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ESTATE PLANNING
S-2 NOVEMBER 14 - 20, 2011
“The Invisible Heroes� found some tax savings opportunities in your estate plan last night.
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TABLEOFCONTENTS TRENDS Examining the potential changes in tax laws and the need to give prudent attention to your estate plan. S4-S9
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Plus Business Succession Planning: Planning for business succession can benefit charities and employees as well as the company’s owner. S10-11
Opportunities during uncertain times By LISA H. MICHEL
T
he Estate Planning Council of Cleveland, in conjunction with Crain’s Cleveland Business, is pleased to present the annual Estate Planning Section. It is the council’s goal to offer the community valuable information related to financial, retire-
ESTATE PLANNING
Taft Attorneys Answer Important Life Questions FAMILY LAW
Consider your estate. Who do you want to inherit your assets? If you become incapacitated, who should handle your financial and medical decisions? What about federal estate tax exemption changes? Could a
ment, insurance, business regarding the transition succession, and estate and of a family-owned busicharitable planning. The ness, planning for retirearticles and commentary ment, creating a legacy for on the pages that follow your family or fulfilling have been provided by philanthropic goals, the some of Northeast Ohio’s articles in this section most experienced profeswill address these issues sionals in these fields. and the benefits of LISA MICHEL Estate planning is one receiving comprehensive of the most overlooked areas of tax and estate planning advice as personal financial management. part of the planning process. It is estimated that more than The Estate Planning Council 120 million Americans do not of Cleveland is composed of a have up-to-date estate plans to diverse array of more than 440 protect themselves or their famiprofessionals working in the lies in the event of sickness, acciGreater Cleveland area, including dent or untimely death. Each attorneys, accountants, bankers year, this costs wasted dollars and and trust officers, financial planhours of hardship, which can be ners, insurance agents, appraisers materially minimized with and representatives from charitaadvanced planning and action. ble organizations. Our members The financial world in which are available to provide you with we live continues to change. Unthoughtful, tax-effective and certainty looms about the future of value-based planning. Our Counestate and gift tax laws and domestic cil’s website (www.epccleveland.org) and international economic percan be a useful resource to locate formance. Nonetheless, the need professionals to assist you with all for preservation of assets built over of your planning needs. a lifetime for the benefit of family, We are pleased to be able to heirs or charities is ongoing. share the insights and commentary Evaluating how your personal of our members and other area objectives for leaving a legacy practitioners with you in this have been affected by the change annual publication. We hope that in laws and market conditions you will find the information inshould include consulting with sightful, helpful and valuable. ■professionals to advise you on the Lisa H. Michel is president of the Estate methods, techniques and docuPlanning Council of Cleveland and a ments available to meet your trust officer at Key Private Bank. goals. If you have concerns
second marriage complicate your decisions? From estate and marital planning, to fiduciary litigation and corporate succession, we counsel clients through TAX
David R. Tavolier
Charitable Giving: Sharing your success with charitable organizations can leave a lasting legacy. S17-S20
PRESIDENT’S LETTER
Missia H. Vaselaney
Carl A. Murway Jill F. Helfman
Estate Plan Tactics: Managing the transfer of your wealth to loved ones through trusts and other avenues. S12-S17
each important step in their lives.
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ESTATE PLANNING
S-4 NOVEMBER 14 - 20, 2011
OHIO and FLORIDA ESTATE PLANNING and PROBATE
Nancy H. Canary, Esq.
PLAN INSPECTIONS
Planning for the New Year: your annual financial physical
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â– CAFETERIA PLAN ELECTIONS Are your withholding elections current? Medical spending/HSA deferrals Dependent care Insurance coverage
ew Year’s shouldn’t be just about making resolutions to better yourself. Consider before the current year’s end whether your financial affairs need to be updated. This can include many things we don’t think about day to day. Moving forward, at least annually, take stock of your financial and estate plan to prepare for future needs. The following are a few of the financial aspects you should consider each year:
â– PAYROLL ELECTIONS Are your tax withholding elections correct? Is a portion going to savings/investment? â– HAS YOUR ANNUAL INCOME TAX PLANNING BEEN COMPLETED?
â– BANK ACCOUNTS Are these titled correctly? Do they provide for proper transfer at death? â– INVESTMENT ACCOUNTS Are these titled correctly? Are the asset allocations diversified and updated to reflect your risk tolerance and time to retirement? Are the investments appropriate for your current income tax situation? â– 401(K) OR 403(B) RETIREMENT PLANS Are your deferral/contribution percentages correct for the
upcoming year? Will your deferral/contribution percentages get you the maximum company match? Have you considered Roth versus Traditional IRAs? Are the asset allocations diversified and updated to reflect your risk tolerance and time until retirement? Are beneficiary designations current?
â– ESTATE PLANNING DOCUMENTS Are your will/trusts current? Are named trustees, custodians and advisers appropriate? If you added a living trust, did you retitle your assets? Do you have a durable power of attorney? Is it current? â– DO YOU HAVE A CURRENT HEALTH CARE POWER OF ATTORNEY AND LIVING WILL? Mary Eileen Vitale, CPA, CFP, is principal with Howard, Wershbale & Co. Contact her at vitale@hwco.com or (216) 378-7210.
ESTATE PLAN CHECKUP By LINDA DELACOURT SUMMERS and PATRICK TULLEY
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o you visit your doctor for an annual checkup? When you do, isn’t it nice to hear that everything is just fine and that there are no changes? Sometimes, however, the doctor finds issues that need addressed. Your estate plan needs a checkup from time to time as well. While not as often as a physical, every few years you should evaluate your estate plan. Consider the following as you evaluate your plan:
1
Last will and testament. Who do you want to inherit your property? Are your executors and guardians still appropriate choices?
2
Trust agreement. Do you have a trust agreement? If not, should you? A trust agreement allows you to control who gets your assets and when. It can help you avoid probate and save estate taxes. At what age do you have your assets being distributed outright to your children? Are your children capable of receiving those assets outright without a detrimental effect on their desire to make their own way?
3
Durable power of attorney. Have you given a trusted person authority to handle your finances and property if
LINDA DELACOURT SUMMERS
PATRICK TULLEY
you become incapacitated? Do you have an alternate, just in case?
4
Durable power of attorney for health care, living will and final arrangements. In case you cannot, have you given someone the power to make health care decisions for you? Have you made your desires known to your family members regarding life support? Are you an organ donor? Do you want to be buried or cremated? Making certain decisions ahead of time eases the burden on those named to take care of you.
5
Provide for the orderly transfer of any business. If you own a business, you should have a succession plan. If you are the sole owner, who is going to run your business if you are not there? If you own a business with others, do you have a buyout agreement? How is it going to be funded?
6
Review account ownership and beneficiary designations. All of the estate plan-
Crain’s Cleveland Business Custom Publishing
ning documents in the world won’t mean a thing if your accounts are not titled properly to work in conjunction with your will and/or trust. Part of your checkup should include contacting all financial institutions holding your accounts and the life insurance companies holding your policies and asking “how is my account titled� and/or “who is my beneficiary?� Many of you will be surprised at what you learn.
7
Storage of documents and information. Where are your original documents stored? Do you have a complete list of your assets? Who, other than you, knows the password to the account information that you keep on your computer? Estate planning is not just about making sure your assets go to the right people in the right way. It also includes the preparation of documents and communication of desires so that your loved ones’ burdens are eased. Just like with a physical checkup, do your estate planning checkup not only for you but for them. â–
Linda DelaCourt Summers and Patrick Tulley are estate planning attorneys at Ulmer & Berne LLP. Contact Summers at (216) 583-7212 and Tulley at (216) 583-7234.
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NOVEMBER 14 - 20, 2011
PLAN INSPECTIONS
How estate planning can help you
Tired of paying for trades instead of guidance?
By DORIS SEIFERT DAY
O
ne of the first things that comes to mind when someone hears “estate planning” is saving taxes. Many individuals do not bother to pursue this planning because they believe that their assets will not be affected by the federal estate tax. However, there are many advantages to estate planning. Yes, there can be both federal and state tax advantages. These may become less important if the federal estate tax threshold remains at $5 million and Ohio retains its plan to eliminate its estate tax in 2013. Until that time, even for a small estate, significant savings can be realized by taking advantage of estate planning techniques. Planning requires you to review your assets and decide who you would like to receive them. This review allows you to consider
If you would like to give a portion of your estate to charity, some assets are more advantageous than others. whether your beneficiaries have special circumstances and if they would benefit from receiving the inheritance in a form other than an outright distribution. Remember, if you do not specify who will receive your assets, state law will. You may want to consider which specific assets (and not just an amount or percentage) a beneficiary receives. If you would like to give a portion of your estate to charity, some assets are more advantageous than others. Consider the form in which you hold your assets. You can create a grantor trust, which will allow you to retain complete control of your assets but avoid probate court costs and delays. It also offers other advantages, such as a trustee to handle the management of trust assets, when the grantor is unable or unwilling to do so. It provides an opportunity to organize and plan, which may make your current asset management more efficient and streamlined. Consider estate planning and the opportunities it may provide to you and your beneficiaries. For questions or concerns contact your tax adviser. ■
Doris Seifert Day is director of taxation for Walthall, Drake & Wallace, LLP. Contact her at (216) 573-2330.
CONTACT US For more information about Custom Publishing with Crain’s Cleveland Business, please contact advertising sales director Mike Malley at 216-771-5070 or mmalley@crain.com.
FeeǦonly, independent, objective investment advice ͵Ͳͳ ǡ ͳͲʹ ǡ ͶͶͳʹʹǦͷͳͻ ʹͳǤͶͶǤʹ Ǥ Ǥ
THE ESTATE PLANNING COUNCIL OF CLEVELAND President Lisa H. Michel 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 Lawrence C. Barrett Stephen Baumgarten Edward J. Bell Steven Berman Gina Marie Bevack-Ciani Mohammed J. Bidar Gary B. Bilchik John J. Bindas Michelle M. Bizily James A. Blue Alane Boffa Jason Bogniard Daniel L. Bonder Nicole Bornhorst Aileen P. Bost Christ Boukis Laura Bozell Herbert L. Braverman Christopher P. Bray James R. Bright David J. Brown Don P. Brown C. Richard Brubaker Robert M. Brucken Martin J. Burke, Jr. Eileen M. Burkhart Robert C. Burkhart Amanda M. Buzo Janice M. Cackowski Linda Cahill J. Donald Cairns Peter H. Calfee Carl Camillo Nancy H. Canary 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 Christy Corrao Barbara J. Cottrell Greg S. Cowan Steven Cox Thomas H. Craft Joseph Crea Stephen Cribley Jean M. Cullen M. Patricia Culler Rand M. Curtiss Cheryl A. D'Amico Jason S. Damicone Stephen M. Darlington Doris A. Seifert Day Dana Marie DeCapite Holly N. Denham Rebecca Dent Thomas A. DeWerth
Vice President Marie L. Monago Jeannemarie Di Padova Carina S. Diamond David S. Dickenson, II James G. Dickinson Gary L. Dinner Nick DiSanto Mary Ann Doherty Lynda Doland Timothy Doyle Emily A. Drake William A. Duncan Carl Dyczek Howard B. Edelstein Elaine Beth Eisner Michael E. Ernewein Patrick J. Ertle Christopher M. Essig Heather R. Ettinger Christina D. Evans Susan M. Evans Darren A. Ewaska Frank Fantozzi Charles E. Federanich William C. Ferry J. Paul Fidler Julie A. Fischer Mary Kay Flaherty Robert E. Fleck Kimberly A. Florcosky Robert B. Ford Judson Forner Betsy Franz Maryann Clarisse Fremion Patricia L. Fries Sherry Fry William H. Fulton Naomi D. Ganoe Beverly Gans Stacey M. Gardella Stephen H. Gariepy Rao K. Garuda Patricia D. Garven Richard Gary James E. Gaydosh Kyle B. Gee Christopher Geiss Thomas M. Genco Arthur E. Gibbs, III Thomas C. Gilchrist Stephanie M. Glavinos Catherine Klima Gletherow Ronald J. Gogul Scott A. Gohn James A. Goldsmith Susan S. Goldstein Tom S. Goodman Lawrence I. Gould Alexandra Gray Karen Greco Sally Gries Nancy Hancock Griffith Charles M. Grimm Alan Gross James P. Gruber Timothy R. Haber Ellen E. Halfon Sarah Hannibal Ronald F. Hanson Douglas R. Hastings Lawrence H. Hatch Robert A. Hauptman Thomas I. Hausman Janet W. Havener Albert G. Hehr, III Theodore N. Hellmuth James M. Henretta James R. Hickey Mark W. Hicks Jean M. Hillman Joanne Hindel Mark L. Hoffman
Secretary Beth M. Korth
Treasurer Jennifer A. Savage
Doris Hogan Ronald D. Holman Harold L. Hom Robert S. Horbaly James M. Horkey Brent R. Horvath Michael J. Horvitz Stuart M. Horwitz Barbara E. Irr Lynnette Jackson George A. Jacobs Paula Jagelewski Christopher P. Jakyma Barbara Bellin Janovitz Robert B. Jensen Craig C. Jernigan Theodore T. Jones James O. Judd Matthew F. Kadish Stephen L. Kadish Ronald L. Kahn Joseph W. Kampman Karen J. Kannenberg Amy A. Kapostasy Kimon P. Karas William E. Karnatz, Sr. William E. Karnatz, Jr. Bernard L. Karr Howard Kass David B. Kearns John D. Kedzior Debra M. Keene Lesley Keller Woods King, III Amy I. Kinkaid Richard B. Kiplinger Raymond G. Klinc Paul S. Klug Victor G. Kmetich Erik R. Kneip Daniel R. Kohler James R. Komos Thomas H. Konkoly William H. Koptis J. Joseph Korpics Harvey Kotler Roy A. Krall Frank C. Krasovec, Jr. Eugene A. Kratus Thomas W. Krause Barbara J. Krepop Bruce A. Kretch James B. Krost Deviani Kuhar Craig A. Kukla Thomas J. LaFond William P. Lange Gary E. Lanzen Donald Laubacher Daniel J. Lauletta Herbert B. Levine Wendy S. Lewis Keith M. Lichtcsien James Lineweaver David F. Long Ted S. Lorenzen Amy R. Lorius Adrienne Love Charles S. Lurie Joshua A. Lusk Robert M. Lustig James M. Mackey David S. Maher Stanley J. Majkrzak Chad Makuch Laura Malone Theodore M. Mann, Jr. Karen T. Manning Wentworth J. Marshall, Jr. Melissa L. Marvin Michael W. Matile
Crain’s Cleveland Business Custom Publishing
Program Chair Michael T. Novak Mark J. McCandless Nancy McCann Karen M. McCarthy Larry E. McCoy Erica E. McGregor Daniel J. McGuire Joseph M. Mentrek Bruce Merrell Mark A. Mihalik Lawrence Mihevic Charles M. Miller Richard S. Milligan William M. Mills Daniel F. Miltner Wayne D. Minich Ginger F. Mlakar M. Elizabeth Monihan Michael J. Monroe Kenneth R. Morgan Philip G. Moshier Susan C. Murphy Hoyt C. Murray Norman T. Musial Christine Myers Jodi Marie Nead Lisa Wheeler Neely Robert Nemeth Michael A. Niederst Lindsey Nordloh Anthony J. Nuccio Eric A. Nye Susan S. Nye Michael J. O'Brien Lacie L. O'Daire Linda M. Olejko Leslie A. O'Malley Charles J. O'Toole Chris Parker Michael J. Parry Jodi L. Penwell Michael D. Pepe Dominic V. Perry Craig S. Petti Daniel W. Phillips Thomas Pillari John W. Pinter Gregory M. Pinter Douglas A. Piper Kevin J. Plank Candace M. Pollock Mary Ellen Potter Douglas Price Maria E. Quinn Howard S. Rabb Susan Racey Jeffrey H. Reitzes Linda M. Rich R. Andrew Richner 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 Robert Sanders Ronald S. Schickler Bradley Schlang Dennis F. Schwartz Vassie Scott, Jr. June A. Seech John S. Seich Holly Selvaggi Emily Shacklett Andrea M. Shea Stanley E. Shearer John F. Shelley Lea R. Sheptak
Immediate Past President Radd L. Riebe Nick Shofar Roger L. Shumaker Sandra M. Skocir Mary Jean Skutt Mark A. Skvoretz Michael J. Sliman John M. Slivka Martha B. Sluka N. Lindsey Smith Cristin Snodgrass Michael T. Sommerfeld James Spallino, Jr. Richard T. Spotz, Jr. William L Spring M. Randal Stancik Cindy L. Steeb Kimberly Stein Laurie G. Steiner Saul Stephens E. Roger Stewart John M. Stickney Robin R. Stiller Robert H. Stock Diane M. Strachan Lori L. Sullivan John E. Sullivan, III Linda DelaCourt Summers Scott Swartz Joseph N. Swiderski Natalie Bell Takacs Yeshwant K. Tamaskar John R. Telich, Sr. Mark M. Tepper Barbara Ann Theofilos Donald A. Thompson Donna Thrane Philip Tobin Eric Tolbert Floyd A. Trouten, III Mark A. Trubiano Patrick J. Tulley John R. Tullio, Jr. 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 Robert W. Wasacz Neil R. Waxman Ronald F. Wayne Michael L. Wear Stephen D. Webster David G. Weibel Jeffry L. Weiler Richard Weinberg David V. Weisberg Katherine E. Wensink Elizabeth Wettach-Ganocy Marcia J. Wexberg Terrence B. Whalen Sharon Kai Whitacre Frederick N. Widen Geoffrey B.C. Williams Erica K. Williams Scott A. Williams Teresa M. Wisniewski Nelson J. Wittenmyer Matthew D. Wojtowicz James D. Yurman Jeffrey M. Zabor David M. Zolt Jack Zugay Gary A. Zwick Donald F. Zwilling
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TRENDS
The give and take in estate and gift taxation Lawmakers increase exemption with a catch ... it expires in 2013 Interest rates
By RADD RIEBE
L
ast December, Congress In August, the Federal Reserve was in the giving mood announced its intention to mainwhen it implemented a $5 tain low interest rates until midmillion exemption for gift 2013. and estate taxes and dropped the Estate planning stratemaximum rate to 35%. gies that take advantage However, as if too much of these historically low good news is a bad thing, rates are particularly Congress chose to sunset appealing. The Section its largess so that on Jan. 7520 rate, which the IRS 1, 2013, the exemption uses in valuing annuities, reverts to $1 million, life interests or interests with a maximum tax rate for terms of years and of 55%. For Congress, the remainder or reversionary RADD RIEBE lure of a 55% tax rate is interests, is at the lowest that it produces $550,000 it has even been. (See chart in taxes for every $1 million at right). above the exemption. While favorable conditions exist for tax-efficient estate planning, these conditions may not remain. It is unknown when the window of opportunity slams shut.
It appears there is only one way rates can go in 2013 — up. The likely shelf life of low interest rates corresponds with the scheduled expiration of the $5 million exemption.
Grantor retained annuity trusts (GRAT) Legislation is ready to go to require a minimum 10-year term for a GRAT. The anticipated benefit of a
GRAT is to outlive the term so that the remainder passes outside the grantor’s estate. There is greater mortality risk in a 10-year term GRAT that makes realizing the potential benefits from the GRAT less probable. Congress may pull the GRAT legislation at any time and attach it to a bill whenever a revenue raiser offset is needed. The combination of the low 7520 rate and the specter of this legislation showing up in a bill in the near future presents a compelling reason to establish a GRAT today.
Tax rates
Your legacy can truly make a difference.
A substantial increase in estate and gift tax rates is already locked in for 2013, unless Congress acts. In all likelihood, Congress will not be concerned with estate and gift rates until after the November 2012 presidential election. It will be a brave individual who waits until then to find out whether 2013 will be a good or bad estate tax year.
Valuation discounts The Joint Select Committee on
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Deficit Reduction will make a recommendation by Nov. 23 to deal with future deficits. The Obama administration has proposals to curtail valuation discounts in family-controlled businesses for transfers among family members. Restricting valuation discounts is one area that may be viewed as a loophole closing rather than a rise in taxes.
Estate planning advantages today Interest rates are low, two-year GRATs are valid, valuation discounts are available, the top gift and estate rate is 35%, and the exemption amount is $5 million. It is difficult to foresee when an opportunity to transfer assets to loved ones will be as favorable as it is now. ■
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.
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TRENDS
Another brief reprieve: the ‘new normal’ for transfer taxes? By LINDA M. OLEJKO
■ NINE YEARS This is how long Congress went unable to draft a long-term resolution for estate and gift taxes. The 2001 tax reductions provided for a complete repeal of estate tax in 2010, but a full reinstatement of higher taxes in 2011. Higher taxes largely were postponed for two years by the 2010 Tax Act, which provides quite generous provisions that each of us should now apply to our best advantage.
Families who can make large gifts should do so as soon as possible. However, is it prudent to relinquish cash flow and security? Most fundamental is the need to understand the actual cash flow and level of assets you require to sustain your lifestyle and, importantly, your peace of mind. Glenmede’s approach is to develop, with you, a balance sheet and cash flow statement that projects your big picture and shows how your assets can fulfill your needs and your tax efficiency objectives.
■ GENERATION SKIPPING The $5 million gift tax exemption also applies to gifts to grandchildren and more ■ PLANNING FOR 2013 AND BEYOND LINDA OLEJKO remote descendants. This is a particularly If Congress stands still through 2013, we good time to create a gift in trust for these generations. will again have a 55% estate and gift tax on A “dynasty” trust can last through generations without all assets in excess of $1 million. This uncertainty additional estate tax. requires us to implement short-term responses that will not hamper or impede post-2012 ■ EFFICIENT MONETIZATION OF THIS BRIEF planning. REPRIEVE Many factors important to financial planning will ■ REVISIT YOUR ESTATE PLAN continue to remain uncertain. We can, however, Questions worth posing: Under current law, work with the facts we have to help clients craft an would your current plan leave your spouse without optimal gifting and estate plan that considers their adequate resources? Do other provisions in your unique personal needs and wealth objectives in this estate plan divide property based on amounts climate of evolving legislation. defined by the tax consequences? ■ MAKE GIFTS Each of us has the ability to pass along $5 million free of estate and gift tax through Dec. 31, 2012.
Linda M. Olejko is vice president, business development for Glenmede. Contact her at (216) 514-7876 or Linda.olejko@glenmede.com.
2012 marks an important year in estate planning By JOHN PATRICK
T
he fundamental goal of estate planning is to protect individuals’ assets from potential losses. The primary drain on an estate is transfer taxes, comprised of gift taxes assessed on assets gifted during a person’s lifetime and estate taxes assessed on assets gifted upon death. The last 12 months have seen taxpayer-friendly progress in helping to avoid or minimize transfer taxes. The 2010 Tax Act allows each U.S. citizen to protect up to $5 million from federal transfer taxes through the 2012 calendar year and reduced transfer tax rates from 45% to 35%. The law also introduced the portability of a married person’s exclusion amount by allowing the estate of a surviving spouse to utilize any exclusion amount that was not used at the deceased spouse’s death. In June, the good news continued when Ohio enacted a law to repeal its estate tax for deaths after Dec. 31, 2012. There are no new federal or state laws that will apply on Jan. 1, 2012, to weaken the impact of these laws. However, 2012 is important under existing federal transfer tax rates since it expires Dec. 31, 2012. Without action,
those rates will revert to 2001 levels ($1 million exclusion and 55% maximum tax rate). President Obama’s fiscal year 2012 budget proposal includes features not as advantageous as the law he signed less than a year ago, but better than what existed in 2001. The proposal permanently restores the federal transfer tax laws to 2009 levels after the 2012 calendar year. Under the proposal, federal estate taxes will apply to assets valued over $3.5 million at a 45% rate. Each U.S. citizen will only be able to gift up to $1 million on top of the annual gift tax exclusion (currently $13,000 a year). The proposal limits dynasty trusts to a maximum term of 90 years, and imposes a minimum 10-year term for Grantor Retained Annuity Trusts, eliminating valuation discounts. Offsetting these setbacks, the proposal plans to make the portability feature of the 2010 Tax Act permanent. During these uncertain times, it is best to align yourself with a skilled professional who will help you make the best decisions for you and your estate. ■
John Patrick, Esq., is a shareholder with Reminger Co., LPA, Attorneys at Law. Contact him at (216) 430-2207 or jpatrick@reminger.com.
It’s not magic. It’s the right people. The key knowledge. The relevant experience. The best tools. Put together with precision, passion and integrity. Calfee’s team of estate and trust attorneys can help you develop an estate plan that is tailored to your circumstances and goals. We have comprehensive experience that includes estate and trust planning and administration, business succession planning, asset protection planning and charitable gift planning.
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Cleveland | Columbus | Cincinnati Crain’s Cleveland Business Custom Publishing
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TRENDS
Ohio estate tax repeal effect yet to be seen
Best time for gifts? There’s no time like the present sunset at the end of 2012, and again we are faced with the possibility of or individuals who reverting to the lower are inclined to exemption and higher include a lifetime rates that were in place in gifting program to 2001. Many consider now children and grandchilthrough the end of 2012 dren as part of their estate as a window of opportuplanning strategy, quesJOSEPH nity to make significant tions abound. What to MENTREK gifts in case lawmakers give? How to give? How scale back the exemption. much to give? Who should beneAnd while I would like to credit fit? With the continuing uncerour legislators for creating this tainty in federal estate, gift and window of opportunity, in reality generation skipping tax laws, the the fundamental core of any question of when to give poses an gifting strategy is designed to additional challenge. remove value and future appreciaChanges in federal tax laws that tion from the taxable estate of the occurred near the end of 2010 donor. increased and unified the lifetime So the sooner one is able to estate, gift and generation skipmake a gift, the better, because the ping tax exemption at $5 million, mere passage of time and the decreased the maximum tax rate power of compounding value are to 35% and added the ability of a the factors most likely to make married couple to effectively share any gifting strategy effective. The their combined estate tax exempfact that we are in a low point in tion amount through a concept the valuation cycles of closely known as portability. held business, real estate and These changes are scheduled to
By JOSEPH M. MENTREK
following Ohio’s lead. Vermont increased its exemption from $2 n June 30, Gov. John million to $2.75 million, and Kasich signed the law North Carolina and Delaware that repealed the Ohio increased their exemptions to estate tax for those who $5 million to match the federal die on or after Jan. 1, 2013. The estate tax exemption. legislation was included as part of However, other states are the Ohio budget bill. taking the opposite approach. The Ohio estate tax has been Looking to increase revenues around since 1968, generating during these challenging economic $333.8 million in fiscal year times, they are imposing new and 2009. Twenty percent of higher estate taxes. Illithe estate tax was distribnois revised its estate tax, uted to the state general effective Jan. 1, 2011, revenue fund, and 80% taxing estates exceeding was distributed to the $2 million and with a top local government where rate of 16%. Connecticut the decedent resided. lowered its exemption However, the tax profrom $3.5 million to $2 duces less than 1% of million per estate. total annual revenues for JOSEPH Gov. Kasich believes KOVALCHECK JR. excess state taxes are a Ohio cities, villages and townships. Additionally, major reason that capital, because proceeds go to the locality businesses and jobs have fled where the decedent resided, it was Ohio in recent years. Many felt that wealthy jurisdictions believe the elimination of the received a disproportionate share estate tax will help stop the exodus of estate tax revenues. No estate of Ohio residents who have fled tax revenues go to Ohio’s schools. to Florida or one of the other 27 Before the repeal, Ohio was states without an estate tax, and one of 22 states that had estate with luck, will attract new resiand/or inheritance taxes. Among dents and their businesses. ■estate tax states, Ohio had the lowest exemption amount, just Joseph P. Kovalcheck Jr., CPA, is prin$338,333, but also had the lowest cipal with M+N Advisory Services LLC. top rate at 7%. Some states are Contact him at (216) 363-0100. By JOSEPH P. KOVALCHECK JR.
F
O other investment assets makes potential results more attractive. Add to that the leverage that can be achieved from more sophisticated techniques and historically low interest rates, and the opportunity increases exponentially. So whether your motivation is high exemption amounts, low asset values or low interest rates, whatever gifting strategy you choose to pursue, the sooner you act, the greater the potential benefits to you and your family. â–
Joseph M. Mentrek, J.D., is vice president, Meaden & Moore, Ltd. Contact him at (216) 928-5343.
Dad’s my hero. He can fix everything from hot water tanks to BB guns. My son has the only two-story tree fort in the neighborhood thanks to him. He’s my go-to guy. Ask him about the big Cleveland game in ` 64, stocks, deep frying turkeys-he knows it all. But he doesn’t get around like he used to. He’s getting older and he can’t fix that. Wonder what he wants for the future? How do I bring it up?
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NOVEMBER 14 - 20, 2011
S-9
TRENDS
TAKE THE HIGH ROAD The current federal exemption from estate taxes is $5 million per citizen taxpayer. Left untouched that exemption will expire on Dec. 31, 2012. ■ WHAT MAY HAPPEN? The $5 million exemption and the rate of 35% could be made permanent. The Obama administration has
preferred a return to the 2009 exemption of $3.5 million and a maximum rate of 45%. ■ GIVEN THE UNCERTAINTY, WHAT’S BEST FOR ME? People still will want to preserve the maximum amount of their estate for the heirs. Even if there is no estate tax, the more personal reasons for estate planning will exist.
Despite uncertainty, proper estate planning still will be compelling issue in 2013 perhaps lineal descendants. The current federal exemption istorically, much of the from estate taxes is $5 million per estate planning that has citizen taxpayer. Left untouched, been done has been to that exemption will expire on Dec. the drumbeat of estate 31, 2012. One camp wants the $5 tax savings. The potential tax million exemption and the maxisavings versus the cost of estabmum rate of 35% to be made lishing the plan was often very permanent. President Obama has compelling. For all of that, preferred a return to the in modern tax history 2009 exemption of $3.5 there has not been a time million and a maximum when more than 2% to rate of 45%. There are too 3% of estates in this many variables involved country were actually taxto predict the outcome, able. For the 97-plus% of but it is reasonable to the population for whom assume we will have some taxes were not a real issue, sort of estate tax. JIM ROSEMAN the planning was done for In 2013, individuals the protection of self and family. still will be interested in protecting In 2011, a typical estate plan themselves and others in the will have five major documents: event of illness or infirmity, pro■ A revocable living trust tecting minor lineal descendants ■ A durable financial power of beyond the age of 18, and preattorney serving the maximum amount of ■ A durable health care power their estate among other things. of attorney Some voices in the estate plan■ A living will ning industry have prophesized ■ A last will and testament the end of the industry without The primary purpose of these major tax planning to drive it; documents is to govern the finanbut even if there is no estate tax, cial landscape of the individual the more personal reasons for for whom they are established. If estate planning will exist and properly established and funded, they will just be more visible they should preclude the necessity once again. ■ of having a guardian of the estate if the grantor becomes ill or Jim Roseman is vice president, senior infirm, and may avoid probate development officer for FirstMerit Bank. administration at death. Contact him at (216) 694-5686 or In addition, if appropriate, the James.Roseman@FirstMerit.com. Firsttrust may set aside assets in a way Merit Bank, N.A. and its representatives that first garners the maximum do not provide legal or tax advice. Indiavailable estate tax exemptions for viduals should consult their personal lethe grantor’s estate and avoids future gal/tax adviser(s) before making taxation in the estates of spouses and legal/tax related decisions.
By JIM ROSEMAN
H
Portability comes with a catch only to the last deceased spouse of an individual. Therefore, if a widow remarries and her most recent n Dec. 17, 2010, the Tax spouse also dies first, she is limited Relief, Unemployment to the new spouse’s unused Insurance Reauthorizaexemption amount, even if it is tion, and Job Creation lower than the amount remaining Act of 2010 became law. The new from the first spouse. law raised the federal estate tax Furthermore, the law exclusion amount to $5 expires on Dec. 31, 2012. million (reduced by taxUnless the benefits are able gifts made during extended, portability will lifetime) for individuals no longer be available who die in 2011 or 2012. after 2012. Surviving In the past, without proper spouses and heirs relying planning, a decedent on the tax benefits of either used the exclusion portability may be disapor lost it. STEVEN COX pointed if those benefits Now, for the first time, the unused portion of a decedent’s are later disallowed. While many expect that portability will be exclusion amount can be passed renewed, there is no guarantee. to his or her surviving spouse to Moreover, portability does not increase the amount available at cover other taxes like the generathe survivor’s death. This “portation-skipping transfer tax imposed bility” of the exclusion between on gifts to grandchildren and spouses can provide a substantial the estate tax imposed at the state tax break to widows and widowers. level. However, portability may not be Portability is not automatic. In as good as it seems. The rules order for a surviving spouse to use governing portability contain siga deceased spouse’s exclusion nificant limitations. amount, an election must be For example, portability applies
By STEVEN COX
O
made by the executor of the deceased spouse’s estate on a timely filed federal estate tax return. In many cases, a return would be otherwise unnecessary because the deceased spouse’s gross estate is less than the exclusion amount. Under the new rules, even small estates must file a return if they want to preserve any unused exemption. Because surviving spouses can acquire unanticipated wealth, every executor should consider filing an estate tax return when the exclusion amount was not fully used. Of course, the preparation of a federal estate tax return often requires the payment of professional fees and the cost of appraisals. While many couples may be tempted to rely on portability as a substitute for more traditional planning methods, the associated limitations, risks and hidden costs may outweigh portability’s apparent benefits. ■
Steven St. L. Cox is a partner with Roetzel & Andress. Contact him at (330) 849-6714 or scox@ralaw.com.
Building wealth takes time, hard work, and dedication. That’s also our approach to managing it. Let’s get to know each other. Wealth doesn’t happen overnight. Our team of experts is here to listen, learn about your needs, and then—and only then—advise. We strongly believe that only when we know where you’ve been, can we help you build for the future.
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IMPORTANT BUSINESS M AT T E R S TRUSTED ADVISORS TO INDIVIDUALS AND BUSINESSES ON MATTERS INVOLVING: Estate and Trust Administration Estate Planning Succession Planning
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Business owners looking for sale can benefit from charitable giving sales. Planners must consider: ■The donor’s effective tax usiness owners anticipating rates in the year of an anticipated sale, and in the preceding and a sale often wish to satisfy succeeding years; charitable objec■Whether an intended tives using part of charity is a public charity their new liquidity. The or private foundation; tax code rewards generosity ■Whether the busifor donors who plan ness being sold is a C corahead. poration, S corporation, The tax savings from a partnership or LLC; and, charitable contribution ■Whether the busidepends on the donor’s ness will sell assets and effective tax rate, the type PETER IGEL liquidate, or whether it of business interest and will sell equity. the type of charity. Gifts of stock Presale gifts to charity tend to made ahead of a potential sale work best when C corporation allow a double benefit of claiming stock is contributed to public a contribution deduction and also charities, and when a donor has avoiding reporting gain on the some ordinary income to be sale. Charities are tax-exempt on offset by the charitable deducmost income, but could report tion. “unrelated business income� on If a donor anticipates signifiS corporation stock sales or on cant capital gains, contributions passed-through income from asset
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Proprietors should consider employee stock ownership By MICHAEL MATILE
T > Estate and Business Planning > Estate and Trust Administration > Business Law > Life Care Planning/Elder Law
might be better in the year before or after a sale, so that the charitable deduction will shelter income taxed at higher ordinary income rates. Post-sale gifts are usually advisable when a donor holds S corporation, partnership or LLC interests because charities could incur significant unrelated business income in sale transactions. Thus, most sellers of pass-through entities participate in the sale and contribute sale proceeds later. Professional planning, early in the process, can guide a business owner through the thicket of issues to create a win-win result for the owners and their favorite charities. â–
here are a number of estate planning considerations for business owners thinking of selling their firms, and among the options are employee stock ownership plans (ESOPs), which can offer a number of benefits. An ESOP is a transition alternative for business owners to create personal liquidity and share ownership with their employees. Frequently thought of only as a succession planning solution, an ESOP also may deliver effective estate planning benefits before and, uniquely, after an ESOP transaction. For business owners who sell less than 100% of their stock to an ESOP, the time immediately following the transaction provides an opportunity to gift shares they still own at a reduced value due to the increased debt and temporary reduction in the company’s equity created as a result of the transaction. Depending upon the circumstances, some sellers may be able to defer capital gains taxes on the proceeds from the sale to the ESOP. The owners must reinvest
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their proceeds within a year into qualified replacement property (QRP), which is defined in the Internal Revenue Code. And if owners hold the QRP until death, it escapes income taxation during their lifetime and also provides their heirs a stepped-up tax basis in the property upon death. Owners who wish to be charitable with their estate plans also may be able to transfer QRP to a charitable remainder trust without it being considered a disposition that would trigger gain. The trust does not pay tax when it disposes of the QRP, deferring the tax until the donor receives payments from the trust. Likewise, QRP holders may be able to transfer it to a grantorretained annuity trust (GRAT) without triggering gain as a disposition. All in all, this may be the best time for business owners tackling estate and ownership-transition issues to consider an ESOP. â–
Michael Matile is a senior wealth planner for PNC Wealth Management. Contact him at (216) 222-5885. PNC Bank does not provide legal, tax or accounting advice.
20111114-NEWS--27-NAT-CCI-CL_--
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NOVEMBER 14 - 20, 2011
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BUSINESS ESTATE PLANNING
Low rates a boon for business succession By DEVIANI KUHAR
T
he increase in the exclusion from the estate, gift and generation-skipping transfer tax both during lifetime and at death to $5 million (which will be adjusted for inflation to $5.12 million in 2012) has been the most noteworthy development for those assisting closely held business owners to transition businesses to the next generation. Close behind the rise in the exclusion amount are historically low Section 7520 rates and applicable federal rates (AFRs). This month, the long-term AFR (for intrafamily loans in excess of nine years) will fall to an all-time low of 2.67%. This astonishingly low rate could have profound implications for families who
want to pass their closely held businesses on to younger generations, but whose businesses pro-
Consider overlooked asset protection opportunities
duce relatively modest annual cash flows. Grantor retained annuity trusts (GRATs) and installment sales using mid-term debt have long been favored methods of transferring family business interests
the loan is treated as a taxable gift. A BOT avoids both these problems. â– MANAGEMENT INCENTIVE PLAN (MIP). A MIP is much more than just a simple deferred compensation plan or bonus plan. It can help protect your business assets from creditors, even from bankruptcy. MIPs provide almost all the benefits of an ESOP, with lower administrative costs. MIPs let you reward specific employees (i.e. discriminate in their favor). Conversely, if an employee leaves or engages in prohibited behavior, you do not have to pay them. This technique allows back-end bonuses to be taxed as capital gains and in some cases, not taxed at all. Finally, if your heirs happen to be key employees, you can include them and not pay gift taxes. The above are proven techniques that have stood the test of time and have been vetted by both the IRS and the courts. In this economy, in which business owners are looking for a competitive advantage, these techniques may be a good start. â–
By STUART M. HORWITZ
I
n today’s competitive business environment, companies are looking for ways to streamline their operations and save money. Consider implementing certain business planning techniques that will offer asset protection while also saving you income taxes and help with your estate plan. ■BUSINESS OPPORTUNITY TRUST (BOT). A BOT is effective when you want to help a child or friend start a business. Since most ventures take time to mature, losses may occur initially. You would be able to use these initial losses on your own income tax return. If the venture is sued, you have two layers of asset protection — the entity and the trust. If the venture eventually becomes wildly successful, your child/friend receives the lion’s share of the appreciation, while you receive a nice return. With a BOT, you avoid all of the problems inherent with a loan. If you loan your child/friend funds to start a business and it fails, your child/friend receives all the losses (which they cannot really use since they have no income). What’s worse, if a venture fails you will not sue for the money so
to younger generations. But if annual, pre-tax cash flows amounted to less than 10% of the transfer tax value of the interest being transferred or sold, a family could not engage in these types of leveraged transfers without owners having to receive back some of their interests (in the case of a GRAT) or face the uncertain prospect of renegotiating the note sometime in the future (in the case of an installment sale). A sale using long-term debt (more than nine years) was possible, but the rate typically was unfavorable. Long-term GRATs usually would offer a more favorable interest rate than the longterm AFR, but the estate tax on potentially the full value of the transferred business interest if the grantor dies during the annuity term of the trust caused most planners to steer away from them. But the landscape has changed
with the long-term AFR about to drop. For example, a business interest that generates 7.67% of pre-tax cash flow per year could be completely out of the first generation’s estate in 20 years if an installment sale of that interest were initiated in November 2011. If the business interest can be discounted by 25% for lack of marketability or lack of control, the required cash flow would need to be only 5.75%, on a pre-discounted basis, to complete the transaction within 20 years. This development could have a profound effect on families that want to engage in succession planning. But they need to act quickly. Long-term Treasury yields will rise again, and with them, the long-term AFR will increase as well. â–
Deviani Kuhar is a partner and chair of the Estate Planning and Probate Department at Benesch, Friedlander, Coplan & Aronoff LLP. Contact her at dkuhar@beneschlaw.com or (216) 363-4469.
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Stuart M. Horwitz is managing member of The Horwitz Group, LLC. Contact him at (330) 670-5300 or e-mail stu@thglawfirm.com.
Congratulations to
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Gary A. Zwick
‡ $ODQ ' *URVV ‡ 0DWWKHZ $ .DOLII ‡ -DQHW 6FKZDUW] 6KDSLUR DJURVV#MFIFOHYH RUJ PNDOLII#MFIFOHYH RUJ MVKDSLUR#MFIFOHYH RUJ
Walter & Haverfield, LLP on receiving the
2011 Distinguished Estate Planner Award from
THE ESTATE PLANNING COUNCIL OF CLEVELAND
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ESTATE PLANNING TACTICS
The ups and downs of a GST By DAVE GAINO
Y
ou’ve read about Generation Skipping Trusts (GST) in other sections of this publication. Sound exciting? It really is. Sound complex? It is, in fact, a very sophisticated but powerful planning opportunity. It’s critical to understand the true power of a GST before deciding whether it is right for you and your family. To start, we can examine the potential benefit of skipping estate tax at succeeding generations. The table at the right shows the benefit of a $5 million principal amount compounded at 3% growth per annum with no estate tax, compared to a 45% effective tax rate over five generations. The benefit is almost too good to believe. So why not skip? First, neither the grantor nor the spouse of the grantor can have discretionary access to the principal or income. So you must be sure you will not outlive your retained assets. Second, trust beneficiaries will
A generational skipping trust is a complex planning tool
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This table shows the benefit of a $5 million principal amount compounded at 3% growth per annum with no estate tax, compared with a 45% effective tax rate over five generations.
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CrainsCleveland.com/register be able to enjoy the income from the trust but never have complete access to the principal, so it is important to consider whether they have access to other capital for discretionary needs. The upside for the future beneficiaries is that the income enjoyed from trust assets will be geometri-
cally more from not having the principal depleted by estate tax every 30 years or so. In addition, estate planning to shelter trust assets from tax is done once, at the start of the trust. Future generations will not need to concern themselves with sheltering trust assets. With the power of the $5 million
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Live for today. Plan for tomorrow. For all the time and effort you’ve put into building your wealth, you deserve peace of mind in return. The kind that comes from knowing your assets are protected, your wealth will be distributed as you wish, and your future is as secure as you can make it.
Deviani M. Kuhar, Partner Chair, Estate Planning & Probate Practice Group Licensed to practice law in Ohio
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Have you considered how taxes will impact your wealth? Do you have a business succession plan in place? Are you sure that your assets have been aligned properly with your estate plan? Have you planned for charitable gifts…long-term care…incapacity? We can assist in these areas and help you manage your assets in ways that will minimize the probate administration process.
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GST exemption set to expire on Dec. 31, 2012, this tool should be thoroughly explored and understood while it is still available. ■
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Survivorship stand-by trust is a flexible choice By LARRY L. ROTHSTEIN
W
ith so much uncertainty, people are seeking estate tax solutions that can also provide lifetime benefits. A survivorship stand-by trust may be a good fit as it can provide estate tax liquidity, lifetime benefits and tax advantages. It is most appropriate for a married couple who may have an estate tax liability or other financial obligations. For a business owner, the insurance could “equalize” the inheritance for children not involved in the business. For families using a QPRT (qualified personal residence trust), the insurance could provide substantial funding for maintenance and taxes. There are many reasons to provide financial liquidity for children. In a survivorship stand-by trust, one spouse acts as the applicant and owner of a survivorship life insurance policy. A survivorship life insurance policy insures two individuals and pays a death benefit at the second death. Since one of the insureds is the owner, there is no gift or annual exclusion needed. The owner has complete control over the cash values of the policy during the lifetime. Policy cash values grow tax-deferred and may also be an alternative source of funds in retirement if it is later determined that death proceeds are not necessary. A “stand-by trust” is named as the contingent owner of the policy. The trust language and naming of beneficiaries may be changed at any time during the owner’s lifetime since it will not
Crain’s Cleveland Business Custom Publishing
become irrevocable until the owner’s death. Upon the owner’s death, the policy automatically transfers to the trust as the contingent owner. The cash value will be included in the owner’s taxable estate, and it is assumed that lifetime exemption will be used to offset any tax due. Upon the death of the surviving spouse, the proceeds will pass to the beneficiaries free of any income or estate tax. If a non-owner spouse dies first, the surviving owner needs to gift the policy directly to a trust. This gift again would require the use of a portion of lifetime exemption. Since the owner is an insured on the policy, this would also trigger the 3-Year Rule. As long as the owner survives three years of more, the proceeds then would pass income and estate tax free to the beneficiaries. The survivorship stand-by trust provides substantial flexibility for families seeking to have their cake and eat it too. It provides a structure to eventually provide tax-free death proceeds to the heirs and it also provides access to policy cash values on a tax-advantaged basis during a lifetime. This approach avoids the use of any annual exclusion gifts and postpones the use of lifetime exemptions until a first death. All and all, the survivorship stand-by trust is an attractive approach, creating flexibility and an ability to deal with an uncertain future. ■
Larry L. Rothstein, CLU, is co-founder of Insurance Management Consultants, LLC. Contact him (440) 801-1800 or visit www.imcwealth.com.
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ESTATE PLANNING TACTICS
Keeping it all in the family: bloodline dynasty trusts 2 By ROBIN ROSE STILLER
A
n article about bloodline dynasty trusts might evoke thoughts of the trials and travails of the 1980s “Dynasty” television family, the Carringtons. This fictitious family spent considerable time and effort to ensure that “outsiders” did not gain access to the family’s considerable Grandma wealth. An indispensible tool to accomplish this asset proSon tection goal is a bloodline Granddynasty trust. child “Dynasty” means power and influence extending over many years. A bloodline dynasty trust does exactly that. It is an estate planning vehicle that provides a set of instructions to administer and
distribute assets over multiple generations for the benefit of only those in the family bloodline. Precisely who is counted in the bloodline is dictated by those creating the trust. Some families include in-laws and domestic partners in the bloodline, while others exclude even legally adopted children. There are three Grandpa primary reasons that ter h ug clients Da wish to create a trust Grandthat will child endure for several generations:
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To protect and preserve the family assets from those who would dissipate them, including creditors and former spouses of beneficiaries;
To create incentives that encourage particular behaviors and that develop and nurture family values and relationships while discouraging negative behaviors; and
3
To achieve significant transfer tax savings.
Retaining the assets in a bloodline dynasty trust protects beneficiaries in a variety of situations, for example, those who are in danger of being sued due to their high-risk professions, those who own their own businesses, those who go through a divorce or a bankruptcy, and those who make irresponsible investment decisions or who spend foolishly. Drafting flexibility and discretion into the document will allow the trust to continue until the assets are exhausted or the last of the bloodline descendants has died ... truly an ending fitting a Carrington. ■
Robin Rose Stiller, Esq., is an OSBAcertified specialist in estate planning, trust and probate law with Smith and Condeni LLP. Contact her at (216) 771-1760 or Robin@Smith-Condeni.com.
Roth IRA may be right for you Converting from a traditional IRA can be beneficial By MICHAEL G. RILEY
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oth IRAs can be a very effective part of a retirement plan. Every case should be analyzed separately, but converting a portion of qualified retirement savings to a Roth IRA adds flexibility and a hedge against income tax increases. When a retirement account such as a traditional IRA is converted into a Roth IRA, income tax must be paid on the converted amount. Properly handled, the converted amount will provide tax-free earnings and distributions throughout retirement and beyond. There are also potential estate planning benefits to Roth IRAs. For example, Roth IRAs are not subject to the lifetime minimum distribution rules that require retirement accounts to be distributed during retirement, generally starting for the year in which age 70½ is attained. Distributions are required to be made at death to the beneficiaries,
but with good planning these distributions can be stretched over many years. In many estates, retirement benefits make up the majority of the family’s wealth. In these cases, it is sometimes necessary to pay the retirement benefits to the credit shelter or family trust to capture the benefit of the estate tax exclusion in the account owner’s estate, but this is not an optimal income tax or estate tax result. Portability of the exclusion amount might alleviate this problem, but portability may not last beyond 2012.
Donald Hopkins LLC. Contact him at (216) 348-5400 or mriley@mcdonaldhopkins.com.
Roth IRAs can be a much more efficient source for funding credit shelter trusts after death because the credit shelter trust will not be depleted by income tax on qualified Roth distributions. Roth IRAs can deliver meaningful benefits for retirement and to estate beneficiaries, but there are many competing considerations, so timely planning is needed. Ask your tax adviser and estate planning attorney if a Roth IRA conversion is right for you. ■
Michael G. Riley is a member in the Estate Planning & Probate Department at Mc-
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Estate planning for remarried, unmarried, same-sex couples
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The verdict is in. 5 Best Lawyers : ®
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enerally, most couples, whether traditional or non-traditional, have similar basic estate planning goals, which are to reduce estate taxes, avoid probate and make sure their assets go to their intended beneficiaries.
use a first marriage distribution plan. They execute simple wills that leave everything to each other and then to their joint children. The flaw in this plan is that there is usually nothing to prevent the surviving spouse from executing a new will that leaves everything only to his or her children.
■ OPPOSITE-SEX ■ MARRIED COUPLES COUPLES WHO CHOOSE WITHOUT CHILDREN NOT TO MARRY Most individuals die Older couples may not MISSIA without drafting even a want to risk their assets VASELANEY simple will. Consequently, should the other spouse states had to enact laws to govern enter a nursing home. A prenuptial the distribution of these individcannot prevent a spouse’s assets uals’ property. Intestate succesfrom being subject to health care sion statutes vary by state. In costs. They also may not want to Ohio, a married individual’s lose Social Security or other benefits property will pass 100% to the surthat may result should they remarry. viving spouse if there are no children, so “he who lives longest ■ SAME SEX COUPLES wins” (or actually his side of the Many same-sex couples feel family wins). the disadvantages they suffer under the law are the direct result ■ REMARRIED COUPLES of their same-sex status. However, Many remarried couples try to the lack of rights and privileges is
not derived from their same-sex couple status as much as it is from the fact that they are unmarried. In most states, same-sex couples are prevented from marrying, and thus tax benefits and priority rights do not exist. Even if a state allows marriage, it will not be recognized for most federal law purposes. Adult adoption is used by some same-sex couples as an estate planning tool. One partner may adopt the other, thereby making the adoptee an heir-at-law of the adopting partner. Such adoption is irrevocable. The issues above are a small sampling of concerns that different types of couples may face as they contemplate marriage, their future and the intended distribution of their assets. An estate planning attorney should be contacted to help chart the proper course. ■
Missia H. Vaselaney is a partner with Taft Stettinius & Hollister LLP. Contact her at (216) 706-3956 or mvaselaney@taftlaw.com.
Jeffrey P. Consolo
Take care when choosing trustees
Chair, Estate Planning and Probate
Brian J. Jereb Bernard L. Karr Michael G. Riley Roger L. Shumaker
By TINA MYERS
All of our Cleveland Estate Planning members have earned the Best Lawyers® distinction.
McDonald Hopkins LLC 600 Superior Avenue East, Suite 2100, Cleveland, OH 44114 216.348.5400
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President
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Chicago • Cleveland • Columbus • Detroit • Miami • West Palm Beach www.mcdonaldhopkins.com
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hen creating a trust, choosing a trustee is often not given the careful consideration it should. This decision cannot be made under pressure, when you’re sitting across the table from the drafting attorney. One’s first instinct is normally to name a family member, relative, close friend or business colleague. However, there are many factors to consider when choosing the most appropriate individual trustee. There also are times when using co-trustees or a professional trustee may better protect the trust’s integrity. When choosing an individual trustee, consider the individual’s ability to make financial decisions, to understand and follow the trust instrument, and to accept fiduciary liability. An individual trustee’s financial ability doesn’t require investment experience, but the person must be familiar with the Prudent Investor Rule in the state and should be able to make prudent
financial decisions. The lacking in any of these individual trustee is often characteristics, then given the ability to hire naming co-trustees could professional investment be an effective way to advisers, but cannot balance the lack of skill. blindly rely on the advice But, be careful since this they provide. The trustee would require “co-responwill have the ultimate resibility” in managing the sponsibility and should trust. If one trustee TINA MYERS conduct adequate due doesn’t uphold his fair diligence in selecting professional share of the responsibility, the advisers. other co-trustee must make up An individual trustee should for the shortfall. also understand the underlying There are many benefits of legal concepts. This will require utilizing a professional trustee some knowledge of the applicable that an individual trustee cannot state’s governing trust law. If the provide. Among these are trust individual doesn’t have the reqcommittee oversight, manageuisite understanding of the ment policies to assure trustee legal issues, they should recogcompliance, longevity and the nize when they need to seek the ability to make good on losses in counsel of an attorney. case of a breach of fiduciary duty. Does the individual trustee Choosing the right trustee is not understand the concept of fiduan easy decision. But failing to ciary liability and that this entails select the correct trustee can personal liability? Will the benethwart the whole purpose of a ficiaries be able to recover damages well-drafted trust. ■ from the trustee, personally? Not Tina Myers, CPA, is tax manager for likely, unless that individual Zinner & Co. LLP. Contact her at trustee is wealthy or has the (216) 831-0733 Ext. 108 or appropriate insurance coverage. tmyers@zinnerco.com. If the candidate for trustee is
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ESTATE PLANNING TACTICS
Do you have someone Special needs trusts protect the future can help relying on you for care? Tool stretch resources
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Everyone should have a living f you are a caregiver, you are will and a durable power of attornot alone. According to a 2009 ney for health care. Make copies study, “more than 65 million of these documents to distribute people, 29% of the U.S. poputo attorneys, financial planners, lation, provide care for a chronifriends and relatives. Visit our cally ill, disabled or aged family website www.hospicewr.org for member or friend during any copies of these documents. given year.” At Hospice of the Have you helped your loved Western Reserve, not only do we one review his or her will lately? provide exceptional services to Wills should be each of our serireviewed after As a caregiver, you ously ill patients, every life milewe also assist can help your loved stone. Help them their caregivers. one create an estate check insurance Caregivers policies and often struggle plan. investments to to manage jobs, ensure that the school, children and a beneficiaries chosen years ago are myriad of other responsibilities, still appropriate — beneficiaries along with the stresses associated can be changed, without cost, at with caregiving. While providing any time. for the physical, social and spiriAs part of our extraordinary tual needs of their loved one is continuum of care, Hospice of the consuming, caregivers should not Western Reserve offers patients and forget to also help make health families access to a team of volcare, financial and legal plans unteer attorneys. These dedicated that will reduce future stress. individuals help families prepare More than 60% of Americans these vital documents, confidenbelieve that our loved ones will tially and free of charge. ■ meet our end-of-life wishes. However, fewer than 20% actually have For more information about Hospice of discussed their wishes with anythe Western Reserve services, call (800) one. As a caregiver, you can help 707-8921. To download a copy of our your loved one create an estate caregiver guide, A Companion Guide plan that includes end-of-life When Facing a Serious Illness, visit choices about health care as well www.hospicewr.org. as financial considerations.
PRACTICAL AND EFFICIENT SOLUTIONS TO ACHIEVE YOUR FAMILY AND BUSINESS OBJECTIVES ESTATE PLANNING | CHARITABLE GIVING TRUST & PROBATE ADMINISTRATION BUSINESS SUCCESSION PLANNING ASSET PROTECTION PLANNING PROBATE LITIGATION
GARY L. DINNER, CHAIR BRENT E. CULHANE ROBERT S. FROST ERICA E. MCGREGOR SUSAN L. RACEY RENNIE C. RUTMAN JEFFRY L. WEILER
216.696.2758 216.696.5865 216.696.3289 216.696.4224 216.696.3651 216.696.4749 216.696.5044
for beneficiaries By DAVID MYERS
A
Special Needs Trust (SNT), sometimes called a “supplemental needs trust,” is a generic term for a trust designed to supplement the means-tested government benefits of a beneficiary with a disability. By maintaining eligibility for cash income and health insurance, a family may stretch its collective resources to care for the individual with disabilities over time. What would prompt someone to establish a SNT? See if you recognize your client: ■ A father is planning his estate and you discover he has a 9-year old with cerebral palsy or a 22year old who is bipolar; ■ a successful plaintiff in a personal injury action has a permanent disability and will lose his employer-
provided health insurance; ■ a spouse or child in a divorce case has multiple sclerosis or severe attention-deficit/hyperactivity disorder (ADHD), and support payments will reduce his or her SSI; ■ an aged or disabled widow is trying to become eligible for Medicaid. Not all benefits are “meanstested.” Medicaid and SSI are, but Medicare and Social Security disability or retirement are not. SNTs can be inter vivos or
testamentary, stand-alone or part of a will or trust. They may be funded with the disabled individual’s money (so-called “d4A” trusts or “Medicaid Payback Trusts” or the local CFMF Pooled Trust). At his or her death, any remaining funds go to reimburse the state. A third-party SNT is typically set up by a parent or grandparent to hold a disabled beneficiary’s share of the estate. Properly done, there is no repayment to the state when the beneficiary dies. Finding the right Special Needs Trust can preserve government benefits so that the beneficiary experiences a net gain and the funds (whether his own or from another person) make a real difference in life, instead of simply relieving the government of its responsibility to pay benefits. ■
David Myers is a principal with Hickman & Lowder Co., LPA, with offices in Cleveland and Sheffield Village. For more information on estate planning for individuals with disabilities, visit Hickman-Lowder.com.
Philanthropy: Shaping the Future of Medicine For 90 years, philanthropy has helped make Cleveland Clinic a world leader in healthcare. 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.
To speak with a member of Cleveland Clinic’s gift planning team, call 216.444.1245, visit clevelandclinic.org/giving or email giftplanning@ccf.org. Same-day appointments available.
1150 HUNTINGTON BUILDING | 925 EUCLID AVENUE CLEVELAND, OHIO 44115-1414 PHONE 216.592.5000 | FACSIMILE 216.592.5009 WWW.TUCKERELLIS.COM
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Settlor’s trusts are relevant with or without estate tax By RENNIE RUTMAN
One firm. Many ways to help preserve your estate. John Patrick
Estate Planning Attorney
Akron Cincinnati Cleveland Columbus Sandusky Toledo Youngstown Ft. Mitchell Lexington Louisville
Reminger has decades of experience in providing estate planning advice designed to help our clients preserve their assets and attain their personal and family goals. Likewise, we are able to provide minimization of the income, gift, estate, and generationskipping taxes associated with the lifetime transfer of wealth. Contact Estate Planning attorney John Patrick for more information.
216.687.1311 Reminger.com
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ow that the federal estate tax exemption is $5 million and the Ohio estate tax exemption, currently $338,333, is scheduled for repeal in 2013, those with net estates valued at less than $5 million may wonder whether there is any real reason to utilize trusts in their estate plans. In many situations, there continues to be compelling nonestate-tax-related reasons for including a typical revocable trust in one’s estate plan. Such reasons include: ■ Assets that are in the settlor’s trust at his death generally can pass to the settlor’s beneficiaries free from attachment by the settlor’s creditors. This creditor protection is not available for inheritances passing to beneficiaries by last will and testament. ■ Assets that are in the settlor’s trust during his incapacity usually can be privately managed by a successor trustee (of the settlor’s choosing) without requiring probate court involvement. Assets owned individually during incapacity often must be the subject of a probate court guardianship
Results. Period.
proceeding. Similarly, assets that are in the settlor’s trust at his death usually can be privately administered and/or managed for the settlor’s beneficiaries with no need to involve a probate court. Assets owned individually when one dies and that pass via last will and testament to beneficiaries often must become the subject of probate court proceedings. Probate proceedings, which are often costly and time consuming, necessitate the reporting of a great deal of personal information (including information concerning the incapacitated/ deceased person, his family, his named beneficiaries, his assets and his liabilities), which becomes part of the public record. The use of a trust can avoid most, if not all, of these disadvantages. ■ Assets that pass to beneficiaries through a last will and testament are generally subject to the beneficiaries’ creditors, including
divorcing spouses and judgment creditors. However, assets that pass to beneficiaries via a settlor’s trust generally can be used for the benefit of the beneficiaries while not exposing the assets to the claims of the beneficiaries’ creditors. ■ Assets that are payable through a last will and testament to a beneficiary who is not yet age 18 generally must be managed by a probate court-appointed guardian. When the beneficiary turns 18, the inheritance generally must be paid outright, in a lump sum, to the beneficiary — irrespective of whether the beneficiary has the financial savvy or life experience to effectively manage the inheritance. However, assets that are payable to a beneficiary through a settlor’s trust can be privately managed by a trustee. This avoids the need to have a guardian appointed if the beneficiary is not yet 18, and permits the settlor to delay the distribution of the inheritance to the beneficiary until whatever age the settlor deems appropriate. Suffice it to say that whether to use a trust in an estate plan is a decision that should be made after consideration of many factors, many of which are not tax related. ■
Rennie Rutman is an attorney at Tucker Ellis & West LLP. She is an Ohio state board certified specialist in estate planning, trust and probate law. Contact her at (216) 696-4749.
Collect digital asset information as part of the estate planning process By CRISTIN R. SNODGRASS
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.
Member FDIC. ¥® and Huntington® are federally registered service marks of Huntington Bancshares Incorporated. Huntington.® Welcome.™ is a service mark of Huntington Bancshares Incorporated. ©2011 Huntington Bancshares Incorporated.
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echnological advances in the last 30 years have dramatically impacted all areas of our lives. Practically everyone has gone digital, including the older generations, and so have their assets. Digital assets include assets and data someone owns, which are electronically created and stored on computers and the Internet. Digital assets may leave a paper trail or exist only electronically. Determining their existence and accessing them is the estate planner’s challenge in the event of a client’s death or incapacity. Tax returns, credit reports and account statements can help identify financial digital assets. Any device involved must be accessed first — whether it’s a smart phone, desktop, laptop or tablet — and access could be contingent upon the device’s ownership. Passwords may also pose a hurdle, including passwords to start a device and those used to access accounts, including email,
financial, social networking, e-commerce, and online data and media storage. While attempts can be made to access the accounts without a password, failed attempts can destroy or corrupt any information. A better route is engaging an electronic forensic specialist. To help avoid the digital hunt, collection of digital asset information and planning for fiduciary access to such information should be incorporated into the estate planning process. Clients can create a physical or electronic list of all accounts and passwords. The lists can be stored
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in a home safe, a safety deposit box or in a paid or personal electronic password summary account. It’s important to ensure, however, that someone else will have access to them through a specific designation when a bank or company is involved. If another password is needed to access the list, it can be kept with the original estate planning documents. The documents themselves should define digital assets, address fiduciary access to them during incapacity and after death, and direct their disposition. Issues related to digital assets are just beginning to surface. Estate planners who incorporate them in the discovery and drafting process for their clients now can help their clients’ families have an easier experience later. ■
Cristin R. Snodgrass, J.D., is a relationship manager for Key Private Bank. Contact her at (216) 828-7327 or Cristin_R_Snodgrass@Keybank.com.
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ESTATE PLANNING TACTICS
The Trusted Advisors' Choice for Donor Advised Funds
Selling your art and collectibles By JAMES CORCORAN
M
any clients who are downsizing their residences have works of fine and decorative art, furniture, antiques, books, jewelry, and sterling silver flat and hollow wear, etc. that they want to sell. Space considerations often are primary in making decisions to sell. Another consideration is that clients’ children and other heirs have no interest in the property and would prefer not to be burdened with it as an inheritance. A third reason for considering the sale of high value personal property is to become more liquid in the current economic environment.
In the course of my 35 years as a certified appraisal professional, I have become acquainted with the owners/managers of more than 80 reputable auction houses around the world. We have achieved notable success for clients by selecting the most appropriate and specialized auction house for the sale of each item of property brought to us. For example: ■ A pair of 1973 Israeli limited edition prints. Local auction estimate $400 to $600. Sold at an auction we selected for $7,700 net to client. ■ A French school of Paris (1960s) painting. Estimated locally at $2,000 to $3,000. Sold for $12,500 net to our client in an out-of-town auction. ■ A set of watercolors by a deceased California artist. Local estimate $1,000 to $1,200. Sold elsewhere for net $10,200 to our client. Neither my firm nor I personally has any conflict of interest in providing this highly valuable service. We never buy clients’ property. We merely direct the client to the best auction (or gallery) for the sale of their items at the highest price possible. We frequently handle the entire process from our receipt of the property: ■ Locating the best market
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True independence for your charitable estate planning. Open investment architecture. Expertise with non-publicly traded assests. Unlimited succession. American Endowment Foundation 1-888-440-4233 I www.AEFonline.org ■ Negotiating with the auction house ■ Insuring the property ■ Packing and shipping the property to the auction house
Supporting and Realizing Value
■ Insuring the property from the time we receive it until the time of final sale ■ Taking necessary legal steps to protect the client’s title to the work prior to the sale In a period when a wide variety of art, antiques and collectibles are coming to market, Corcoran Appraisal Group provides a valuable service to obtain the highest possible prices for the sale of client property. ■
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James Corcoran is a Harvard Law School graduate, and a certified member of the three National Personal Property Societies. Corcoran Appraisal Group has been active professionally for 35 years. Contact him at (216) 767-0770 or CorcoranAppraisals @gmail.com.
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Radd L. Riebe, JD, ASA
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CHARITABLE GIVING
Philanthropy as a family teaching tool By LAURA J. MALONE
F
or many families, the idea of being a “philanthropist” has been associated with the abundance of wealth. However, in the modern age of charitable vehicles like donoradvised funds and giving circles, everyday families can become philanthropists. Even more important is that they can use these vehicles to make philanthropy a family affair. Statistics show that roughly two-thirds of all wealth transfers fail. In many cases, these families got so concerned with protecting their financial capital that they neglect to focus on the values of the family that are typically expressed though social, human and intellectual capital. Philanthropy can make us feel good and create a positive effect on the world around us. However, most people underestimate how philanthropy can have the capacity to: ■ teach younger generations money and wealth management skills, decision making and responsibility for themselves and the global community. ■ become a conduit for conversations about wealth/money and
their meaning in the lives of all family members. ■ open deeper conversations about values and what matters most to individual members. ■ become a bridge/gift to the next generation to nurture their values and vision. ■ become the glue that holds a family together in good times and bad. Today’s charitable vehicles make it easier to prepare your family for wealth without exposing them to all of the wealth. They make it easier for parents to talk about the time, talent and treasure they share with charitable organizations and express why those organizations are important to you. Furthermore, they can support the cultivation of the rest of the family’s charitable interests. While it is better to begin these teachings early, we have seen through our donor-advised fund clients that it is possible at any age. The holidays can be a great time to start since family and giving naturally come together. ■
What do You value?
Estate Planning
Retirement Planning Tax Planning Business Succession Planning
Whether it’s retiring in comfort, educating your children or grandchildren or helping your loved ones, being able to live those values and fulfill your dreams lies in setting goals and carefully planning a course of action. Call 216.241.3272 to talk to a Meaden & Moore professional about protecting what you value.
Laura J. Malone is director of gift planning for the American Endowment Foundation. Contact her at 877-599-8903 or lauramalone@aefonline.org.
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CHARITABLE GIVING Help us connect people to the wonders of the universe
BETHEFUTURE To learn more about estate planning and life income gifts to the Museum, contact Sheryl Hoffman, Director of Major & Planned Gifts at (216) 231-4600, ext. 3310 or shoffman@cmnh.org www.cmnh.org/site/GiftGuide.aspx
Maximize the impact of giving through retirement plans of your retirement plan account. Charitable gifts of retirement ne of the easiest and plan assets at the participant’s most “tax-wise” ways to death avoid both income and make a gift to estate tax to heirs. When University Hosa participant makes a pitals, or another charity, retirement plan gift, the is by using your retirement charity receives the gift plan assets. In spite of the directly from the qualieconomic downturn, fied plan or IRA trustee Americans are building without going through large retirement plan balthe probate process. This ances, mainly through alleviates the delays and the use of employer-spon- PATRICIA FRIES costs associated with prosored 401(k) plans. bate, allowing the charity Almost all retirement plans to receive the gift more quickly have yet to be taxed, and considand cost-efficiently than if it had erable taxes will result when been made from an estate. retirement plan assets are used or distributed directly to heirs. HowDIRECT IRA ROLLOVERS ever, if these retirement plans are TO CHARITY given to a qualified charitable organization, they are received in Congress has reauthorized legfull, with no tax due, resulting in islation that allows you to make a more significant gift to charity. lifetime charitable gifts from your IRA accounts during 2011 without incurring federal income tax RETIREMENT PLAN on the withdrawal. The IRA charDESIGNATION TO CHARITY itable rollover provides you with You can leave your legacy by an excellent opportunity to make naming University Hospitals, or a gift during your lifetime from another charity, as a beneficiary an asset that would be subject to
By PATRICIA FRIES
O POWER OF ATTORNEY? YES. YOUR TYPICAL LAWYERS? NO. Because we’re not what you think of when you think about lawyers. You’ll want us to represent you because we’re not only trust and estate experts but we’re also approachable. We like to say, we’re “likable lawyers.” Imagine that.
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multiple levels of taxation if it remained in your taxable estate. IRA CHARITABLE ROLLOVER REQUIREMENTS ■ You must be age 70½ or older at the time of gift ■ Transfers must be made directly by an IRA administrator to the charity ■ Gifts must be outright IRA CHARITABLE ROLLOVER BENEFITS ■ Counts toward your required minimum distribution ■ Excluded from your gross income as a tax-free rollover ■ Gifts up to $100,000 The extension of the IRA charitable rollover will expire on Dec. 31. Act now to take advantage of this limited charitable planning opportunity. ■
Patricia Fries, Esq., MBA, is director of gift planning for University Hospitals. Contact her at (216) 844-0430.
Not all charitable gifts created equal deferred gifts that involve a direct transfer of assets. Examples he words “charitable include charitable gift annuities, giving” often evoke charitable remainder thoughts of tax annuity trusts, charitable deductions, but remainder unitrusts and it’s not always that simple retained life estates. The with deferred giving. common thread among Some deferred gifts are these gifts is that an asset revocable, meaning you is irrevocably transferred can revoke the gift at any to a charitable organizatime, while others are tion, often making the irrevocable, meaning per- JAMES HICKEY transaction eligible for manent. When considering an immediate income a deferred gift, it’s important to tax deduction. In many cases, understand that some gifts will these gift options also provide provide an immediate income lifetime payments to the donor tax deduction, while others will and other beneficiaries, giving provide tax benefit to your estate. you a two-fold benefit.
that allows you to change your mind at a later date. There are several revocable gift options available including will bequests, estate notes, life insurance beneficiary designations, pay on death/transfer on death assets, and more. The revocability of these charitable gifts negates the opportunity for an immediate income tax charitable deduction. However, deductions are usually available to the donor’s estate as the gifts mature.
■ TAX BENEFITS NOW
■ TAX BENEFITS LATER
If a positive tax benefit on your current year taxes is your goal, consider irrevocable
If you are uncomfortable with letting go of an asset now, you may appreciate a revocable gift
James R. Hickey, CFRE, CAP, is gift planning director for Ohio Presbyterian Retirement Services Foundation, serving Breckenridge Village. Contact him at (440) 942-4342 ext. 1506.
By JAMES R. HICKEY
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Crain’s Cleveland Business Custom Publishing
Most importantly, talk to your tax professional and charitable gift adviser to make sure your gift meets your goals. ■
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CHARITABLE GIVING
Establish a legacy gift and guarantee income with CGA By SHERYL HOFFMAN
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n July 1, the American Council on Gift Annuities announced an increase in Single Life and Two Lives-Joint & Survivor gift annuity rates. The Cleveland Museum of Natural History (CMNH) has incorporated the recommended increases for all new Charitable Gift Annuities (CGA) made to the Museum. A SHERYL Charitable Gift HOFFMAN Annuity is a wonderful way to create a legacy gift while guaranteeing fixed payments to you for life in exchange for your gift of cash or securities. A charitable gift annuity could be right for you if: â– You want to maintain or increase your income â– You want the security of fixed, dependable payments for life â– You want to save income taxes or capital gains taxes
HOW AN ANNUITY WORKS By KERRY MINK WRAY
charitable annuity allows individuals to support a charity while receiving a cash reward for years to come. It is a great way to give a donation and pay yourself back over time, while reducing your tax bill. For example:
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â– Mary, 68, provides a onetime cash donation of $5,000 to the charity of her choice. Her Annuity Rate of Return, determined by the American Council of Gift Annuities based on her age, gift amount and other factors, is 5.5%. The rate is fixed over her lifetime. â– Her tax deduction the first year is $1,847. â– She will receive $275 every year ($180 tax-free, $95 ordinary income). Annuities provide a competitive and reliable rate of return and allow donors to support their favorite charities at the same time.
Kerry Mink Wray, JD, is development director of the Benjamin Rose Institute. Contact her at (216) 373-1607 or kmink@benrose.org. *Calculations are for illustrative purposes and should not be considered legal, accounting or other professional advice. Actual benefits may vary depending on the timing of the gift.
■You would like income that may be partially tax-free ■You are considering a gift amount of $10,000 or more To establish a CGA, a donor makes an irrevocable gift of cash, securities or other property to CMNH. In exchange, CMNH pays a fixed amount each year for the rest of the donor’s life. When the gift annuity ends, its remaining principal passes to CMNH. A CGA can be established for a Single Life or a Two Lives-Joint and Survivor. In the case of a Two Lives CGA, the surviving annuitant will continue to receive payments for the remainder of his/her life. For example, a Two Lives-Joint & Survivor CGA of a minimum $10,000 gift will earn a couple with younger age 82 and older age 84 a rate of 6.9% for the life of the annuitants. The information below illustrates the benefits
Charitable deduction: $4,321 Annual payment: $690 Tax-free portion: $525.78 Ordinary income: $164.22
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After 10.8 years, the entire annuity becomes ordinary income. Partial payments for the year of gift will depend on the timing of your gift. CGA rates, payments, charitable deductions and tax free portions are based on the age of the annuitant(s), the timing of the gift and the amount of the gift. â–
Sheryl Hoffman is director of major & planned gifts for The Cleveland Museum of Natural History. Contact her at (216) 231-4600, ext. 3310 or shoffman@cmnh.org. Read more about charitable gift annuities and run calculations on rates and payments at www.cmnh.org/site/GiftGuide.aspx.
says Kara Downing, portfolio manager at Spero-Smith Investf you itemize deductions on ment Advisers, Inc. When you your tax return, one opportudonate an asset to your fund, the nity to harvest some tax sponsoring organization liquisavings is through charitable dates it and transfers the proceeds donations. Generally, individuals into investments selected by the deduct the annual cash contribudonor from within the donortions they make to non-profit advised fund’s available options. organizations. Donor-advised The donor can use these funds funds offer you an easy way to reto make cash gifts to charitable move assets from your taxable esorganizations over several years. tate and get a bigger income tax When ready to make a donation benefit today but maintain flexito a qualifying charity, the donor bility regarding sends a grant who receives the request to your The donor can use donation, how fund’s sponsoring these funds to make much and when. organization, A donorcash gifts to charitable which then advised fund sends a check organizations over is particularly directly to the several years. useful when you charity indicating have a spike in that it is from income (e.g. business sale, the donor’s account. options exercise, bonus), if you The charitable tax deduction is believe your future tax rate will taken when the assets are congo down (e.g. after retirement) or tributed to the donor-advised if you believe Congress will fund, not when the check is sent reduce the charitable deduction. to the charity. The tax benefit can be magniMany community foundations, fied by donating appreciated financial institutions and some assets held more than one year, public charities sponsor donoras you may be able to deduct the advised funds. Consult your qualfull market value of the asset and ified tax professional to help you avoid paying the capital gains tax determine what makes the most you would have paid by selling sense given your goals and finanthat asset. cial situation. ■“A donor-advised fund is similar to a private foundation Matthew S. Olver, CFP, is senior vice but requires less money, time, president for Spero-Smith Investment legal assistance and administraAdvisers, Inc. Contact him at (216) tion to establish and maintain,� 464-6266 or matt@sperosmith.com.
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Experienced Estate Planners
of a $10,000 CGA for this couple.
Donor-advised funds: same benefit to the charity, bigger tax benefit for you By MATTHEW S. OLVER
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ESTATE PLANNING
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CHARITABLE GIVING
Stewardship plays critical role in philanthropy Building strong relationships can make a difference By TODD S. POLIKOFF
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t minimum, all donations stem from someone asking, whether through direct mail, phone banks or direct solicitation. “Major gifts” require the additional element of an organic belief by the donor in the mission and vision of the organization. A major donor’s support of the organization must transition from a cerebral thought process to an emotional response. The most effective way to make the migration from the head to the heart is through a comprehensive donor stewardship plan. At the Jewish Federation of Cleveland, donor stewardship is
defined as the development of an ongoing relationship with donors, which includes recognizing them for their contributions, ensuring that the gifts are used in accordance with the donors’ wishes, reporting to donors what has been accomplished, heightening their interest and involvement, and soliciting additional and larger donations. Unlike cultivation, stewardship deals with the non-gift aspects of the donor relationship and has no set timetable (i.e. annual or capital campaign drives). Furthermore, the Jewish Federation of Cleveland’s stewardship plan is multi-generational and engages entire families in the philanthropic process. The organizational benefits of a stewardship plan go beyond increased revenue. Proper stewardship reduces costs as it is less expensive to steward a current donor than to acquire a new
one at the same level. The donor stewardship process also transforms donors into force multipliers for the organization. Ultimately, the Jewish Federation of Cleveland’s stewardship plan is a strategy aimed at mitigating the impact of the multiple economic and demographic challenges facing the non-profit sector. Many major donors today are exhibiting an increased level of discretion in their philanthropy. This places an imperative on an organization’s ability to assert its relevance in the eyes of the donor. Donor stewardship plans are the most effective way to ensure that your organization remains a top philanthropic priority for your most supportive donors. ■
Retained life estates allow donors to bring home and heart together By AMANDA STEYER
Todd S. Polikoff is a senior development officer at the Jewish Federation of Cleveland. Contact him at (216) 593-2905.
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home often is a family’s most significant asset. Incorporating a home into a charitable giving plan can benefit the family, their heirs and a favorite charity. However, many do not know they can make a gift of their residence now and continue to live in it for the rest of their lives. With a gift of a retained life estate, the owner of a residence or farm irrevocably transfers ownership of the property to a favorite charity, while retaining the right to live on the property for life, a set term of years, or a combination of the two. The residence does not need to be the principal residence but may be, for example, a vacation home. The donor retains the right to live on the property during that time and continues to be responsible for all routine expenses, such as maintenance, insurance, landscaping and property taxes. When the retained life estate ends, the designated charity then can use the property or the proceeds from the sale of the property for the directed purpose. This gift plan entitles the donor to an immediate charitable income tax deduction for a portion of the appraised value of the property.
The highest tax deduction is produced when applicable federal rates are low. With October’s 7520 rate of 1.4%, the time for a retained life estate couldn’t be better. Some individuals may be hesitant to gift their home due to the uncertainty of the later years. What if at some point they want or need to move into a nursing
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Many do not know they can make a gift of their residence now and continue to live in it. ■ With October’s 7520 rate of 1.4%, a retained life estate is ideal. ■ The retained life estate not only removes the residence from the donor’s taxable estate but also relieves the heirs or estate of the burden of inheriting the home and arranging for a sale.
home or assisted living facility? The retained life estate provides flexibility with alternative options to consider. If they later decide to vacate the property, they may rent, gift or sell their interest to family, a third party or the charity. The retained life estate not only removes the residence from the donor’s taxable estate but also relieves the heirs or estate of the burden of inheriting the home and arranging for a sale. Ultimately, the donor can make a significant gift to a favorite charity during his or her lifetime without in any way altering standard of living or cash flow. Discussions between clients and their advisers are always recommended. With the right guidance, the planning and implementation of a gift of a home can be a satisfying and rewarding decision for families and charities. Cleveland Clinic’s gift planning professionals would be pleased to assist with those conversations if there is interest in supporting its medical mission. ■
Amanda Steyer, Esq., is assistant director, gift planning, institutional relations and development at Cleveland Clinic. Contact her at (216) 636-0117 or giftplanning@ccf.org, or visit clevelandclinic.org/giving.