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TABLEOFCONTENTS

IT’S YOUR TURN... TO SET AN EXAMPLE. TO SHARE TRADITIONS. TO INSPIRE GENEROSITY. PHILANTHROPY IS INHERITED. BE SURE TO PASS IT ON. A charitable gift to the Benjamin Rose Institute on Aging allows us to continue our mission of caring for Cleveland’s older adults through home health care, mental health, social work and senior day programs, as well as conduct research and advocate for seniors.

TRENDS Uncertainty in potential tax changes keeps advisers on their toes. S4-S6

To receive tax savings from your charitable gift, call Kerry at 216.373.1607 or e-mail

kwray@benrose.org

Q Q Q Q Q Q Q Q

Business valuation Sale advisory and succession planning Discount studies (FLP/LLC) Tax controversy and expert testimony Real estate appraisal Forensic accounting Complex illiquid financial instrument valuation

Radd L. Riebe, JD, ASA

+1.216.373.2998

Gifts to family: Choose the right path to preserve inheritances. S9-S12, S14 Charitable giving: The best ways to help make a difference. S13-S20

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

Private Client Services Q Q

Succession Planning: Exit strategies require special attention. S6-S7

Experts can implement your plans By MARIE MONAGO

Q Q

Plus

PRESIDENT’S LETTER

Supporting and Realizing Value

Q Q

rriebe@srr.com www.srr.com

Estate Planning. Ever-changing laws and circumstances require an experienced trusted advisor.

objectives — be it the transition of a family-owned business, taking care of a family member with special needs, planning for retirement, creating a legacy or fulfilling a philanthropic goal. The Estate Planning Council of Cleveland has over 400 members, all professionals in the Greater Cleveland area including attorneys, accountants, bankers and trust officers, financial planners, investment managers, insurance agents, appraisers and representatives from charitable organizations. All of us are dedicated to serve our clients and our community with thoughtful, tax-efficient, value-based planning. We want to help guide you as you determine what will work best for you, your family, your heirs and the charitable organizations you want to support. Our website, www.epccleveland.org, can be a useful resource to locate professionals to assist you with your planning needs. We are pleased to share the insights and commentary of our members and other area practitioners with you in this publication. We hope you will find the information insightful, helpful and valuable. ■

Disclaimer

Whether concerned about a potential tax impact, interested in maximizing opportunities, or just don’t know where to begin, Ulmer & Berne LLP is ready to assist. Our experienced attorneys simplify the important task of protecting your assets. Estate Planning | Wills & Trusts Probate & Trust Litigation | Succession Planning

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Content provided within this Special Advertising Section is offered solely for informational and educational purposes. The information is not intended as tax, legal, accounting or investment advice. No representation or warranty is made that any tax savings or other results will be achieved. Consult an attorney and financial advisers to evaluate individual estate planning needs. Internal Revenue Service Circular 230 Disclosure: Advice (if any) relating to federal taxes that is contained in this section is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or (b) promoting, marketing or recommending to another party any transaction or matter discussed herein.

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BUSINESS CLIMATE

Planning in a low interest rate environment By MICHAEL MATILE

Look beyond impact on savings accounts for benefits

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

Crain’s Cleveland Business Custom Publishing

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ESTATE PLANNING

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BUSINESS CLIMATE

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

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. ■

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

Vice President Beth M. Korth

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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Daniel F. Miltner Wayne D. Minich Ginger F. Mlakar M. Elizabeth Monihan Michael J. Monroe Kenneth R. Morgan Philip G. Moshier Susan C. Murphy Norman T. Musial Christine Myers Jodi Marie Nead Lisa Wheeler Neely Robert Nemeth Michael A. Niederst Anthony J. Nuccio Eric A. Nye Kevin J. O'Brien Michael J. O'Brien Lacie L. O'Daire Linda M. Olejko Leslie A. O'Malley David Orth Charles J. O'Toole Michael Parente Jodi L. Penwell Michael D. Pepe Dominic V. Perry Craig S. Petti Daniel W. Phillips Thomas Pillari Jennifer N. Pinkerton John W. Pinter Douglas A. Piper Candace M. Pollock Mary Ellen Potter Douglas Price William J. Price Maria E. Quinn Howard S. Rabb Susan Racey Jeffrey H. Reitzes Izabela Reszko Linda M. Rich R. Andrew Richner Radd L. Riebe Elton H. Riemer Michael G. Riley Frank M. Rizzo Lisa Roberts-Mamone Kenneth L. Rogat James D. Roseman Carrie A. Rosko Larry Rothstein Rennie C. Rutman Patrick J. Saccogna Fran Schaul Ronald S. Schickler Bradley Schlang Dennis F. Schwartz Vassie Scott, Jr. Aimee M. Scullin June A. Seech John S. Seich Doris A. Seifert-Day Marc J. Servodio Emily Shacklett Andrea M. Shea Stanley E. Shearer John F. Shelley Roger L. Shumaker Judith C. Singer Sandra M. Skocir Mary Jean Skutt Mark A. Skvoretz John M. Slivka N. Lindsey Smith Cristin Snodgrass

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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BUSINESS CLIMATE

Evaluate portfolio by yearâ&#x20AC;&#x2122;s end By STEVEN BERMAN

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 â&#x20AC;&#x153;Bush-era tax cutsâ&#x20AC;? 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 donâ&#x20AC;&#x2122;t know. Thatâ&#x20AC;&#x2122;s why you should consider A new 3.8% Medicare tax will taking steps before yearâ&#x20AC;&#x2122;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

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.

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.

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

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 â&#x20AC;&#x201D; and if you still want to own the stock, repurchase and establish a higher cost basis.

Some effective strategies such as grantor trusts, dynasty trusts and GRATs are facing limits under the administrationâ&#x20AC;&#x2122;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, youâ&#x20AC;&#x2122;ll want to develop a plan to take advantage of any opportunities. If you donâ&#x20AC;&#x2122;t plan, you may not be prepared to act and could lose out on valuable tax-saving strategies. â&#x2013;

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

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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By ROBERT NEMETH

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n effective succession plan isnâ&#x20AC;&#x2122;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 â&#x20AC;&#x201D; have the business prosper for years to come. Itâ&#x20AC;&#x2122;s rare that todayâ&#x20AC;&#x2122;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 companyâ&#x20AC;&#x2122;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

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

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&#x2013;

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

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.

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.

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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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

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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GIFTS TO FAMILY

Valuation formula clauses stand up to IRS challenges Unexpected, hard-to-value assets in the spotlight By JEFFRY L. WEILER

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

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.

Allied Partners in Philanthropy Philanthropy has helped make Cleveland Clinic a world leader in healthcare. To honor those allied professionals who have helped facilitate a charitable gift to Cleveland Clinic, a new society has been established – Allied Partners in Philanthropy. By working with allied professionals, Cleveland Clinic’s gift planning team helps supporters achieve their philanthropic goals. Together, we are securing Cleveland Clinic’s future through gift planning.

If you would like more information on Allied Partners in Philanthropy, or information on gift planning, please contact Nancy McCann at 216.445.8980 or mccannn@ccf.org.

Same-day appointments available.

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GIFTS TO FAMILY Have your business advisors left money on the table?

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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 â&#x20AC;Ś and then there are those valuation discounts. â&#x2013;

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 â&#x20AC;&#x201D; such as valuation discounts when transferring wealth to younger family members â&#x20AC;&#x201D; while maintaining control over access to the partnershipâ&#x20AC;&#x2122;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. Given that

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tâ&#x20AC;&#x2122;s possible that when you first stepped into your attorneyâ&#x20AC;&#x2122;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 beneficiariesâ&#x20AC;&#x2122; 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&#x2013;

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

Delaware trusts offer exceptional advantages By ANNE MARIE LEVIN

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

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

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.

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. 706-3956. The child most likely will leave

By MISSIA H. VASELANEY

WHAT LEGACY ARE YOU LEAVING? It’s vitally important to design your estate plan around an expert, goal-oriented framework. Our estate & trust specialists work closely with individuals, trustees, executors, and their advisors in order to best develop integrated, goal-based plans that minimize taxes and leave a lasting legacy.

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YOUR SUCCESS IS OUR BUSINESS 29125 Chagrin Blvd. p 216.831.0733

www.zinnerco.com

f 216.765.7118

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CHARITABLE GIVING

Making gifts to young children By TINA MYERS

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 â&#x20AC;&#x153;kiddie taxâ&#x20AC;? 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 parentsâ&#x20AC;&#x2122; 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 grantorâ&#x20AC;&#x2122;s â&#x20AC;&#x153;parental obligations,â&#x20AC;? 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 childâ&#x20AC;&#x2122;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&#x2013;

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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.

www.glenmede.com Glenmedeâ&#x20AC;&#x2122;s services are best suited for those with $3 million or more to invest. To learn more, please call Linda Olejko for a personal conversation at 216-514-7876. Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC; Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC; Â&#x2DC; Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC; Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC; Â&#x2DC;Â&#x2DC;2Â&#x2DC;Â&#x2DC;

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. Thatâ&#x20AC;&#x2122;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

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

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. ■

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

th Anniversary Gala

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.

thearcofgreatercleveland.org

Thank you to the lead sponsors of our 50th Anniversary Gala held on September 29, 2012: Superstars Brennan Industries/David and Carole Carr John R. and Carolyn Climaco 1-888 OHIOCOMP and Minute Men Stafﬁng Services/The Lucarelli Family Shooting Stars Dr. Joseph & Beverly Calabrese Workers’ Compensation Management Solutions/ The Fedeli Group Select Restaurants, Inc.

Rising Stars Ben M. Bonanno Blue Technologies—Paul Hanna Cuyahoga County Board of Developmental Disabilities Dillard’s HELP Foundation, Inc. Independence Excavating— The DiGeronimo Family MetroHealth Our Lady Of The Wayside Pepco–Jack Borkey

Our mission is to empower persons affected by intellectual and developmental disabilities (IDD) through advocacy, education and promotion of activities that improve quality of life.

A BANK INVESTED IN MORE THAN YOUR BALANCE. At Huntington, we do things a little differently. Okay, a lot differently. For starters, we reinvest your money right back into the community. Helping businesses open. And neighborhoods grow. We staff our call centers locally and service all our loans right here. Creating jobs and opportunities for our neighbors. So 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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CHARITABLE GIVING

Foundations offer their own opportunities Appropriate vehicle depends on goals By CAROL F. WOLF

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.

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.

...Private...Wealth...Counsel... For more than nine decades, our tax and wealth management practice has been serving the increasingly sophisticated needs of entrepreneurs, closely held and family businesses, high net worth individuals and tax exempt organizations.

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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

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 â&#x20AC;&#x201D; 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 thatâ&#x20AC;&#x2122;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 â&#x20AC;&#x201D; 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 youâ&#x20AC;&#x2122;d like to give through your estate. Most philanthropists do a

combination. What is your preference?

charitable interests, weâ&#x20AC;&#x2122;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&#x2013;

Income. Some people give in a way that provides them â&#x20AC;&#x201D; or a loved one â&#x20AC;&#x201D; 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 theyâ&#x20AC;&#x2122;ve made some guiding decisions. Determining the range thatâ&#x20AC;&#x2122;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 patientsÂš 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.

Building a ďŹ nancial plan Building a ďŹ nancial plan that helps meet your needs is much easier when you rely on the expertise of Lincoln Financial Advisors. We can provide you with the appropriate ďŹ nancial strategies for your individual needs through our comprehensive planning services. We provide a multitude of products and services to help meet your goals in: t *OWFTUNFOU QMBOOJOH

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Jeremy DiTullio, CFPÂŽ, AWMAÂŽ, CRPCÂŽ Managing Principal Lincoln Financial Advisors (.,&' 9^W]h_d 8blZ$" Ik_j[ )&& Â&#x161; 9b[l[bWdZ" E> **'(( F0 (', -,+#-*+& Jeremy.DiTullio@LFG.com

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ÂŠ2012 Lincoln Financial Advisors Corp. 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.

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

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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CHARITABLE GIVING

Life Insurance gift options

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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 policyâ&#x20AC;&#x2122;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 policyâ&#x20AC;&#x2122;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 donorâ&#x20AC;&#x2122;s philanthropic nization. In addition, each PATRICIA and financial goals. Degift may be made in varipending on the donorâ&#x20AC;&#x2122;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 donorâ&#x20AC;&#x2122;s situacost-effective way to provide tion than others. We work with future support for a charity.

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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&#x2013;

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

espite weak economic conditions, various classes of collectible personal property have escalated substantially in value in the national and international market â&#x20AC;&#x201D; 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

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CHARITABLE GIVING

Hold your trust company to fiduciary standard of care Other models built on suitability standards By LINDA M. OLEJKO

n today’s turbulent financial environment, a trust company is legally bound to place client concerns ahead of company interests. A striking aspect of the trust company model is this embedded legal and moral commitment to a fiduciary purpose. In contrast, broker-dealers are bound by a “suitability standard.” The laws LINDA M. defining a OLEJKO provider’s obligations under this standard vary greatly and only require the provider’s recommendations be appropriate in light of the client’s investment objectives and circumstances. Trust companies are also distinguished by their safekeeping of client property. The expectation that assets will be available when clients need them seems fundamental and reasonable. Under certain circumstances, however, many broker-dealers are permitted to borrow assets from client margin accounts for corporate purposes.

Decisions, decisions While client goals vary based on preference and need, the following questions highlight important information all investors should know before choosing a provider: ■ What is the organization’s corporate ownership structure?

Simple……Smart……Meaningful. An AEF Donor Advised Fund can: • create a charitable legacy for business, family or both • provide the best tax benefits without administrative burden Increase capacity by leveraging appreciated assets like stock, real estate and closely held business interests. Grow and preserve your charitable assets without hidden agendas like: • heavy restrictions on investments or use of a financial advisor • limited succession or geographic scope • programmatic lobbying

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

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■ How are the company and its investment professionals compensated? ■ What are the protocols governing custody of client assets? Can the organization potentially access client holdings without client consent? ■ Is the company financially sound? Does the organization include business lines exposed to significant market risks through trading or other practices? ■ How does the company demonstrate its objectivity and emphasis on fiduciary services?

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

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. The availability of large increases

Estate planning and wealth management. What percentage of the client’s total net worth is in the form of personal property holdings? A fair market value appraisal can be essential to a complete and up-todate estate plan for clients who own significant high value collectibles. Remember, too, that you may be largely unaware of client holdings of such property. A discrete inquiry can yield important information.

Wells Fargo Advisors, LLC, Member SIPC

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Linda M. Olejko is vice president, business development for Glenmede. Contact her at (216) 514-7876 or Linda.Olejko@glenmede.com

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. Dramatic increases in value of certain categories of high value personal property mean that a current appraisal or reappraisal of client assets based on current fair market value is essential. A current appraisal provides you with the data you need to provide current and accurate advice and guidance to your clients:

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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? ■

James Corcoran, JD, AAA, ASA, ISA, is founder of Corcoran Appraisal Group, which has been active professionally for more than 35 years. Contact him at (216) 7670770 or corcoranfinearts@gmail.com.

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CHARITABLE GIVING

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

or many, Thanksgiving is the rare time of year when family members put aside their busy schedules and gather to spend time together. The holiday also provides a unique opportunity for families to discuss making charitable giving a shared activity. The Cleveland Foundation is often invited to help families facilitate this process, one of the many ways we practice donor stewardship. Each year, hundreds of individuals, families, organizations and corporations use the Cleveland Foundation as their partner in philanthropy. Through our extensive knowledge of the community and sound fiscal stewardship, we help them

KAYE RIDOLFI

People are exploring the idea of family philanthropy as a way to reconnect with each other.

achieve their philanthropic goals in intelligent and creative ways, often designing personalized funds to ensure that donors’ charitable contributions have the desired impact. Simply put, our role as donor stewards is to help you help others. For those interested in creating a charitable family legacy, we are available to guide families as they work together to make a difference in the lives of others.

Increasingly, people are exploring the idea of family philanthropy as a way to reconnect with each other and teach the next generation valuable lessons, as children and grandchildren learn the importance of being charitable. It’s also a way for senior family members to prepare younger people for leadership opportunities and to practice philanthropy in ways that reflect the values of the family. The Cleveland Foundation staff knows how to best approach the concept of family philanthropy and will work closely with donors and their families to ensure that the family legacy continues. ■

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

If your clients want to

CHANGE TOMORROW, help them start today.

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

Give a charitable gift that will last forever. Please call our Advancement Team at 1.877. 554.5054 ClevelandFoundation.org

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