of fixed lifetime payments, donors

enjoy tax advantages.

A portion of each annuity payment is tax-free when it is received.

In the event the beneficiary outlives his or her life expectancy, payments become ordinary income. In the event the beneficiary dies early, a deduction is allowed on the final income tax return.

In addition, donors can claim a charitable income tax deduction in the year of the gift. If longterm, appreciated assets are used to fund the annuity, donors can reduce their capital gains taxes.

Charitable gift annuities can be a good strategy for donors in a

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variety of circumstances, truly, a gift for all seasons. Charitable gift annuities are known as the “gifts that gives back.”

Donors can plan for current or deferred income needs and receive tax benefits. In addition, donors experience the satisfaction of making a significant gift during their lifetime to their favorite charitable institution.

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Patricia L. Fries is senior gift planning officer for University Hospitals, including Ireland Cancer Center and Rainbow Babies and Children’s Hospital. Contact her at 216-844-0430.

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A sound choice in all times In these challenging times, your clients rely on you more than ever for the right advice. And, when it comes to charitable giving, you can be confident in recommending the Cleveland Foundation.

We are Greater Cleveland’s largest grantmaking organization. And for 95 years, we’ve been helping Greater Clevelanders make a lasting impact on causes they care about deeply. We work in partnership with your clients to help them realize their charitable goals.

Through our expert knowledge of the community, their gift can have positive long-term effects on the place we each call home.

Giving through the Cleveland Foundation is a sound choice in any climate. Learn more by visiting www.clevelandfoundation.org.

A CALFEE ATTORNEY

goes above and beyond. And backwards. And sideways.

At Calfee, we begin with a single objective: to help our clients succeed. Everything else stems from that objective. From our extreme responsiveness to our practical legal counsel that helps clients take BEWBOUBHF PG CVTJOFTT PQQPSUVOJUJFT B $BMGFF BUUPSOFZ SFNBJOT lFYJCMF and delivers sophisticated advice tailored to each client.

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The foundation is a leader in public education reform and has helped launch eight new-concept schools, including the Cleveland Girls Leadership Academy at Douglas MacArthur School.

216.861.3810 www.clevelandfoundation.org

Crain’s Cleveland Business Custom Publishing

If you want to be remembered, do something memorable.TM

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November 16-22, 2009

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Safeguarding the POAs Group of Ohio attorneys considers push for uniformity

Charitable bequests: Make wishes known

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lanning an estate is a very personal task. Often, people feel uncomfortable about sharing their plans with children or other relatives. However, those leaving gifts to charity should consider notifying these organizations of their intent.

Many individuals who are unable to make major gifts during their lifetimes choose to do so through their estates. Sharing their plans with their chosen recipient charities allows benefactors to discuss their visions and motivations for their gifts, which will help to ensure that the charities use the gifts as they were intended.

“It’s my great pleasure to show them how their legacy will be created and live on,” says Nelson J. Wittenmyer, Esq., at the Cleveland Clinic.

One of several options may be chosen to convey estate planning information to a charity. Many individuals send documents through their attorneys, and some

include a copy of their will or trust as proof of the gift. Alternatively, often a charity has a simple form that a donor can complete. The charity will keep the information on file as a record of the gift’s intended use.

Notifying a charity of a future estate gift allows the organization to plan. It is estimated that charities are aware of less than 30% of the gifts that they receive through estates. Awareness of future philanthropic dollars gives charities an added advantage in setting longterm goals.

When charitable wishes are made known, the gift can be recognized, the donor and family can be honored, and the gift is more likely to be used as it was intended.

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“power of attorney” is an authorization for one person to act on someone else’s behalf in a legal or business matter. The person authorized to act under a power of attorney is the “agent” and the person granting the authorization is the “principal.”

A durable power of attorney is a power used to create the agency that continues after the principal becomes incapacitated.

The durable power of attorney is an inexpensive method of substitute decision-making for principals whose assets do not justify more sophisticated planning, such as with the creation of a trust. The durable power of attorney is for incapacity planning as well as convenience.

Ohio has had laws governing the use of powers of attorney since 1953. These laws have been periodically updated and are now under consideration for further changes.

A committee of Ohio lawyers is considering asking the state legislature to enact the Uniform Power of Attorney Act (UPOAA) in Ohio.

Substitute decisionmaking needs of our aging society are ... aided by the use of powers of attorney.

Nationally, studies of durable powers of attorney revealed that the forms being used did not address the use of multiple agents, the impact of divorce of the principal from the agent, and the ability to use forms across state lines when the principal or agent moved.

In addition, these studies found concern about granting powers to agents who might alter a principal’s estate plan.

Ohio’s version of UPOAA would be similar to the uniform act and address those issues and permit the agent to perform acts necessary to maintain the standard of living of both the principal and the principal’s children and other individuals whom the principal has customarily supported and is legally required to support.

If a principal wanted to give an agent the ability to affect the estate plan, the principal would have to specifically authorize an agent to amend or create a trust on the principal’s behalf, to make gifts and to change beneficiary designations.

Third parties, such as banks and brokerage firms, would not be required to accept power of attorney forms drafted under UPOAA, but following the provisions of the act would make the creation and use of these forms more uniform across state lines.

Incapacitated individuals are uniquely vulnerable to financial abuse, but the substitute decisionmaking needs of our aging society are greatly aided by the use of powers of attorney by trustworthy agents. Enactment of UPOAA in Ohio will help individuals to choose trustworthy agents and clearly spell out the authority those agents will possess.

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Joanne Hindel is vice president and senior personal trust office for Fifth Third Bank. Contact her at 216-274-5633.

Nelson J. Wittenmyer is vice chairman of Institutional Relations and Development for the Cleveland Clinic. Contact him at 800-223-2273, extension 41245.

Philanthropy: Shaping the Future of Medicine Philanthropy has helped make Cleveland Clinic a world leader in healthcare. It supports the best minds, the most sophisticated technology DQG WKH ÀQHVW IDFLOLWLHV GHGLFDWHG WR LPSURYLQJ medicine and conquering disease. By customizing gift plans, Cleveland Clinic’s gift planning professionals help supporters achieve their philanthropic goals.

Together, we build the foundation for tomorrow’s healthcare.

To speak with a member of Cleveland Clinic’s gift planning team, call 216.444.1251, visit clevelandclinic.org/giving or email giftplanning@ccf.org.

Every life deserves world class care.

Crain’s Cleveland Business Custom Publishing

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Life insurance trusts contain many benefits

A â&#x20AC;&#x2DC;defectiveâ&#x20AC;&#x2122; trust can be a useful tool

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he Intentionally Defective Grantor Trust (IDGT) is an advanced estate planning tool used to protect assets from taxes.

An IDGT moves assets outside the grantorâ&#x20AC;&#x2122;s estate. Any assets held within the IDGT appreciate in value outside the donorâ&#x20AC;&#x2122;s taxable estate, effectively â&#x20AC;&#x153;freezingâ&#x20AC;? the value of that donorâ&#x20AC;&#x2122;s estate. â&#x20AC;&#x153;Do not let the term â&#x20AC;&#x2DC;defectiveâ&#x20AC;&#x2122; dissuade you from considering this strategy,â&#x20AC;? says Jeffrey A. Concepcion, president & CEO of Stratos Wealth Partners, Ltd. â&#x20AC;&#x153;The term merely refers to an irrevocable trust that would normally keep assets and income out of a grantorâ&#x20AC;&#x2122;s estate but in this case has â&#x20AC;&#x2DC;defectiveâ&#x20AC;&#x2122; language that causes income to be taxed to the grantor, instead of the trust.â&#x20AC;?

Because the grantor is paying the income taxes incurred by the trust, the assets grow unreduced by the income taxes. This, in turn, increases the value of the assets available to the trustâ&#x20AC;&#x2122;s beneficiaries.

An IDGT can be used as a succes-

sion planning tool for transferring a closely held company to the next generation.

The companyâ&#x20AC;&#x2122;s value is â&#x20AC;&#x153;frozenâ&#x20AC;? for the purposes of estate and gift taxes on the day the shares in the company are sold or given away.

The grantor transfers or gives business assets to the trust at a discounted rate by utilizing a discount valuation strategy.

In exchange, the trust gives the grantor a promissory note. The grantor receives the non-appreciating asset, the note, in place of the shares in the business, which hopefully will continue to appreciate in value. Upon the grantorâ&#x20AC;&#x2122;s death, the increased value of the companyâ&#x20AC;&#x2122;s shares pass to the designated heirs free of federal estate tax. The donorâ&#x20AC;&#x2122;s estate pays tax on the noteâ&#x20AC;&#x2122;s unappreciated or â&#x20AC;&#x153;frozenâ&#x20AC;? value.

Todayâ&#x20AC;&#x2122;s historically low interest rates combined with the depreciated value of many assets creates an ideal environment where the IDGT can be an especially effective means for transferring wealth.

L No planning strategy is a perfect fit for every person or for every situation. â&#x20AC;&#x153;Executing an IDGT properly is the key,â&#x20AC;? Concepcion says. â&#x20AC;&#x153;The trust document must be properly written and transactions need to be structured to provide the maximum tax advantages. If a valuation is involved â&#x20AC;&#x201D; gifting shares of a company for example â&#x20AC;&#x201D; using a reputable and experienced valuation firm is important. â&#x2013;

Jeffrey A. Concepcion is president and CEO of Stratos Wealth Partners, Ltd. Contact 440-519-2500 or visit www.StratosWealthPartners.com.

At 85, her future never looked so bright.

Life insurance may actually increase the taxes due at your death. â&#x2013; At todayâ&#x20AC;&#x2122;s tax rates, the estate tax could cost you nearly one-half of your insurance benefits. â&#x2013; To avoid the estate tax on life insurance proceeds, you must remove the policy from your taxable estate.

ILIT has some drawbacks. Ideally, the ILIT would own a new policy.

The trustee of your ILIT would apply for a new policy on your life, and you would make periodic transfers of cash to the ILIT to pay the premiums.

These cash transfers are generally considered taxable gifts, but the trust could contain provisions to allow you to eliminate the gift tax by using your annual gift tax exclusion.

Recent economic developments have made it more likely that estate taxes are here to stay. Life insurance and life insurance trusts can play a valuable part in the efficient transfer of your estate to your heirs. â&#x2013;

Steven St. L. Cox is a partner with Roetzel & Andress in Akron. Contact him at 330-849-6714 or scox@ralaw.com.

PRACTICAL AND EFFICIENT SOLUTIONS TO ACHIEVE YOUR FAMILY AND BUSINESS OBJECTIVES

Why let your money sit in a low-interest account when you can earn more income right now? With a Federation charitable gift annuity, you can support the Jewish community while receiving great returns on a lifetime annuity for yourself, spouse and/or another loved one. You can lock in payment rates of up to 9.5% (depending on your age) and know that you are making a real difference in the lives of so many.

Rate % 5.0 5.3 5.7 6.3 7.1 8.1 9.5

ife insurance often plays an important role in estate planning. It can be used to replace the earnings of a deceased family member, to benefit a charity or to pay estate tax.

Without careful preparation, however, life insurance may actually increase the taxes due at your death.

Life insurance proceeds normally pass to beneficiaries free of income tax. However, if you own the policy at your death, the proceeds are considered part of your taxable estate and are subject to the estate tax. Therefore, proper planning is crucial.

To avoid the estate tax on life insurance proceeds, you must remove the policy from your taxable estate. The policy should be owned and controlled by someone else. Initially, that sounds simple.

But if you donâ&#x20AC;&#x2122;t own the policy, who will? Very often, a life insurance trust is the answer.

A life insurance trust is an irrevocable trust created for the purpose of owning a life insurance policy.

Because the trust is irrevocable, it requires careful drafting. When structured correctly, an irrevocable life insurance trust (ILIT) can be used to avoid estate tax at your death, at the death of your spouse and even in future generations.

Once established, your ILIT should own the insurance policy. If you already have an insurance policy, it can be transferred to the ILIT. The transfer of an existing policy to the

ESTATE PLANNING TRUST & PROBATE ADMINISTRATION BUSINESS SUCCESSION PLANNING CHARITABLE GIVING ¡ASSET PROTECTION PLANNING PROBATE LITIGATION

This morning, the retun on her investment went from 2% to 8.1%.

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November 16-22, 2009

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Foundations use your gifts for the greater good

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ommunity foundations are perhaps the most impactful and versatile — and often among the least discussed — vehicles for charitable giving.

That is especially ironic in Cleveland, the city that gave birth to the community foundation movement in 1914 and where no fewer than five such foundations operate within 50 miles of downtown.

Community foundations build and strengthen communities by allowing donors to create funds that meet present and future needs. Community foundations are often the primary catalysts for positive change within a city or region through their grantmaking and leadership activities.

Northeast Ohio is fortunate to have a number of small and large community foundations, including such organizations as the Akron and Cleveland foundations, and the Community Foundation of

Lorain County.

The concept of community foundations originated in Cleveland nearly a century ago, when banker Frederick Harris Goff established the Cleveland Foundation for the purpose of pooling charitable resources into a single, great and permanent endowment for the betterment of the city.

Goff’s vision has evolved today into community foundations that offer a wide range of charitable giving options — from outright gifts and bequests to more complex arrangements like gift annuities, charitable remainder trusts and charitable lead trusts.

The advantages of giving through a community foundation for donors are numerous.

For example, gifts of cash and ordinary income property to a community foundation are generally deductible up to 50% of adjusted gross income. Such gifts to private foundations are deductible only up to 30%. In the same way, gifts of

COMMUNITY FOUNDATION GIVING BENEFITS ■ Gifts of cash and ordinary income property generally are deductible up to 50% of adjusted gross income.

■ Gifts of appreciated property are deductible up to 30%, vs. 20% for a private foundation.

■ A fund established through a community foundation benefits from the expertise of the foundation’s financial professionals. appreciated property to community foundations are deductible up to 30%, vs. 20% for a private foundation.

Community foundation staff also have in-depth knowledge of the community and its ongoing needs. Staff members work with donors to identify their charitable interests and to help match those interests with the most pressing needs of nonprofit organizations.

A fund established through a community foundation benefits from the expertise of the foundation’s financial professionals, who

Donor-advised funds grant giver flexibility

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s we prepare for Thanksgiving, our thoughts turn to those less fortunate.

This year, so many of our friends and neighbors need a hand. But sometimes we aren’t sure how best to help.

As you consider the worthwhile organizations in your community, you may be looking for a vehicle that will help you guide your giving to the causes most important to you. If so, a donor-advised fund at a local community foundation may help you achieve this goal.

Donor-advised funds are philanthropic funds out of which gifts or grants are made to charitable organizations.

Donor-advised funds are offered by most community foundations and can be established with an initial gift as low as $10,000.

Donor-advised funds are also ideal vehicles to help engage family in philanthropy.

Once your fund is in place, you can make recommendations regarding the size and recipient distributions. Provided they meet the conditions set forth by the community foundation administering your fund, those distributions generally will be made to your chosen charity.

One of the most appealing benefits of donor-advised funds is the expertise available from the community foundation.

According to David Dombrowiak, executive director of the Community West Foundation, donors often seek advice on what charities are best at serving the needs of their community.

“We often help donors make the biggest possible impact with their charitable dollars by sharing our experience with our area’s nonprofit organizations,” he explains.

Donor-advised funds are also ideal vehicles to help engage family in philanthropy. Making your grant

recommendations a family project teaches children and grandchildren the value of giving to community and presents an occasion to learn more about the needs of those who have less, and about the valuable organizations that serve those needs.

Many families find the holiday season a perfect time to discuss potential grant recommendations.

There is no better way to ensure your values are passed on than by demonstrating those values through conversations about philanthropy.

There can be significant tax and financial benefits to establishing a donor-advised fund.

Gifts to donor-advised funds are tax deductible in the year of the

gift, but distributions can be spread out over one or more years.

This flexibility makes a donoradvised fund a valuable resource in years in which you may need a charitable income tax deduction but are unsure about the organizations or causes you would like to support.

Donor-advised funds can be established with gifts of cash, equities, bonds, life insurance or real property. Donor-advised funds can sell appreciated securities free of capital gains taxes, allowing the full value of your assets to be used for charitable purposes.

■

invest dollars in ways designed to maximize growth and long-term charitable impact, as well as from the administrative convenience and cost savings associated with community foundation giving.

Donors can choose to establish restricted funds that focus on a single area or organization, or they may give in an unrestricted manner so that program officers can work with charitable agencies

to create new programs and innovative services that might not otherwise exist.

Community foundations apply their funds to a long list of areas, including youth and economic development, education, human services, scholarships, and arts and culture, among many others.

Community foundations have shown to be excellent options for donors who seek to give back to the community and improve the lives of their neighbors, both now and into the future. Their flexibility, built-in financial advantages and sense of mission make them attractive choices for donors of all means and charitable intents.

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Caprice Bragg is vice president for gift planning and donor relations at the Cleveland Foundation. Contact her at 216-261-3810.

It’s Your Turn...

TO SET AN EXAMPLE. TO SHARE TRADITIONS. TO INSPIRE GENEROSITY. PHILANTHROPY IS INHERITED; BE SURE TO PASS IT ON. Since 1908, we have counted on donations to provide compassionate care to Cleveland’s elderly people.

We continue to provide home care, mental health, social work and senior day programs, as well as conduct research and advocate for seniors.

To receive tax savings from your charitable gift, call 216.373.1607 or e-mail kmink@benrose.org

David Dombrowiak is executive director of the Community West Foundation.

Contact him at 216-476-7060.

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Wealth transfer system future unclear

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n 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which provided an increasing schedule of estate tax exclusions from 20012009, and repeals the federal estate tax during 2010.

In 2009, the federal estate tax exclusion amount (the amount one can leave estate tax-free at death other than to a spouse or

With EGTRRA set to expire in 2009, potential changes are up for debate charity) is $3.5 million. Assets in excess of that amount are subject to federal estate tax at 45%.

An asset that is inherited at death receives a “step-up” in income tax basis to its federal estate tax value.

In 2009, the federal gift tax annual

permanent the $3.5 million exclusion and the 45% rate. One House bill eliminates the use of valuation discounts for family limited partnerships and minority interest discounts for exclusion amount (the family businesses. amount one can gift to a person each calendar year Other proposed bills before it is considered a unify the gift and estate “taxable” gift) is $13,000. tax exclusion amounts, Under EGTRRA, one make the estate tax exclucan make $1 million in sion amount portable “taxable” gifts during between spouses, tie the one’s lifetime without BARBARA estate tax rate to the top paying a federal gift tax.

BELLIN income tax rate on capital If one makes taxable lifeJANOVITZ gains, double the rate for time gifts, one’s estate tax estates over $25 million, exclusion available at phase in an estate tax death is reduced. For example, exclusion amount of $5 million by someone who makes a $1 million 2015, and/or propose different taxable gift in 2008 has $2.5 exclusion amounts (between $2 million available at death in 2009. million and $5 million).

Lifetime taxable gifts in excess of $1 Congressional Democrats appear million are taxed at 45%. determined not to have the federal On Jan. 1, 2010, the estate tax is estate tax repealed. With the current scheduled to be repealed for 2010. deficit, it is likely that Congress will The gift tax will not be repealed, but at least pass a one-year extension of the top rate will be 35% on taxable the 2009 estate tax system before gifts in excess of $1 Dec. 31. If the million. The basis scheduled repeal in step-up will be lim2010 is changed, ited to $1.3 million, Congress may plus another $3 increase the federal million for property estate tax rate to passing to a spouse.

55%, with an excluUnless Congress sion of $1 million, acts prior to Dec. without taking 31, 2010, on Jan. 1, additional legisla2011, the estate tax tive action. exclusion will reThe Senate vert to $1 million, appears to favor the gift tax and “permanent” PHOTO PROVIDED estate tax exclureform of the President Barack Obama’s plan sions will be unified estate tax. keeps the estate tax exclusion at and the maximum Regardless of $3.5 million and the tax rate at 45%. federal estate tax how Congress rate on estates addresses the federal under $10 million will be 55%. estate tax issue, one’s estate likely When EGTRRA was passed, few will remain subject to Ohio estate tax. people thought we would get this In most cases, it will remain close to 2010 without having a new advisable for married couples to law in place. However, the reality is divide their assets between the that a myriad of estate tax bills in spouses and establish trusts to miniCongress lie dormant and are taking mize their Ohio estate tax liability. a back seat to health care reform.

Perhaps most importantly, if Changes in the law being considfederal estate tax planning becomes ered by Congress may greatly less of an issue, the importance of impact one’s estate plan. the non-tax, personal aspects of the President Obama’s plan keeps estate planning process will become the estate tax exclusion at $3.5 more significant. Thus, in an envimillion and the tax rate at 45%, ronment of uncertainty, where while the House Republican Leadlong-term planning has been a ership bill permanently repeals challenge, it remains vital that the federal estate tax on Jan. 1, individuals work closely with their 2010. Various proposals are pending estate planning advisers.

■ in Congress that meet between the president’s proposal and Barbara Bellin Janovitz is chair of permanent repeal.

Reminger Co. LPA’s Estate Planning House and Senate bills make Group. Contact her at 216-430-2178.

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Designate an agent for burial arrangements

S

everal years ago I met with an unmarried couple to discuss updating their estate plan. They wanted a provision in their wills stating that they were to be buried next to each other.

While I could put the provision in their wills, under the existing Ohio law the provision was not enforceable. They were upset to learn that their respective families, which objected to their relationship, could determine their funeral and burial arrangements.

Another client’s father had remarried and was survived by a spouse who was JEFFRY not the client’s WEILER mother. The stepmother wanted her husband cremated, but our client wanted his father buried next to his mother. Under the existing Ohio law at the time, his stepmother — as the surviving spouse — would determine the arrangements.

Several weeks later, I attended an Ohio State Bar Association meeting, where I found that colleagues throughout Ohio had clients experiencing similar problems. The Ohio State Bar Association Committee suggested that we propose a change in the Ohio law to permit people to have more control over their funeral and burial arrangements.

During this process, a front-page article in The (Columbus) Dispatch described how a terminally ill man wanted to be buried so that under his religious beliefs his soul would go to heaven, but his soon-to-bewidow (a second spouse) wanted to have him cremated. The widow won a lawsuit filed by his child, and the man was cremated.

This lawsuit dealing with religious observances received the attention of the Ohio General Assembly. Several months later, an Ohio law was adopted that permits people to name an agent for their funeral and burial arrangements. By selecting the appropriate person, people living in Ohio can have some assurance that their views concerning funeral and burial arrangements will be observed.

This is accomplished by completing and signing a form that names the agent to carry out their wishes. This form can be very important when differences in opinion about burial vs. cremation, religious observances, and burial location or disposition of cremated remains can be anticipated among surviving family members.

An attorney is not necessary to complete the form. The form is available on the Internet by printing Ohio Revised Code Section 2108.72(B).

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Jeffry L. Weiler is a certified specialist in estate planning, trust and probate law for Benesch Friedlander Coplan & Aronoff LLP. Contact him at 216-363-4551.