Estate Planning 2016 by Crain's Cleveland Business

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Estate Planning Council of Cleveland

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Changing climate should prompt estate plan review

Motivations for charitable giving may evolve

New regulations may impact family business interests

ESTATE PLANNING

S2 November 7, 2016

PRESIDENT,S LETTER

Estate Planning Council offers bevy of resources to help ensure your legacy lives on By MICHAEL MATILE

he Estate Planning Council of Cleveland is pleased to once again partner with Crain’s Cleveland Business to present our annual estate planning special section. The purpose of this section is to provide the community with timely information and valuable resources reflecting our multi-disciplinary approach, including financial, insurance, business succession, and estate and charitable planning matters. The articles and commentary on the pages that follow have been provided by some of the region’s most experienced professionals in these fields. They may help you address some of your financial and estate planning concerns, or spur fur-

ther discussion with your adviser. Estate planning often is an overlooked aspect of personal financial management. Millions of Americans do not have an up-to-date estate plan and/or medical directives, leaving them vulnerable in the event of illness, accident or untimely death. Committing a modest amount of time to establishing Matile these documents can save much time, expense and hardship for families, loved ones and businesses. From a tax standpoint, we have spent the past few years in a relatively stable period. However, the political climate is shifting and a new administration

will soon take office. The IRS recently issued longawaited proposed regulations that could severely restrict the opportunities for business owners to transfer shares of their business to family members in a tax-efficient manner. Business succession plans, business agreements and estate documents that contemplate intra-family transfers will need to be reviewed. In addition to the political and economic instability abroad, it is imperative that people protect and preserve the assets they have spent their lifetime building. It is wise to seek and rely upon the services of experienced professionals who are familiar with income, gift and transfer tax laws and who are current in their knowledge of

the financial and investment world. Plenty of such experienced professionals make up the membership of the Estate Planning Council of Cleveland. They can help you evaluate how your personal financial goals have been affected by market and legal changes in the United States, as well as events on the world stage. These professionals can help you determine your estate and financial planning goals and analyze your ability to achieve financial independence throughout your projected lifetime. Perhaps you have family members with special needs. You may have a family business that you want to transfer to a future generation or prepare for sale. Maybe you are in a position to fulfill your charitable intentions. Our members can help you with the methods, techniques and documents that will enable you to attain these and other goals. Founded in the 1930s, the Estate Planning Council of Cleveland is composed of more than 400 members working in the Greater Cleveland area, including attorneys, accountants,

bankers and trust officers, financial planners, insurance agents, appraisers and representatives from charitable organizations. Our members are committed to their clients and their community and are able to provide you with the assistance you will need to safeguard your financial future. Our website, www.epccleveland. org, is a valuable resource that can help you to identify the professionals you will need to assist you with your unique situation. We are pleased to present you with this special section in Crain’s Cleveland Business, which contains important insights and commentary on a variety of estate planning issues. We hope that you will find it to be an indispensable resource as you work with your advisers to plan a sound financial future. Michael Matile is senior vice president and senior wealth and planning specialist at FNB Wealth Management. Contact him at 216-331-1906 or MatileM@fnb-corp.com.

Table of Contents ESTATE PLANNING

3-12

CHARITABLE PLANNING

13-14

14-19 TAX PLANNING 20-21 INSURANCE 22 PLANNING CHARITABLE GIVING

What Will We Do Without You? Your current support is critical to CMA’s success today. But have you considered including the museum in your estate plan to help enrich lives in our community through the beauty and power of art for generations to come? For creative ways to continue your support of the museum for the next 100 years, contact Diane Strachan, CFRE at 216-707-2585 or dstrachan@clevelandart.org

Advertising director Nicole Mastrangelo, nmastrangelo@crain.com Managing editor, custom and special projects Amy Ann Stoessel Section editor Kathy Carr Graphic designer Staci Buck For more information about custom publishing opportunities, please contact Nicole Mastrangelo.

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November 7, 2016 S3

Estate planning 2016: A changing focus Climate stabilization should prompt thorough review By LINDA M. OLEJKO

ESTATE PLANNING

fter a decade of uncertainty, estate planners are enjoying the stability of “permanent” estate tax laws, a consistent tax rate of 40% and historically high exemption levels that increase annually with inflation. Interestingly, as a result of these changes, less than 0.2% of Americans who pass away in 2016 will owe federal estate tax. The same legislation that introduced estate tax relief and stability also increased income tax rates, phased out various income tax exemptions and limited itemized deductions for high earners and investors.

When combined with the new Medicare taxes on net investment income and wages, and increasing state budget deficits, many Americans now face combined federal and state income tax rates in excess of 30% on capital gains and more than 50% on ordinary income. The Internal Revenue Code has long provided for a step-up in tax basis on assets passing from one individual to another at the time of death. Previous conventional wisdom may have led an individual to defer the

distribution of his or her IRA until the last possible moment, instead spending down a stock portfolio to save current income tax. However, with the estate tax diminished or eliminated, children likely would prefer to inherit appreciated real estate or stock rather Olejko than a parent’s IRA. Any distribution from an inherited IRA would be taxed at the highest income tax rates and could push the child into a higher tax bracket. Further, charitable gifting directly from IRAs during life (if over age 70½) or at death can provide substantial income tax savings over the use of

‘‘

With the proper use of trusts, diligent planning with advisers and the passage of time, individuals can reduce or eliminate estate tax exposure for multiple generations.

appreciated property. For the wealthiest Americans, who are still subject to estate taxes under the new laws, lifetime wealth transfer strategies remain a viable option. With the proper use of trusts, diligent planning with advisers and the passage of time, individuals can reduce or eliminate estate tax exposure for multiple generations. However, traditional planning methods that remove rapidly appreciating assets

from an estate have left some taxpayers with low-basis assets sitting in trusts. With the current estate tax laws appearing to have settled, and federal and state income tax rates increasing, now is the time to refocus on a comprehensive estate and income tax strategy. Linda M. Olejko, CFP®, CEPA is a managing director of Glenmede. Contact her at 216-514-7876 or Linda.Olejko@glenmede.com.

Estate planning is still relevant and necessary By MARY EILEEN VITALE

lanning for your estate is still important in today’s environment when many won’t exceed the federal estate tax exemption. Estate planning was done long before the estate tax was implemented. A good estate plan should provide for a number of documents, including a will that directs where assets should go. Additionally, a will can relay the individual’s wishes to the custodians of minor children and how their financial

ESTATE PLANNING affairs should be handled. A will can even name pet caretakers. Trusts are another product of estate planning. They protect wealth for future generations and can be used to protect heirs from creditors, spouses in divorce, gambling or drug addictions and spendthrift issues. Trusts also provide disabled heirs the ability to qualify for government

benefits while still accessing their allowable assets. These documents may protect an heir in the case of lawsuits caused by intentional or inadvertent actions. The individual can still access assets held in the trust while forestalling payment Vitale of amounts related to a legal judgment. Assets left in trust are protected in the case of an heir’s divorce if it has been managed properly. In many

states, inherited assets are not counted as assets considered to be split. Spendthrift issues of an heir can be reined in by putting assets in trust rather than leaving the assets outright to the individual. Because a trustee controls distributions, trusts help control heir spending. However, heirs can often request additional distributions if they need the income for extenuating circumstances. The trust can also own assets used by the heir for such items as housing and transportation. Sound estate planning also safeguards

heirs with addiction problems. Protecting these individuals from their own challenges is a benefit. Certain trust provisions can address how the trust should be administered should the beneficiary incur a physical or mental health issue. No matter the estate tax environment of today or the possible changes in the future, estate planning will always be important. Mary Eileen Vitale, CPA, CFP™, AEP, is principal at HW&Co. Contact her at 216-831-3164.

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ESTATE PLANNING

S4 November 7, 2016

Estate planning in a global environment Complex issues warrant case-by-case examination By DANA MARIE DECAPITE

nternational estate planning issues come into play for multinational families domiciled in the U.S. and for U.S. citizens with assets abroad. This article serves as an overview of the considerations and certain planning tools and techniques for clients with global interests, based on personal domicile, the domicile of a non-citizen spouse or foreign assets of U.S. citizens.

Domicile and transfer tax.

The concept of domicile is extremely important in determining how international estate planning and transfer tax considerations will apply to a certain client or family. It is also imperative to note that domicile, as related to transfer tax, is an entirely separate determination than residency requirements for income

I BELIEVE IN

ESTATE PLANNING tax purposes; therefore, an individual can be a U.S. income tax resident, but a non-domiciliary for U.S. transfer tax purposes, or vice versa. A client is generally considered to be domiciled in the U.S. for transfer tax purposes if physically present in the U.S., with the intent to remain indefinitely. In order to assess one’s intent to remain indefinitely, the subjective determination is made on a case-by-case basis, and a number of factors are considered, including: location of homes, location of family members, location of business contacts, driver’s license and automobile registration, voter registration, location of bank accounts,

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and declarations of residence made in various legal documents.

International transfer tax planning. The current federal es-

tate and gift tax exemptions pose little worry for most U.S. citizens, with the exclusion amount at $5.45 million per individual (annually indexed for inflation), the concept of portability between spouses and an allowance for unlimited marital de- DeCapite duction for transfers to spouse during lifetime or at death. However, for non-citizen clients, or clients with non-citizen spouses, many of the tax benefits afforded to a married couple are nonexistent. For instance, lifetime gifts to noncitizen spouses (regardless of whether the donor is a U.S. citizen or not) are not eligible for the unlimited gift tax marital deduction, rather the annual gift tax exclusion amount is reduced to $148,000. Oftentimes in this scenario, a lifetime gifting strategy is implemented, wherein the citizen spouse shifts wealth to the noncitizen spouse over time within the confines of the applicable annual gift tax exclusion, effectively reducing the value of the citizen spouse’s estate. Additionally, for U.S. citizen spouses who desire leaving assets to a noncitizen spouse, the federal estate tax

marital deduction may only be utilized by the non-citizen surviving spouse if the property passes to a Qualified Domestic Trust, unless otherwise allowed by treaty. In other words, the QDOT is designed to allow the noncitizen surviving spouse to qualify for the unlimited marital deduction. Under this structure, distributions from the QDOT are taxable for federal estate tax purposes (insofar as they exceed the decedent spouse’s exclusion), with two exceptions (1) income distributions or (2) distributions made to the surviving spouse experiencing “hardship.” A hardship distribution is made to a spouse in response to an immediate and substantial financial need related to the spouse’s health, education, maintenance or support, where there are no other sources of funds available to the spouse. Currently, the United States has treaties with sixteen nations regarding estate tax and/or gift tax, which determine transfer tax implications of internationally held assets, and in certain circumstances provide for mitigation of double taxation and other unfair tax treatment. For instance, certain treaties reduce the tax burden on the non-citizen spouse by increasing the marital deduction available to such non-citizen spouse. The application of a certain treaty depends on the domicile of the client and the location of the property, but can be very important to tax and

estate planning considerations.

International assets of U.S. citizens. International jurisdictions

have separate and distinct laws of intestacy, laws of succession and tax regimes to consider when planning for a U.S. citizen client owning foreign property. Generally, it is favorable to execute a separate set of international documents with the assistance local counsel, to properly control the disposition of such international assets. However, the U.S. documents and international documents must be carefully drafted to ensure simultaneous operation, rather than an unintended revocation or supersession of one set of documents. Additionally, certain jurisdictions (such as civil law countries) do not require estate planning documents to complete a certain bequest, rather, property ownership vests in one’s heirs immediately upon death. It is important to note that all international estate plans should be evaluated on a case-by-case basis, as the domestic and international estate planning, tax and probate laws can be cumbersome in application as they relate to a particular client situation. Dana Marie DeCapite is an associate in Benesch’s Business Succession Planning/Wealth Management Practice Group. Contact her at 216-363-4443 or ddecapite@beneschlaw.com.

When is it time to bring your estate plan in for a check-up? By NICK SHOFAR and SUSAN RACEY

ou finally signed your estate planning documents, retitled your assets and completed beneficiary designations to avoid probate. Now what? Typically, estate planning attorneys recommend that clients update their estate plans every few years, but as we all know, life doesn’t happen every few years. Events in your life that affect you or your family often also affect your estate plan. The following are a few of those “life events”:

Marriage A marriage in the family (your own or your child) will impact your estate plan. Should a prenuptial agreement be signed? If the marriage has occurred or a prenuptial agreement is not desired, you should consider other options available to protect assets if the marriage ends.

Divorce Although under Ohio law, a divorce revokes provisions for your ex-spouse in your estate planning documents and

ESTATE PLANNING beneficiary designations, these laws should not be relied on as a substitute for updating your estate plan.

Birth, death and other life events The birth of a child or grandchild may require changes, such as the need to name a guardian for a child or to provide for the new addition to your family. Changes may need to be made upon the death or deterioration of health of a family Shofar member or if the person you designated as a fiduciary (such as a health care agent, executor, guardian or trustee) has died or, due to age or Racey incapacity, is no longer the appropriate choice. If you have discovered that a family member has creditor, substance abuse, gambling or marriage problems, changes should

be made to protect your loved one.

Change in assets, employment or residence Significant increase in assets, or a change of employment or state of residence will often require modifications. A sudden increase in assets could occur because of an inheritance. A new job requires updates to beneficiary designations for benefits obtained through your new employer. Anytime you acquire a valuable asset, you must make sure that the ownership of the asset is properly titled, so that upon your death, it will be disposed of as you desire and avoid probate. A relocation to a new state may require changes due to the differences in the laws between the two states. Simply, the best estate plan is one that keeps up with your and your family’s ever-changing lives. Nick Shofar is an associate in the Tucker Ellis Estates, Trusts & Probate Group. Contact him at 216-696-4147 or nick. shofar@tuckerellis.com. Susan Racey is a partner in the Tucker Ellis Estates, Trusts & Probate Group. Contact her at 216-696-3651 or susan.racey@ tuckerellis.com.

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November 7, 2016 S5

Proper asset titling channels estate accordingly By STEPHANIE M. GLAVINOS and LINDA DELACOURT SUMMERS

nderstanding how assets will pass following your death is an important component of creating a proper estate plan. Estate planning is really a two-part process. Part “A” is the formulation of the plan and the execution of the documents. Part “B” is carefully reviewing and aligning the titling of your assets and/ or the beneficiary designations for your assets with the provisions set forth in your estate planning documents. Many clients operate under the false assumption that by executing estate planning documents, they have ensured their assets will pass outside of

ESTATE PLANNING probate to their heirs and in the manner designated in their estate planning documents. This is not always the case. Probate can be avoided if you choose to pass on your assets either by naming designated beneficiaries, through joint and survivorship titling, transfer on death/payable on death designations or titling assets in a trust. Each of these asset-titling choices is discussed below. n Beneficiary designation can be used with assets, including retirement accounts, life insurance policies and annuities. By completing and signing

the beneficiary designation form, you are making a contract with the custodian of that asset that the asset will pass directly to the beneficiaries listed on that form. This occurs despite what you may provide under the Glavinos terms of a last will and testament or trust. If a surviving beneficiary is designated on the form, these assets pass on to that beneficiary outside of probate. n Joint and survivor-

Summers

ship titling is commonly used by married couples who own bank accounts,

investment accounts and real property. This type of titling is a contract between those individuals and upon the death of the first owner, the entire ownership of that asset passes outside of probate directly to the survivor by contract, again despite what may have been provided under the terms of a last will and testament or a trust. n Transfer on death designations or payable on death designations can be used for real property, automobiles, boats, bank and investment accounts. The beneficiary of these types of titling can be individuals or a trust. These assets pass outside of probate to the beneficiary listed on the designation. n Finally, by titling assets in the name of a trust, those assets pass outside of

probate to the beneficiaries designated under the terms of the trust agreement. Ensuring that you have proper asset titling is a critical step in the estate planning process. Although it can be somewhat daunting and timeconsuming to complete this Part “B” of the process, it is necessary so that Part “A,” the documents themselves, actually carry out your wishes regarding who, how and when your beneficiaries receive your estate. Stephanie M. Glavinos is counsel at Ulmer. Contact her at 216-583-7230 or sglavinos@ulmer.com. Linda DelaCourt Summers is counsel at Ulmer. Contact her at 216-583-7212 or lsummers@ulmer.com.

Family giving makes powerful, lasting impression By KATE BROWN

ris November’s first gift to MetroHealth Medical Center matched perfectly her personality: a supply of teddy bears for the hospital’s child life program. A few years later, Iris and her husband, Morton “Mort” November, began the first of several gifts in memory of Mort’s daughter, Debra Ann. In 2012, the couple came together with other family members for a transformational gift. The MetroHealth Middleburg

ESTATE PLANNING

Heights November Family Health Center opened the following summer. Unlike some philanthropists, the Novembers always have been public with their giving. “We have a very strong feeling about not giving anonymously,” Iris November says. “Every time we have given, people who know us ask, ‘How do I get involved?’ If you do it anonymously, it

doesn’t have the same impact.” Larry November already participated in MetroHealth fundraisers and contributed to a newly created endowed chair. In 2014, he began giving to MetroHealth’s Cancer Center in memory of his wife, Linda. The Brown most recent gift was for a new hope and healing garden. “My father was a good example,” said Larry, a member of the board

Trusted Advisors. Respected Advocates.

of directors of The MetroHealth Foundation, which raises money for programs and services supporting MetroHealth’s mission. “Watching him give for a number of years inspired me.” A new generation of Novembers has continued that commitment as members of the emerging professionals group MetroHealth N.E.T. As the Novembers illustrate, family philanthropy doesn’t always involve the creation of a family foundation. Direct gifts to a favorite charity or organization are often a preferred

alternative when considering the tax benefits or even the absence of administrative costs. All of these considerations are helpful to weigh as you and your family review your philanthropic goals and giving strategy today and in the coming years. Kate Brown is president of The MetroHealth Foundation and chief development officer of The MetroHealth System. Contact her at 216-778-7509 or kbrown@metrohealth.org.

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ESTATE PLANNING

S6 November 7, 2016

Breathing new life into old life insurance trusts Review advantages of maintaining policy By KATHERINE E. WENSINK

n irrevocable life insurance trust is one way to assist with the payment of estate tax while keeping life insurance proceeds out of a decedent’s estate. This is helpful when an estate is comprised of illiquid assets, such as a family business. The unified credit (the amount of assets an individual may transfer during their lifetime and at death

ESTATE PLANNING combined without incurring gift or estate taxes) has increased to $5.45 million. Many families with ILITs no longer need them to create liquid assets to pay the estate tax because their assets are below the larger unified credit. So, what to do with the life insurance policies and ILIT? If the individual has the ability to

continue the premium payments, without reducing their quality of living, then keeping the policy may make sense. If the original irrevocable life insurance trust no longer fits, options include: n Transferring the Wensink policy to a new ILIT. This can be done through a process called “decanting,” where the policy

Demystifying trust decanting By STEVEN D. HINKLE

hat is it? A new trust is created and the trustee distributes all of the assets of the old trust to the new trust. The trustee is making the distribution using its discretionary authority to make distributions, including distributions in further trust.

Who must receive notice? Thirty days in advance of the transfer to the new trust, notice must be given

ESTATE PLANNING to the “current beneficiaries” of the old trust. These are the beneficiaries of either mandatory or discretionary principal or income, as of the current date.

Limitations When the standard for distributions contained in the trust agreement are fairly strict, such as for the “health, support, maintenance and education” of the beneficiaries, the new trust

agreement cannot “materially change the interests of the beneficiaries of the first trust.” However, if the standard for distributions is broader, such as for the “best interests,” “welfare” or “comfort” of the beneficiaries, the new trust agreement can Hinkle also delete one or more of the old trust’s beneficiaries. Regardless of the distribution standard, the new trust agreement may

is moved to a new trust with the same beneficiaries. n Terminating the trust and distributing the policy outright to the beneficiaries. n Changing

the trustee. If a friend or corporate trustee served, often an adult child can step into the role, reducing the need for third parties. If the policy no longer makes sense, surrendering the policy (if possible) in exchange for the cash value may make sense. Once the ILIT has cash, the options include:

not reduce a mandatory distribution of income or principal of the old trust, or reduce a right to withdraw a percentage of the value of the old trust, or to take distribution of a specified dollar amount.

Advantage compared to using a Private Settlement Agreement Because only current beneficiaries need to be notified, and even then do not need to agree to the decanting, it is a less cumbersome procedure than a private settlement agreement. The trustees, the beneficiaries, and any creditors must agree and execute the private settlement agreement.

n Using the funds for the beneficiaries’ expenses, such as education or to buy a home. n Investing

the cash value.

n Terminating the ILIT and distributing the proceeds.

Periodically revisiting old irrevocable life insurance trusts is an important estate planning tool. Katherine E. Wensink is an attorney with McDonald Hopkins LLC. Contact her at 216-348-5729 or kwensink@ mcdonaldhopkins.com.

“Beneficiaries” is a much broader class than the “current beneficiaries” who must be notified of a decanting. With a private settlement agreement, “beneficiaries” includes both the beneficiaries who are presently entitled to mandatory or discretionary payments of income or principal, as well as those who may benefit in the future. Potential future beneficiaries must agree even if their interest is contingent on one or more future events. Steven D. Hinkle is senior vice president of Key Private Bank, Family Wealth/ Wealth Services. Contact him at 216689-0333 or steven_d_hinkle@key.com.

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November 7, 2016 S7

Several factors influence best college funding spigot Carefully weigh pros, cons of using trust versus 529 plan By PATRICK J. SACCOGNA and JAMES SPALLINO

e are often asked by clients what source of funds they should use for a child’s college education costs when the child, let’s call him Johnny, is a beneficiary of an irrevocable trust established by a parent or grandparent, and is also the beneficiary of a Section 529 qualified tuition program account established with a state college savings program (“529 plan account”). Trust distributions are typically subject to the discretionary distribution standards set forth in the trust agreement. A 529 plan account will have someone, typically a parent or grandparent of the beneficiary, who is designated as the account owner. The account owner Saccogna has the sole authority to request distributions from the 529 plan account. So, how do the trustee of the trust and the owner of the 529 plan account decide which pot of Spallino funds to choose from when making a distribution to Johnny for his college education and related costs? In some cases, the trustee and the account owner of the 529 plan account are the same person, but not always. In any event, the trustee and the account owner should consider several factors in order to determine what portion of any given distribution comes from the trust, on the one hand, and the 529 plan account, on the other. The trustee of the trust must carefully review the terms and provisions of the trust agreement to determine the scope of the trustee’s discretion to make distributions for Johnny’s education.

ESTATE PLANNING Does the term “education” include only undergraduate programs at a fouryear institution, or are community colleges and vocational schools also included? What about graduate school? Will the trust cover only tuition costs, or other expenses too? Also, are there any limitations on the timing, amount or frequency of distributions that the trustee can make for Johnny’s education? The account owner of the 529 plan account must be familiar with the rules governing distributions from the account and how they apply in Johnny’s situation. Distributions from a 529 plan account can only be made for “qualified educational expenses” without incurring negative income tax consequences. In addition to the terms of the trust agreement and the 529 plan account, the following additional factors should be considered.

to current income tax. Conversely, a distribution of funds from the trust would carry out taxable income to Johnny that would likely be taxed at a lower rate than if such funds remained in the trust and were taxed to the trust. In addition, the assets of the trust do not grow on an income tax-deferred basis because the trust is a taxpaying entity.

Transfer tax considerations. Contributions to a 529

plan account are typically “annual exclusion gifts,” which are exempt from federal gift tax and federal generation-skipping transfer tax. Contributions to the trust may be annual exclusion gifts or may require use of the donor’s applicable exclusion amount. The assets of the trust will be exempt from GST tax if GST exemption is applied to all transfers to the trust. Distributions from the trust and the 529 plan account

generally will not be considered a gift or a generation-skipping transfer.

Other factors. The trustee and the account owner should bear in mind that the 529 plan account assets may be withdrawn by the account owner, and that the account owner may change the beneficiary to someone other than Johnny. Of course, these changes may have income and transfer tax ramifications. Also, the trustee may be able to distribute funds to Johnny for things other than education. As you can see, a number of important factors go into the analysis, and, depending on the specific facts and

circumstances surrounding any given distribution and the relative importance of each of the factors to the parties involved, the trustee and account owner may decide to make the distribution solely from the trust, solely from the 529 plan account, or partly from each. Patrick J. Saccogna, J.D., LL.M., AEP, is a partner in Thompson Hine LLP’s Personal & Succession Planning practice group. Contact him at 216-566-5761 or Patrick.Saccogna@ThompsonHine.com. James Spallino, Esq., is a partner in the firm’s Personal & Succession Planning group. Contact him at 216-566-5865 or James.Spallino@ThompsonHine.com

Asset protection. Assets in an Ohio 529 plan account are protected from creditors of the beneficiary and the account owner under Sections 3334.15 and 2329.66 of the Ohio Revised Code. Unless the trust is an Ohio Legacy Trust or another domestic asset protection trust protected by the similar laws of another state, however, the assets of the trust could be subject to the claims of Johnny’s creditors. This could happen if a creditor were to obtain a judgment against Johnny and then successfully satisfy such judgment by forcing the trustee to distribute to the creditor under one of the trust’s distribution standards.

Your Investment Par tner for Estate Planning

Income tax ramifications.

Assets held in a 529 plan account appreciate on an income tax-deferred basis. A distribution from a 529 plan account to pay for Johnny’s qualified educational expenses will not be subject

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S8 November 7, 2016

Special needs trusts offer security for disabled individuals By ALLISON M. McMEECHAN

amilies with special needs children require an estate plan that takes into consideration benefits and services from public sources. The family’s attorney should have experience drafting trusts for disabled individuals and understand the different programs and services available to these individuals. If a trust is not drafted in accordance with appropriate federal and state laws, the disabled individual may lose means-

ESTATE PLANNING tested public benefits. Two types of trusts for disabled individuals exempt from means-tested public benefits are third-party and selfsettled trusts. A third-party trust is established by someone other than the disabled individual for the disabled individual’s benefit. The trust assets, which are never owned by the disabled

individual, are intended to supplement, but not replace public benefits. Upon the disabled individual’s death, any assets remaining in the trust may be paid to designated beneficiaries. A properly drafted trust allows parents to set McMeechan aside funds for their disabled child’s benefit. A self-settled trust is established by a disabled individual with his or her

own funds. For example, a settlement awarded to someone on Medicaid can be placed in a self-settled trust to allow the individual to continue to receive Medicaid. Two types of selfsettled trusts are special needs (d4A) and pooled. A d4A trust is exempt if established by a parent, grandparent, court, or legal guardian, with the assets of a disabled individual who is under the age of 65. A pooled trust is a separate account maintained by a nonprofit association. A pooled trust account is

established by the disabled individual or by his or her parent, grandparent, legal guardian, or court. Unlike the d4A trust, there is no age limit to establish this trust. Both trusts require that the State of Ohio is the trust beneficiary upon the disabled individual’s death if the state provided medical assistance on behalf of the disabled individual. Allison M. McMeechan, LPA, is the cochair of Reminger Cos. Elder Law and Special Needs Planning Practice Group.

Intended, unintended consequences of naming IRA beneficiaries By DORIS SEIFERT DAY

ith the estate tax exemption over $5 million, many estates need not worry about paying the 40% tax. However, estates still have the challenges of minimizing income tax

ESTATE PLANNING on inherited IRA distributions. Who your beneficiary is determines both whether the IRA can be rolled over, and the time period over which it

must be withdrawn. The decision on who will inherit your IRA assets may seem simple, but there are several unforeseen benefits and consequences:

them to treat the IRA as their own and name their own beneficiaries. This allows for more years of tax-deferred growth and a Roth Conversion.

Not naming a spouse: Spousal Naming an estate: If the estate is

beneficiaries have a unique opportunity — a rollover option — that allows

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the beneficiary, then distributions must be taken over either of two periods. If the decedent owning the IRA had not reached his or her required beginning date, then the IRA must be distributed by the end Day of the fifth year following the owner’s death. If the owner had reached his or her required beginning date, the required distributions are based on life expectancy. This generally requires distributions to be taken faster than if an individual was named.

Not naming contingent beneficiaries: If the primary

beneficiary dies prior to the account

owner and a new beneficiary is not named nor is a contingent beneficiary, then the estate is the beneficiary.

Establishing

trusts: While trusts provide control over the IRA distributions, they require the distributions be made over the oldest qualified designated beneficiary’s life. If the distributions remain in the trust, the income tax liability will generally be higher than if paid to an individual. The trade-off for the control is generally a shorter deferral and higher income tax.

Giving: Unlike other assets held by

a decedent, IRA assets do not receive a step-up in basis to the fair market value at the owner’s death. If leaving assets to a charity, the charity will not pay taxes on the IRA distributions, but the other beneficiaries will.

Doris Seifert Day, CPA, MBA, is director of tax at Walthall CPAs. Contact her at 216-573-2330 or d.day@walthall.com.

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There’s no time like now to create a GRAT By WADE T. WEBER

rantor Retained Annuity Trusts are an effective vehicle to transfer wealth when interest rates are low and valuation discounts are available for transfers of closely held businesses to family. A GRAT is a trust in which the grantor transfers assets to an irrevocable trust for the benefit of a beneficiary (or beneficiaries), while retaining a fixed annuity payment for a term of years. When the term ends, the property in the GRAT transfers to, or is held in future trust for, the remainder beneficiary. If the grantor survives the term, the trust property is excluded from their estate for federal estate tax purposes. If the grantor dies during the Weber term, some or all of the GRAT will be taxed in the grantor’s estate. The GRAT strategy for transferring wealth leverages the difference between the return generated by the GRAT property over the IRS assumed interest rate. The grantor’s annuity is discounted by the IRS Section 7520 rate effective when the GRAT is created. The gift amount is the value of the property less the present value of the grantor’s retained annuity. The current low interest rate increases the value of the retained annuity and decreases the value of the gift. If the GRAT is structured so that the value of the annuity equals that of property contributed, there will be negligible taxable value of the gift’s remainder interest. Appreciation of the assets in excess of the Section 7520 rate during the term also passes to the remainder beneficiary, tax-free. Therefore, ideal contributions to GRAT are assets that generate income, while also appreciating in value. When transferring a closely held business interest to a GRAT, valuation discounts should be available. However, the IRS recently issued proposed regulations that would eliminate such discounts for closely held interests transferred to family, outright or in trust. The proposed regulations may be effective as soon as Dec. 31. By creating a GRAT this year, business owners can save substantial transfer taxes by taking advantage of current valuation discounts and low interest rates.

Wade T. Weber is a lawyer in McCarthy Lebit’s Trusts & Estates, Taxation and Business & Corporate practices. He can be reached at 216-696-1422 or wtw@ mccarthylebit.com.

November 7, 2016 S9

Fashion a solid plan that addresses sudden wealth By KENNETH SABLE

hether from the sale of a business, a structured settlement, an inheritance or the lottery, the issues that individuals deal with when they receive a large sum of money are the same. While planning for sudden wealth is not always an option, in some of these circumstances, a sound plan can be put in place prior to receiving wealth. Too often we hear of business owners who sell their business for less than they need to sustain their standard of living. This places them

ESTATE PLANNING in the awkward position of reducing their style of living, returning to work or running out of money during retirement. Depending on the means and the amount of wealth acquired, the client will have to make Sable some major decisions. Can they retire? Will their lifestyle change? Can they spend it all in their lifetime?

If not, how do they want to leave the remainder to their beneficiaries? What are the most tax-effective ways to invest the money? How can future income and estate taxes be minimized? Clients should be advised to build a team of qualified and trustworthy professionals as soon as they are aware of the potential windfall. That team should consist of an accountant, lawyer and financial adviser. It is imperative that these professionals work with the client as a team to develop and implement a solid plan. Business owners, specifically,

should work with professionals well in advance of their business exit and subsequent receipt of sale proceeds. The team can help the business owner maximize the value of his/her business and meet future financial needs and goals. It is never too early to speak to a professional about the future sale of a business. Proper planning will maximize the proceeds and minimize expenses and taxes. Kenneth J. Sable, JD, MBA, AEP, is director of planning at Strategic Wealth Partners. Contact him at 216-800-9000 or ken@swpconnect.com.

CREATE YOUR JEWISH LEGACY

Caring for those in need never goes out of style. Whether we are feeding the hungry, comforting the sick, or caring for the elderly, our Jewish values have always inspired us to act. Those same values teach us to care for the next generation. By making a legacy gift, you leave your children and grandchildren a precious inheritance and a lasting testimony to your values. Find out how you can become a member of the Jewish Federation of Cleveland’s Legacy Society by contacting Carol F. Wolf for a confidential conversation at 216-593-2805 or cwolf@jcfcleve.org.

L’dor V’dor. From Generation to Generation.

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ESTATE PLANNING

S10 November 7, 2016

Making a gift and keeping the income By MARTA KELLEHER

ESTATE PLANNING

he most tax-advantageous assets to contribute to charity are those that have appreciated most in value. If you are considering selling an appreciated asset, would like to continue to receive income from this asset, and ensure the financial future of your charitable organization, you may want to consider a charitable remainder trust. The CRT is a form of split-interest charitable trust in which the donor (or heirs) receives an income stream, for either the life of the donor or a term of years, and the charity receives the

remainder value. The income can be a fixed sum of money (an annuity trust) or a fixed percentage of the trust that is revalued each year (a unitrust). This charitable tool can provide both a solid lifetime income and immediate tax benefits for the donor and the donor’s family. For example, if Mary wants to convert one or more of her assets to produce a significant income, the CRT is a good option. Mary (age 76) owns appreciated

stock worth $300,000 that she bought some years ago for $50,000. The growth stock provides little income. Mary could sell the stock and invest the proceeds, but she would incur capital gains taxes of $59,500. If she invested the after-tax sales proceeds Kelleher of $240,500 in CDs earning 2%, she would only realize an income of $4,810 that year. On the other hand, Mary can transfer the appreciated stock to an annuity

trust and name one or more charities as the remainderman. She receives $15,000, or 5% a year in income and an income tax charitable deduction of $161,922 (the deduction assumes an annual fixed rate of 1.8% and an annual payout). Mary’s charitable deduction will ultimately result in a tax savings of approximately $64,121. The tax savings and the annual lifetime payouts make the CRT a big win for Mary. The fact that what remains in the trust will go to a charity makes it a win for the charity.

The charitable remainder trust is flexible and can be tailored to meet individual needs and objectives. It can be a vital and rewarding part of a donor’s financial, retirement and estate planning. It can be a means of increasing spendable income or providing a reliable income for another person while carrying out a donor’s philanthropic objectives. Marta Liscynesky Kelleher, Esq., MBA, AEP, is the senior gift planning officer at University Hospitals. Contact her at 216-844-7912 or Marta.Kelleher@ UHHospitals.org.

Firearms require special considerations in estate planning By KEVIN R. McKINNIS

ESTATE PLANNING

f all the unique assets that may be covered in the estate planning process, firearms perhaps present the most unique set of challenges and considerations. Owners of firearms need to make sure they disclose ownership upfront during the planning process and seek counsel from an attorney who knows

the right questions to ask. Important considerations include the type of firearm involved, its value, background on the beneficiary and location of the beneficiary. There are multiple types of firearms and firearm accessories — each subject

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to different rules and regulations on the federal, state and local levels. While many of these issues may not arise until the individual dies and the estate or trust is being administered, they need to be considered when drafting the estate planning documents. Firearms not sub- McKinnis ject to the National Firearms Act are the most commonly owned and include hunting rifles and pistols. Two primary issues could arise when attempting to transfer ownership of these types of firearms — either the beneficiary is disqualified from owning a firearm because of being a felon or the particular firearm may be illegal in the

state in which the beneficiary lives. In addition, consideration should be given to whether the firearms should pass through probate or be transferred into a trust upon death because of the laws regarding the transferring of firearms. Of all firearms, Title II firearms create the most difficult estate planning issues. Those firearms fall under the authority of NFA and include sawed-off shotguns, silencers and machineguns. One strategy for passing on Title II firearms is to have a firearms trust own the firearms. If a firearms trust is not used, a new background check, registration paperwork and a fee of $200 must be filed for each firearm when it passes to a beneficiary. When an owner of NFA firearms passes away, his or her attorney must

inform the trustee or executor as to who can possess the firearms during the administration process and where the firearms can be legally and properly stored during the administration process. If the firearms are improperly transferred or possessed, an individual can be fined up to $250,000 and receive up to 10 years in prison. Without a doubt, there are many issues that can arise from passing on firearms. But good communications early in the estate planning process with an attorney knowledgeable about special firearms considerations will help avoid problems later on. Kevin McKinnis is an attorney in the tax and wealth practice group of Clevelandbased Walter | Haverfeld LLP.

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Tanzie D. Adams Charles F. Adler, III Ronald S. Ambrogio Bill Ambrogio Thomas D. Anderson Graham T. Andrews Gary S. Archdeacon Kemper D. Arnold James S. Aussem P. Thomas Austin Charles J. Avarello Molly Balunek Kimberly J. Baranovich Albert J. Barnabei Lawrence C. Barrett Ronald E. Bates Stephen Baumgarten Alexandra G. Beach Maureen K. Beaver Edward J. Bell Steven Berman H. William Beseth, III Mohammed J. Bidar Gary B. Bilchik Michelle M. Bizily Alane Boffa Tami M. Bolder Daniel L. Bonder Nicole K. Bornhorst Aileen P. Bost

Jill A. Branthoover Sandra J. Brantley Herbert L. Braverman Christopher Paul Bray James R. Bright Kenneth B. Brown Don P. Brown C. Richard Brubaker Robert M. Brucken Bethany J. Bryant Martin J. Burke, Jr. Eileen M. Burkhart J. Donald Cairns Carl Camillo William G. Caster Jennifer Chess James R. Chriszt Trevor R. Chuna Mark A. Ciulla R. Michael Cole Katherine E. Collin Jeffrey P. Consolo James I. W. Corcoran Heather A. Cornell Calla Hoyt Cornett Barbara J. Cottrell Greg S. Cowan Steven Cox Thomas H. Craft Joseph Crea

M. Patricia Culler Jason S. Damicone Thomas A. DeWerth Carina S. Diamond David S. Dickenson, II James G. Dickinson Sarah M. Dimling Nick DiSanto Mary Ann Doherty Lynda Doland Terry Ann Donner Kara Downing Timothy Doyle Emily A. Drake Therese Sweeney Drake Jill Dugovics William A. Duncan Carl J. Dyczek Howard B. Edelstein Elaine B. Eisner Michael Embrescia Michael E. Ernewein Christopher M. Essig Heather R. Ettinger Christina D. Evans Susan M. Evans Darren A. Ewaska Frank Fantozzi Charles E. Federanich J. Paul Fidler

November 7, 2016 S11

Julie E. Firestone Mary Kay Flaherty Linda Fousek Patricia L. Fries Robert R. Galloway Naomi D. Ganoe Stephen H. Gariepy Rao K. Garuda James E. Gaydosh Kyle B. Gee Christopher Geiss Thomas M. Genco Arthur E. Gibbs, III Thomas C. Gilchrist Stephanie M. Glavinos Caroline Gluek Ronald J. Gogul Scott A. Gohn James A. Goldsmith Susan S. Goldstein Tom S. Goodman Laura Joyce Gorretta Lawrence I. Gould David A. Grano Alicia N. Graves Karen L. Greco Sally Gries Anne Marie Griffith Nancy Hancock Griffith Elizabeth C. Griffiths

Alan D. Gross Gary Haas Ellen E. Halfon Patrick A. Hammer Sarah Hannibal Lorie Hart Lawrence H. Hatch Albert G. Hehr, III Theodore N. Hellmuth James M. Henretta Jean M. Hillman Joanne Hindel Mark L. Hoffman Ronald D. Holman Harold L. Hom Robert S. Horbaly Brent R. Horvath Michael J. Horvitz Stuart M. Horwitz Douglas Ingold Lynnette Jackson George A. Jacobs Paula Jagelewski Christopher P. Jakyma Barbara Bellin Janovitz Theodore T. Jones James O. Judd Matthew F. Kadish Stephen L. Kadish Ronald L. Kahn

Matthew A. Kaliff Joseph W. Kampman Karen J. Kannenberg Lori L. Kaplan William E. Karnatz, Sr. William E. Karnatz, Jr. Bernard L. Karr Howard Kass John D. Kedzior Marta L. Kelleher Lesley Keller Jonathan M. Kesselman Alexis Kim Amy I. Kinkaid Richard B. Kiplinger Elizabeth D. Klein Paul S. Klug Victor G. Kmetich Daniel R. Kohler James R. Komos Beth M. Korth Harvey Kotler Roy A. Krall Frank C. Krasovec, Jr. Thomas W. Krause James B. Krost Deviani Kuhar Craig A. Kukla Kristen Kuzma Louis D. LaJoe

THE ESTATE PLANNING COUNCIL OF CLEVELAND President Michael W. Matile

Vice-President Emily Shacklett

Gary E. Lanzen Steven P. Larson Donald Laubacher Mary Lavin Paul J. Lehman Kevin J. Lenhard David M. Lenz Wendy S. Lewis Keith M. Lichtcsien Dennis A. Linden James Lineweaver Jennifer R. Loan David F. Long Ted S. Lorenzen Amy R. Lorius Janet Lowder Edward C. Lowe Lisa K. Lowy Robert M. Lustig James M. Mackey David S. Maher Stanley J. Majkrzak Chad Makuch Karen T. Manning Monique W. Marinakos Wentworth J. Marshall, Jr. Donald C. May Nancy McCann Karen M. McCarthy Robert F. McDowell, Jr. Erica E. McGregor Ryan P. McKean Kevin R. McKinnis

Joseph M. Mentrek Lisa H. Michel Charles M. Miller William M. Mills Wayne D. Minich Ginger F. Mlakar Marie L. Monago M. Elizabeth Monihan Michael J. Monroe Robert C. Moore Kenneth R. Morgan Philip G. Moshier Joseph L. Motta Susan C. Murphy Hoyt C. Murray Norman T. Musial Christine A. Myers Raymond C. Nash Jodi Marie Nead Lisa Wheeler Neely Robert Nemeth Michael H. Novak Anthony J. Nuccio Eric A. Nye Michael J. O’Brien Lacie L. O’Daire Linda M. Olejko Matthew S. Olver Leslie A. O’Malley Robert J. O’Neil Richard M. Packer Jodi L. Penwell Dominic V. Perry

Secretary Julie A. Fischer Craig S. Petti Marla K. Petti Timothy J. Pillari Thomas Pillari Jennifer N. Pinkerton Douglas A. Piper Candace M. Pollock Mary Ellen Potter Douglas Price Rebecca Yingst Price Matthew M. Pullar Maria E. Quinn Susan Racey Uma M. Rajeshwar Timothy L. Ramsier Charles L. Ratner Melissa Anne Register Linda M. Rich R. Andrew Richner Radd L. Riebe Elton H. Riemer Kathleen K. Riley Michael G. Riley Frank M. Rizzo Lisa Roberts-Mamone Kenneth L. Rogat Carrie A. Rosko Philip B. Rosplock Debbie Rothschild Larry Rothstein Alexander I. Rupert Alexander I. Rupert Rennie C. Rutman

Treasurer Peter Balunek

Program Chair Dana Marie DeCapite

Kenneth J. Sable Patrick J. Saccogna Jennifer A. Savage Fran Mitchell Schaul Ronald S. Schickler Dennis F. Schwartz June A. Seech John S. Seich Doris A. Seifert-Day Andrea M. Shea Stanley E. Shearer Nick Shofar Douglas E. Shostek Roger L. Shumaker Gary M. Sigman Michael A. Simmons Judith C. Singer Mary Jean Skutt Mark A. Skvoretz John M. Slivka N. Lindsey Smith Cristin Snodgrass Arthur K. Sobczak, III Sondra L. Sofranko James Spallino, Jr. Richard T. Spotz, Jr. William L. Spring Laura B. Springer M. Randal Stancik Stacey Staub Kimberly Stein Laurie G. Steiner Saul Stephens

Immediate Past President Michael T. Novak

E. Roger Stewart Beverly A. Stiegele David J. Stokley Diane M. Strachan Thomas E. Stuckart John E. Sullivan, III Linda DelaCourt Summers Scott E. Swartz Joseph N. Swiderski David A. Szabo Yeshwant K. Tamaskar Richard Tanner Barbara Theofilos Maryann Fremion Thomas James K. Thompson Donna Thrane Floyd A. Trouten, III Mark A. Trubiano Thomas M. Turner Diann Vajskop Thomas M. Turner Diann Vajskop Robert A. Valente Jaclyn L.M. Vary Missia H. Vaselaney Amy Vegh Catherine Veres Mary Eileen Vitale Michael A. Walczak Kimberly A. K. Walrod Robert W. Wasacz Neil R. Waxman Kimberly A. K. Walrod

Robert W. Wasacz Neil R. Waxman Ronald F. Wayne Julie A. Weagraff Michael L. Wear Wade T. Weber Stephen D. Webster David G. Weibel Jeffry L. Weiler Richard Weinberg Miles P. Welo Katherine E. Wensink Elizabeth Wettach-Ganocy Marcia J. Wexberg Terrence B. Whalen Andrew Whitehair Frederick N. Widen Geoffrey B.C. Williams Erica K. Williams Scott A. Williams Teresa M. Wisniewski Nelson J. Wittenmyer Matthew D. Wojtowicz Carol F. Wolf Brenda L. Wolff Alan E. Yanowitz James D. Yurman Jeffrey M. Zabor Michael J. Zeleznik David M. Zolt Gary A. Zwick Donald F. Zwilling

ESTATE PLANNING

S12 November 7, 2016

For end-of-life wishes, document, communicate intent with family By EILEEN BEAL

ESTATE PLANNING

Do the paperwork The first, and most important, is to create a living will and medical power of attorney. “These are advance directives, and they should be kept up to date,” says Lori Lozier, a Benjamin Rose Institute on Aging board member. Living wills are medically and legally recognized documents. They give a patient’s health care providers instructions about the procedures, treatments and care they do and do not want if they are terminally ill, seriously injured, in a coma, in the late stages of dementia or near the end-of-life. “Every state has its own document and it must be witnessed by two people who are not the person’s physicians or on their nursing home’s staff, but it doesn’t have to be notarized,” says Lozier, who also is director of geriatrics, palliative care and post acute care services at University Hospitals Case Medical Center. The other document is a Power of Attorney for Health Care/Medical Power of Attorney. This authorizes the person named in the document to speak and make decisions on the patient’s behalf. “Their decisions can’t go against what’s in the living will, so they need to know what it says,” Lozier says. Advance directives can be ignored, however, if those who should know about them don’t. To decrease the chance that happens, copies of both documents should be included in all medical records. They also should be given to the person appointed power of attorney for health care, close family members and friends, and posted where an EMS team can easily find them.

‘‘

Because these conversations are about so much more than words on paper, they need to take place at home, not in a lawyer’s office, hospital or ICU.

Have the conversation Even when advance directives are in patient files and in the hands of those who should know about them, they may not get read. Or the person who reads them may not agree with them. To make sure that everyone hears both what the documents say and what they mean, discuss them before they are needed. Because these conversations are about so much more than words on paper, they need to take place at home, not in a lawyer’s office, hospital or ICU. “This is a kitchen table conversation. At the kitchen table there’s no stress and no crisis, so everyone can discuss things calmly,” Lozier says. Having that advanced conversation helps get everyone on the same page and can lessen the pain and anguish of a loved one’s passing. “That’s because they (the loved one) took the burden of making difficult decisions off them,” she says. “And also it’s because they know their loved one got the care and experience of dying that they wanted.” Eileen Beal is a local health and aging issues writer. Contact her at eojb@visn.net.

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What do billionaire Howard Hughes and rock icon Prince have in common? By JAMES S. LINEWEAVER

hen Prince passed away prematurely, he left behind an estimated $300 million estate that included several highend real estate holdings around the globe, and song and movie royalties, along with many unreleased songs. Prince also died single, childless, and “intestate,” or “without a will.” As a result, the complex process of resolving his estate and distributing the net assets has fallen to the federal and state probate courts. Ironically, despite having no wife or children, 36 potential “heirs” have laid claim to Prince’s estate, and it will likely take years to sort out. Several of these potential heirs will also undergo genetic testing to validate their claims. Similarly, Howard Hughes, the billionaire aviator, industrialist, and filmmaker, died childless and without a will in 1976. Hughes’ death set off a decades-long battle over his estimated $2.5 billion estate, with the last payout from his estate coming in 2010 — 34 years after his death — with a payment from a bankrupt mall owner to a loose federation of Hughes’ distant relatives.

Mistakes cost money, privacy and more What can we learn from the life and death of these extraordinary people? Quite simply, everyone should have a thorough and coordinated estate plan, and it’s never too early to create one. Why? Probate fees can skyrocket: appraisal costs, executor’s fees, court fees, legal and accounting fees, and surety bonds can reduce your estate value 3% to 8%. And, all court proceedings will be open to public scrutiny. So much for discretion and privacy. But probate costs and invasion of privacy are only part of the story. Lack of a will and proper planning also most likely mean higher state and federal taxes. In the case of Prince, the attorneys for the firm overseeing his estate estimated that Prince’s tax bill and fees could amount to almost half the value of his entire estate, or around $150 million. As a result, Prince’s estate will probably have to liquidate some real estate holdings and sell the rights to a number of his unreleased and released music, probably at a discount to true value. A 2015 online survey by Harris Poll revealed that 64% of Americans still don’t have a simple will or estate plan. Why? One of the most common reasons for the lack of an estate plan is “I don’t think

ESTATE PLANNING I need one.” Even if your own wishes aren’t a priority to you, at minimum you should want to make sure you don’t leave a disorderly financial mess behind for your loved ones. Regardless of your net worth, everyone should have a proper estate plan that identifies distribution of bank accounts, retirement accounts, Lineweaver family heirlooms, personal possessions, avoids probate and provides guidance to the next generation. Medium-sized estates might want to consider a revocable living trust to keep money in their bloodline, control distributions from the grave and minimize taxes. Larger estates should consider more sophisticated strategies listed below. Without a proper estate plan, a court may distribute your estate in a manner that is not in accord with your wishes or family’s needs. You could also expose your loved ones to unnecessary tax liabilities and extraordinary fees.

Where to go? Certainly there is no shortage of professional specialists willing to act as estate advisers. Attorneys, accountants, insurance agents, stockbrokers, private bankers, and others can all be valuable players. But, it’s only natural that each of these professionals will make recommendations most familiar to them. For example, attorneys might rec-

ommend some type of trust such as credit shelter, bloodline dynasty, charitable lead or charitable remainder trusts. The accountants might recommend gifting programs, LLCs, Roth conversions, stretch IRAs or family limited partnerships. The insurance agents will look at second-to-die life insurance inside an irrevocable life insurance trust, annuity trusts or charitable gift annuities. The stockbroker might recommend donoradvised funds and private foundations. All these are valid concepts and are worth looking into, as no two estate situations are exactly alike. Intelligent estate planning requires the use of a qualified, experienced adviser who is going to create, communicate, coordinate and monitor the proper estate planning strategies between yourself and the other relevant professionals. We refer to this adviser as a “financial quarterback.” His or her role is to ensure your entire professional team works effectively and efficiently to develop and monitor a worry-free estate distribution plan. In this context, perhaps the question to ask yourself is, “Who is your financial quarterback? ™” Sources for this article can be found at www.lineweaver.net James S. Lineweaver, CFP® AIF®, is founder, president and financial quarterback™ of Lineweaver Financial Group. Contact him at 216-520-1711 or www.lineweaver.net. Securities offered through Triad Advisors, member FINRA and SIPC. Advisory Services offered through Lineweaver Wealth Advisors, LLC. Lineweaver Wealth Advisors is not affiliated with Triad Advisors.

ESTATE PLANNING

November 7, 2016 S13

A simple thank you can go a long way By JULIE A. WEAGRAFF

S A primer on charitable donations of personal property By JAMES CORCORAN

any charitable donations are motivated by altruism. They may also provide substantial tax benefits. This primer covers the basics of the process. The IRS requires that charitable donations of personal property be made to nonprofit institutions with, for example, a 501(c)(3) status. A CPA can provide a full list of tax-exempt nonprofit institutions. Donated property must directly relate to the institution’s stated Corcoran mission and be in the institution’s possession on or before Dec. 31 of the tax year in which the deduction is claimed. Generally, a donor may deduct the fair market value of a donation from gross income. IRS regulations require a “qualified appraisal” for charitable donations in excess of $5,000 in fair market value. In part, a “qualified appraisal” is an

CHARITABLE PLANNING appraisal prepared by a “qualified appraiser.” Selecting an appraiser who belongs to at least one of the national appraisal organizations — American Society of Appraisers, Appraisers Association of America or International Society of Appraisers — is the best option to avoid rejection of a claimed deduction, or even a full-blown audit. Along with the properly prepared qualified appraisal, the donor will file Form 1040 and Form 8283, which requires the signatures of the qualified appraiser and ranking officer of the donee organization. Additional nuances require the assistance of a qualified appraiser. James Corcoran, JD, AAA, ASA, RICS, Esq., is an IRS qualified appraiser at Corcoran Fine Arts. Contact him at 216-767-0770 or corcoranfinearts@ gmail.com.

Julie A. Weagraff, CFRE, is the director of fund development for Girl Scouts of North East Ohio. Contact her at 330983-0399 or jweagraff@gsneo.org.

Security and Stability Ulmer & Berne’s estate planning attorneys rely on decades of experience to maximize opportunities, minimize risk, and protect your life’s work.

James A. Goldsmith jgoldsmith@ulmer.com 216.583.7114

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are so overused that they often lose their meaning. But to a charitable donor, a thank you can be expressed in a number of creative ways. To the donor who has contributed to a scholarship fund, a hand-written thankyou note from the student who received the scholarship can be extremely meaningful. To the donor who has supported a Weagraff chamber orchestra, an invitation to a reception to meet the conductor makes a music lover’s heart sing. To the donor who has given to a social service agency that provides food and clothing to those in need, a newsletter sharing

the story of a family who was helped can inspire a legacy of giving. Donors who make charitable commitments are making an investment in their communities and in the lives of others who need their support, whether it’s a scholarship, basics needs or the arts. Nonprofit organizations have the opportunity to build long-term relationships with their donors through a variety of stewardship activities throughout the year. Beyond the initial thank-you letter, an invitation, a greeting card and even a personal visit from a staff member are all ways that the organization can continue to remember their donors and remind them of how their investment is making an impact.

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tewardship is defined as “the careful and responsible management of something entrusted to one’s care.” Nonprofit organizations as the beneficiaries of charitable donations are responsible for making sure that their donors’ gifts are used in the manner they intended. Every donor deserves to be properly acknowledged for a contribution, no matter how big or small the gift. A timely thank-you letter, a phone call of appreciation from a volunteer and recognition in an organization’s annual report are all standard ways of expressing thanks. But when an organization goes above and beyond a standard thank you to a personal and creative thank you, then the path to true donor stewardship is achieved. Sometimes the words “thank you”

CHARITABLE PLANNING

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ESTATE PLANNING

S14 November 7, 2016

Donor-advised funds ideal charitable vehicle for owners who sell By LAURA J. MALONE

n discussions owners of closely held business have with their trusted advisers, there are often two important and interrelated questions about business exit: What is the best strategy for leaving the business, and how can I get the most financial and tax benefits from that exit? Business owners and their trusted advisers may also ask: How can I take a portion of these proceeds to make my world a little better? How can I ensure that my life’s efforts have made a difference? How can I be certain that my

CHARITABLE PLANNING success won’t alter my children’s values? A donor-advised fund is that point of intersection where the owner’s personal and social interests intersect in simple, taxsmart and meaningful ways. Many owners find the donor-advised fund enables them the Malone opportunity to ensure the same benefits of a private foundation but without the laborious oversight and, ironically,

with more privacy.

Business owner benefits Charitable planning with donor-advised funds can often increase the business owner’s personal benefit. Gifts of closely held stock, real estate or other assets qualify for the highest benefits available including: n Maximum income deduction available; n No capital gains on gifts of longterm assets; n No estate taxes on the portion that is donated; n Possibility of reduced alternative

minimum tax and net investment income tax; and n Tax-free growth of charitable assets.

No need to fear Owners often have concerns that making a charitable gift before the sale may lead them to losing control of the business. Gifting non-voting shares or a minority interest in the business allows the owner the ability to maintain majority control in the running and selling the business. Also, because the gift must be made before any formal, legally binding agreement to sell or merge the company, donating the shares

to the donor-advised fund and the subsequent transition of those shares to the buyer can take place without slowing down the transaction process. With the help of a multidisciplinary team of tax, legal and financial professionals, the simplicity and costeffectiveness of a donor-advised fund provides owners a meaningful way to create both leverage and legacy. Laura Malone, CAP®, CEPA, is vice president of corporate/complex giving for American Endowment Foundation (AEF). She can be reached at lauramalone@ aefonline.org or 888-440-4233.

Family philanthropy is one of the greatest charitable legacies By KAREN J. KANNENBERG

amily philanthropy has been a part of the Cleveland area since its founding. Many notable names come to mind as pillars of Cleveland’s philanthropic history, as

CHARITABLE GIVING well as for the support they continue to provide throughout Northeast Ohio. In recent years, several “new” families

have made significant gifts that have had a tremendous impact on Cleveland. Although there is not a specific definition for family philanthropy (or Internal Revenue Service legal classification), most people associate a private family foundation with the term

Your legacy helps create a healthier community. Leave your legacy. Remember University Hospitals in your estate plans.

family philanthropy. However, family philanthropy can also be accomplished through donor-advised funds or simply through siblings pooling their resources. Family philanthropy is not limited to those with exceptional means and it is an ideal way to introduce children to “giving back.” Ultimately, creating a plan for Kannenberg family philanthropy can be as unique as the individuals involved. For most families, creating a plan for family philanthropy begins with assessing assets and selecting the most appropriate financial or estate planning techniques. The Cleveland area is fortunate to have a wide range of estate planning professionals who have experience working with families to develop philanthropic plans from a financial perspective. However, finding the most appropriate charitable organizations to support can be the most challenging, yet rewarding, part of the process. To be truly effective, family philanthropy requires all generations of a family to evaluate their charitable

objectives. This includes not only selecting the organizations to support but how to make gifts. For example, some families focus on one or two organizations that will receive ongoing support based on a specific connection to their family such as a health-related issue, or religious affiliation. Others choose to define a specific geographic region. Identifying categories for support such as education or basic human need is also a common way for families to determine what organizations they would like to support. Holidays such as Thanksgiving can be a great time for families to start a conversation about family philanthropy or review their charitable plans. In addition to being an important part of estate planning, family philanthropy is a special way to keep multiple generations of families connected while making an impact on the community. Karen J. Kannenberg, CFRE, is manager of gift and donor development at Cleveland Metroparks. Contact her at 216-635-3217 or kjk@ clevelandmetroparks.com.

Gifts to University Hospitals continue the legacy of giving from generation to generation – by enabling us to live our mission every day:

To Heal. Enhancing patient care, experience and access To Teach. Training future generations of physicians and scientists To Discover. Accelerating medical innovations and clinical research And with your support, we’ll continue to provide the same high-quality care that we have for 150 years. Join the many who are making a difference.

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November 7, 2016 S15

Motivations for giving may evolve with time Donors tend to have personal stake in mission-driven bequests By CAROL F. WOLF

CHARITABLE GIVING should be taken seriously and often requires professional advice. Individuals who give to many charities annually will probably include only one or two charities in their wills, demonstrating another reason for the serious consideration that a bequest requires. The charities included in an estate plan are those that the donor thinks of as family — an additional child whom they wish to support even after they have passed away. Potential donors ponder several questions as they make charitable plans that “do good and feel good.”

What are my charitable priorities? In other words, what

do I care most about? Perhaps human services, religion or education. And, education may mean supporting an inner city tutoring program to one person and donating to a college campus building to another.

What impact do I want my gift to have? Donors may

Do I trust the organization? Donors need to feel

control over how their future gifts will be used are less likely to make unrestricted gifts, preferring designated or field of interest funds. Donors who require less control may prefer making a gift that may be used where it is

wish to fulfill an existing need or help create a new and innovative program.

that the organization receiving their bequest will use it as intended in a fiscally responsible manner. All this will happen long after the donors, and maybe their surviving family members are deceased. It is important that donors learn about the organization’s effectiveness, stability and experience with planned gifts. The relationship between the donor and key staff members, including the CEO and development professionals, is of utmost importance in establishing trust.

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if they want to be recognized for their planned gifts at all. The desire for recognition may motivate donors to reveal testamentary intentions during their lifetimes.

Carol F. Wolf, LISW, CFRE, is managing director of planned giving and endowments at Jewish Federation of Cleveland. Contact her at 216-593-2805 or cwolf@jcfcleve.org.

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close friend who is a cancer survivor sends an email asking you to sponsor her for a run/walk to support an organization that provides services for cancer patients and their families. You are somewhat familiar with the charity but have not supported it before. How long does it take to decide to make a donation? Most likely, you clicked on the link to her fundraising page and gave immediately. Will you continue your support annually? Will you include the organization in your estate plan? The annual gift takes Wolf thought, but the decision to make a testamentary gift requires much more consideration. Most people who give charitably support several charities each year for different reasons. As noted, it may be as simple as a quick response to a friend’s request. It may involve a business obligation or an event one wants to attend. Deciding to write a check or click on a link once or even annually may not take much soul searching or selfreflection. In contrast, the decision to include a charitable organization in an estate plan may take years and involve others in the decision-making process. Often, tax benefits may prompt charitable conversations but as the discussion progresses, it is the person’s philanthropic intent and goals that will lead to an actual commitment. Experienced development professionals know that charitable gifts made solely for financial reasons often end with regret. Testamentary gifts are usually much larger than charitable gifts that donors have made during their lifetimes. Therefore, it makes sense that the decision of what to give to whom

Charities appreciate knowing about expected gifts, and donors may enjoy being part of the charity’s Legacy Society. Once these questions are answered, donors may have a better idea of the organizations they wish to support. Next, deciding how to make the gift may involve a team of advisers, including a financial professional, CPA, attorney, development professional and hopefully, family members. The most successful philanthropic plans include open communication between donors and the team of advisers. By working together, they help the donor achieve his or her personal, philanthropic and financial goals. Charitable giving has been scientifically proven to improve health and quality of life. Russell James, director of graduate studies in charitable planning at Texas Tech, has a theory about the core reason for philanthropy. “Deep down in a person’s head, perhaps in the subconscious, there is something that drives a person to seek meaning outside of themselves, and it often finds expression through charitable giving. Giving to help others and/or to a cause greater than one’s self gives meaning to our own lives.” Perhaps that is the most influential factor that motivates donors’ philanthropic decisions, and all other details are secondary.

ESTATE PLANNING

S16 November 7, 2016

Tax-beneficial IRA charitable rollover rules now permanent By HOWARD ESSNER

CHARITABLE GIVING

id you know you can make a charitable contribution directly from your IRA, avoid federal (and possibly state) taxation on the distribution, and have the contribution count toward your required minimum distribution? This special provision, which has been around in temporary form since 2006, is now permanent. If you take money out of an IRA and contribute it to a charity, the distribution would be taxable, but you might not get a full Essner tax benefit from the corresponding charitable contribution deduction. Now, a qualifying charitable distribution from an IRA is excluded completely from your federal taxable income. This can help save taxes in the following situations: n If you do not itemize and would not realize a tax benefit from the contribution. n If you have maxed out your charitable deductions at 50% of adjusted gross income, since gifts from the IRA do not count against this limit. n If you are subject to taxes or limitations on deductions that are limited because of high income,

because the charitable distributions from IRAs are not counted as income. n If you live in a state that does not allow charitable deductions and/or taxes retirement distributions like Ohio. In order for a distribution to be excluded from income, the following requirements must be met: n The distribution must be made from a traditional or Roth IRA. Distributions from 401(k), 403(b), SEP, Keogh or defined benefit plans are not eligible. n The owner of the IRA must have reached age 70½ by the date of the contribution. n The distribution must be made to a qualified charitable organization. Donations to private foundations, donor-advised funds and supporting organizations do not qualify. n The amount excluded from gross income is limited to $100,000 per year per taxpayer. n The contribution must be made directly by the IRA custodian to the charitable organization. Howard Essner, J.D, is general counsel, managing director and family wealth advisor at Ancora Inverness LLC. Contact him at 216-839-5130.

Team-based strategy best for executing gifts By STACEY L. McKINLEY

hen finalizing estate plans, many individuals wish to include their favorite charities. While charitable giving often is through wills or trusts, advisers may want to remind their clients that they can make a meaningful philanthropic gift through a beneficiary designation. A charity easily can be named a beneficiary of a life insurance policy, an IRA or other retirement account, or another transfer-on-death asset such as a bank or brokerage account.

Reasons for giving There are significant reasons for naming a charity as beneficiary of these assets. Family members could face a hefty personal tax burden if they were named as the beneficiaries of a retirement account. In addition, beneficiary designation forms are simple to execute and often can be completed or updated online at no cost. Upon a donor’s death, a beneficiary designation allows an asset to be transferred to the charity quickly and outside of the probate process.

Documentation that nonprofits need Advisers should remind donors that a beneficiary designation form takes precedence over a will. When assets are transferred through a beneficiary designation form, a will is simply a back-up document.

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CHARITABLE GIVING A donor naming a charitable organization as beneficiary of a retirement or other account will need some basic information from the charity to complete the gift. This includes the organization’s legal name and tax identification number, which can be obtained by calling a development or gift planning professional at the McKinley organization. This information also might be found on the charitable giving page of an organization’s website. Charities often ask donors to notify them if the organization is named an account beneficiary. A donor can give the charity a copy of the beneficiary form. Another option is to complete an organization’s gift intention or notice of future philanthropy document that includes the donor’s name and address, gift type, estimated value of the gift, and the name of the donor’s attorney or financial adviser. This form typically is non-binding and can be revised at any time. An added benefit of these forms is that they allow donors to notify a charity when their gift is to be used for a specific purpose, something the beneficiary form may not provide. Having a copy of a donor’s beneficiary form also may make it easier for a charity to collect a gift upon that individual’s death. Life insurance and financial services companies typically require beneficiaries to submit a certified copy of a donor’s death certificate to collect funds. In many instances, a charity can purchase a copy of a death certificate online through a third-party vendor. In some jurisdictions, such as New York, death certificates are obtainable only by immediate family members or others with a documented claim or court order. Having a copy of a donor’s beneficiary designation form is the most effective way to prove a charity’s legal claim to a decedent’s asset.

Financial services companies also require other items from the charity in order to distribute a gift through a beneficiary designation upon a donor’s death. A development or finance officer can facilitate and make sure these items are readily available in both print and electronic files. Most finance and life insurers will require a corporate resolution and a certificate of incumbency. The resolution indicates that the charity is authorized to collect the gift. The certificate of incumbency shows who is authorized to sign documents on behalf of the organization. These frequently are within one document. Organizations should make it a point to update these documents regularly to ensure that they have the signatures of their current officers and executives. Many financial companies also will request a nonprofit corporation’s Articles of Incorporation, a document that serves as the official recognition of the corporation’s existence. Corporate articles usually can be found by searching the secretary of state’s web site. Organizations should keep a PDF copy of their organization’s articles in their electronic files in order to retrieve a copy quickly when needed. Finally, charities should include a letter to the financial services company requesting immediate payment along with the forms and other items requested for collection. A financial services company may not issue a check automatically after receiving these items. Charities should make it clear that the funds are not to be held in an account, but immediately should be sent to the charitable beneficiary.

Teamwork is important By working together, donors, financial advisers and charities can use retirement funds, life insurance or other assets to make a significant philanthropic gift that is easy to establish and can provide generous support for years to come. Stacey L. McKinley is director of gift planning at Cleveland Clinic. She can be reached at 216.445.8552 or mckinls@ccf.org.

ESTATE PLANNING

CHARITABLE GIVING

Planned gifts free up funds to spend on life By MARY GRACE HERRINGTON

November 7, 2016 S17

Donating household items may require an appraisal By LORIE HART

CHARITABLE GIVING

onating household goods and clothing is a great way to clear out a home and help others. However, the donor must comply with the 2006 Pension Protection Act when making a non-cash contribution of household goods for a tax deduction. This act was partly enacted to stop taxpayers from donating household items and clothing in poor condition and claiming tax deductions. Broken chairs and torn shirts are no longer acceptable items for donation. According to the act, clothing and household goods must be in “good”

condition. “Good” is not defined, however. Household goods are defined as furniture, furnishings, electronics, appliances and linens. Donations may be made to a qualified tax-exempt organization that has 501(c)(3) tax-exempt status. Churches and other religious organizations are not required to obtain this tax-exempt status. There are several other types of organizations that are also tax-exempt, thus, it is best to consult with your CPA to confirm your donation is deductible. Keep records and receipts of all dona-

tions. For items totaling more than $500, IRS Form 8283 must be submitted. Keep a list of donated items, including condition, value and charity names and addresses. For a single item donation of $500 to $5,000, you must include how you acquired the item and when you acquired it. If the item is in Hart poor condition, you need a formal appraisal from a qualified appraiser. A broken Windsor fan back chair made by Charles Chase may have value and qualify as a donation. A moth-eaten

Victorian gown may not have value and would not qualify. Non-cash donations valued at more than $5,000 must have a formal appraisal and a completed Form 8283. A personal property appraisal is a written document that provides a value for an item based on research. An appraisal is written according to the Uniform Standards of Professional Appraisal Practice. Qualified appraisers are compliant with USPAP and have a certificate stating that they are up-to-date. Lorie Hart, ISA, AM, is a founder of L&L Estate Liquidation & Appraisal Services LLC. Contact her at 216-470-7002.

hen you really believe in an organization and its cause, you may be drawn to support it with small, targeted gifts — tickets to an annual fundraiser or an annual donation. Though every dollar counts when it comes to charitable giving, planned gifts allow you to make a lasting financial difference in your chosen charities without impacting your current cash flow. There are ways to balance your philanthropic values so that you’re able to support organizations long term while still invest- Herrington ing in life’s current moments. Donors should seek counsel from their trusted financial advisers on the specifics, but to get you started, here are three simple ways to make the most out of your assets through planned giving:

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Make a charitable bequest You can leave organizations gifts in your will or living trust either as a percentage of your estate or based on what remains after other obligations have been met. This allows you to ensure that group’s mission continues.

Redistribute your retirement plan assets Consider naming your favorite charity as the beneficiary of your IRA or pension plan. This is an especially good fit for planned giving because charitable organizations do not owe taxes on retirement plan assets they inherit. If the same assets go to family heirs, they will typically owe income and estate taxes.

Leverage your life insurance policy There are a few ways to leave a life insurance policy as a charitable gift, including naming your favorite charitable organization as the beneficiary of a new or existing life insurance policy or signing over ownership of the policy to an organization so the donor receives an income tax deduction for the approximate policy value as of the transfer date. These legacy-defining actions can be reviewed and updated at any time, but setting them up now is the first step to leaving the exact legacy you want for yourself. Mary Grace Herrington, CFRE, is chief development officer at WVIZ/PBS, 90.3 WCPN, and WCLV 104.9 ideastream. Contact her at 216-916-6270 or marygrace.herrington@ideastream.org.

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ESTATE PLANNING

S18 November 7, 2016

Frame your estate plans early on Proactive approach helps build lasting legacy By JENNELL C. VICK

he goal of estate planning is to make arrangements for your estate, before death, through various means, like wills, trusts or insurance policies. You might think that estate planning happens a very long time from now — closer to death, or

CHARITABLE GIVING minimally, long after the kids moved out and you’ve had sufficient time to amass any sort of “estate.” The reality is that estate planning can and should happen now, and should reflect your values and priorities, includ-

ing the causes and charities that are meaningful to you. Optimally, estate planning is one component of any financial plan that begins with the end in mind. While we assume death will occur much later in life, establishing life and disability protection, Vick as well as maintaining an updated will, should be part of every financial plan.

When you build a home, the contractor starts at the foundation and builds up. The same is true with financial planning. Once a strong foundation of protection is in place, you will build walls of accumulation as your assets continue to grow. But long before the contractor poured your foundation, an architect helped design a plan the contractors would follow. That crucial design piece is often absent in early financial plans, if they even exist. People tend to assume they have to accumulate assets before seeking assistance from a financial adviser. This outdated

idea could not be further from the truth. A financial plan that begins with the end in mind will help you protect those you love, accumulate more on your journey and ultimately leave a legacy greater than you imagined. Financial plans that include estate planning will help you meet your financial goals and make a meaningful philanthropic impact along the way. Jennell C. Vick is executive director of the Cleveland Hearing & Speech Center and an assistant professor at Case Western Reserve University.

Your success is our foremost concern.

Open discussion with charitable beneficiaries is mutually beneficial By DAVE STOKLEY

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onors are often reluctant to notify charitable beneficiaries of planned gifts they have made to these organizations. Understandably, some donors value their privacy, while others may worry about committing to something that seems distant in their future or perhaps uncertain. Organizational development staff understand and honor these valid concerns and are here to help. Here are just a few reasons it may be in your favor to notify charitable beneficiaries of your plans:

CHARITABLE GIVING Avoid surprises Many donors have specific passions at the organizations they support and choose to direct their gifts accordingly. As time passes, however, the needs and functions of an organization often change, which can cause restrictions on the use of the gift to severely limit its impact. A Stokley conversation will go a long way toward maximizing your gift’s impact and intent.

Set an example

SMART ADVICE

Many people make gifts after being inspired by seeing someone else give. When you tell an organization about your gift and allow them to recognize it, you create the possibility that others will follow your example.

Enjoy special benefits Many charities have special groups designed to thank and recognize those who have made estate gifts.

Retain flexibility and anonymity In terms of flexibility, charities understand that circumstances can change and that your gift may be less than originally intended. Many types of gifts can be changed (e.g. wills, revocable trusts), and notifying your charity of the gift can be done without being legally binding. For those who do not want public recognition, your charity will be happy to keep your gift anonymous. Anonymity does not prohibit you from discussing your intent, inspiring others or enjoying other benefits offered. Dave Stokley, JD, is the associate director of principal giving at the Cleveland Museum of Art, where he also advises donors on planned giving strategies. Contact him at 216-707-2198 or dstokley@clevelandart.org.

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ESTATE PLANNING

November 7, 2016 S19

5 smart ways to maximize your donor-advised fund By KAYE RIDOLFI

onor-advised funds have become a universally popular tool in charitable giving, and for good reason. These funds are a smart choice for your philanthropic investments, and with careful planning, can bring you great tax savings, flexibility and the benefit of centralizing your charitable dollars in one convenient account. In 2015, donor-advised funds at the Cleveland Foundation invested nearly $18 million in our community and beyond. Some simple strategies can help you fully realize the impact of your fund and boost the satisfaction you get from giving:

CHOOSE THE RIGHT PARTNER: You have options in who you choose to set up and manage your donoradvised fund. Be sure to think through what is most important to you in your giving. When you choose the Cleveland Foundation as your charitable partner, for example, you have access to expert grantmaking and financial teams. Our staff members have a deep understanding of the community’s needs and the most effective nonprofits who serve them. A dedicated adviser will work with you to customize a giving plan that will help you make your charitable giving more impactful.

INVOLVE YOUR FAMILY: You may choose to involve your family by designating members as current advisers or successor advisers to your fund. Some donors have even opened up separate donor-advised funds for each of their children. Many donors like the idea of teaching their children how to make grantmaking decisions and experience firsthand how their philanthropic choices can transform the community. A customized philanthropic plan helps donors and their families establish a shared vision. Engaging your family members is one way to demonstrate the importance of charitable giving and to perpetuate your legacy of giving through the generations.

MAXIMIZE FLEXIBILITY: Timing: The nature of a donoradvised fund allows you to make philanthropic decisions whenever it works for you. When you make a contribution, you can claim an income tax deduction right away, and decide which charities to support at your convenience. Assets: The most popular types of contributions to donor-advised funds are cash and appreciated securities. If you choose to gift appreciated securities to your fund, you claim full market value as a deduction without paying taxes on appreciation. What’s more, the Cleveland Foundation can facilitate your fund’s gift of appreciated securities to smaller charities that may not have the means of handling your donation directly. Convert your private foundation: If you created a family foundation years ago and now find that circumstances are different, perhaps as a result of a changing family, geographic dispersion, or updated charitable pri-

CHARITABLE GIVING orities and estate plans, you can convert your private foundation into a donor-advised fund. You can focus on the grantmaking and won’t have to worry about the administration of the fund, and will likely receive tax benefits. Gifts from others: Not only can you add to your fund anytime with a variety of assets, but others can too. This creative option can increase the impact of your fund, and also expose friends, family and community to the power of

giving. Many Cleveland Foundation fund holders have shared news of their fund with friends and family, encouraging donations in memory of a loved one, or in place of wedding, anniversary, retirement, birthday or bar and Ridolfi bat mitzvah gifts.

CONNECT TO THE COMMUNITY: Inform your giving by connecting with other fund holders as well as the many nonprofits in

Greater Cleveland and beyond doing meaningful work worthy of your investment. Donors can use their funds to contribute to any 501 (c)(3) nonprofit organization in the U.S. You can choose the causes and charities you want to support here at home, or in other communities that are important to you. Grants made from your donoradvised fund can always be made on an anonymous basis.

LEAVE A PERMANENT LEGACY: As you review your estate planning options, consider using your donor-advised fund to

leave a lasting legacy. You can designate children or other beneficiaries to continue grantmaking in your name after you pass away. The Cleveland Foundation has a long history of partnering with professional advisers to design creative solutions so your fund remains part of your larger estate, or so your favorite charitable organizations are supported by you in perpetuity. Kaye Ridolfi is senior vice president of advancement at the Cleveland Foundation. Contact her at 216-615-7168 or kridolfi@clevefdn.org.

Trust your legacy with our top-ranked Personal & Succession Planning practice. Thompson Hine’s professionals in our Personal & Succession Planning practice advise high net worth clients, business owners, executives, family offices and nonprofit organizations on a variety of sophisticated estate planning, business succession planning and charitable planning matters. Our lawyers also advise fiduciaries on trust and estate administration matters, risk management, conflict resolution and litigation. Working with a client’s other advisers, we implement comprehensive plans for our clients. We address clients’ needs as they relate to: • Wills, trusts, powers of attorney and health care documents • Trust and estate administration • Business succession planning • Tax minimization and gifting strategies • Family Offices • International planning matters • Philanthropy • Retirement planning • Funding college costs • IRS audits and disputes • Fiduciary litigation

Thompson Hine’s Personal & Succession Planning practice is ranked in Band 1 for Private Wealth Law (Ohio) in Chambers High Net Worth. In addition, each of the lawyers above has been selected for The Best Lawyers in America® 2017.

For more information about our lawyers and how we can assist you, please contact us. Patrick J. Saccogna, Partner Personal & Succession Planning 216.566.5761 Patrick.Saccogna@ThompsonHine.com James Spallino, Jr., Partner Personal & Succession Planning 216.566.5865 James.Spallino@ThompsonHine.com Andrew L. Fabens, III, Senior Counsel Personal & Succession Planning 216.566.5736 Andy.Fabens@ThompsonHine.com Tom Feher, Partner Fiduciary Litigation 216.566.5532 Tom.Feher@ThompsonHine.com

ESTATE PLANNING

S20 November 7, 2016

Communication is key to succession planning By CHUCK FEDERANICH

s few as 3% of all family businesses survive to a fourth generation, let alone thrive. The methods of effectively transferring a business, whether to family members or by other means, are constantly changing, either out of evolution or as a result of challenges by taxing authorities. Gifts of equity interests are popular, either outright or in trust. Nonvoting interests transfer value without giving

TAX PLANNING up control. Recently proposed Section 2704 regulations would prevent the use of valuation discounts when transferring equity to family. Shifting ownership before law changes take effect will be an important issue through the end of 2016. Other ideas can be explored if attractiveness of family gifts is limited. Lost discounts may not be a problem

for married owners with lifetime gifts and estates below $10.9 million in value. More equity will be conveyed at death, giving heirs a basis step up to the equity’s fair market value. Tax-free basis stepup of assets is being questioned in current proposals, but outright Federanich repeal would adversely affect many more small business owners. This reduces the chances of the business

making it to the next generation. However, not all business owners have family members interested in taking over. If owners have built a strong team internally, an employee stock ownership plan is worth considering. Employees buy the business on a taxdeferred basis, typically using debt for the purchase. The ESOP itself is not subject to income tax. Funds that would have been used for taxes can instead pay down the note. Practitioners can propose numerous solutions from the alphabet soup of

Grantor Retained Annuity Trusts (GRAT’s), Intentionally Defective Grantor Trusts (IDGT’s), and the like until their clients’ eyes glaze over. The real solution is for advisers and their clients to communicate regularly about owners’ objectives for transitioning their business, to ensure that owners’ wishes are truly being met. Chuck Federanich, CPA, MT, AEP®, is director of tax at Pease & Associates CPAs. Contact him at 216-348-9600 or cfederanich@peasecpa.com.

Proposed family business valuation rules warrant attention By JOSEPH M. MENTREK

n August, the Treasury Department released long-anticipated regulations aimed at curtailing or eliminating the discounts traditionally allowed in determining the value of non-marketable minority interests in a family business for federal estate, gift and generation-skipping tax purposes. The perceived valuation discount “loophole” has been on the current administration’s hit list since 2009, with a call for either legislative or

TAX PLANNING regulatory action to eliminate the benefit and its alleged abuse. The proposed regulations mount a powerful attack in response to previously failed attempts by the IRS to limit such discounts. The changes would apply to transactions where 50% or more of the equity in the business is owned by the family of the person transferring the interest.

The regulations impute control and liquidity in the form of a three-year look back rule that ignores a transfer establishing a minority interest for a decedent and a broader concept of disregarded restrictions that effectively eliminate the discounts altogether. The regulatory pro- Mentrek nouncement allows the IRS to impose what amounts to an affirmative and proportional right of liquidation or

redemption on the part of the person holding the interest to be valued (a “put” right) whether or not such right actually exists, unless such a restriction is actually mandated by state law. Fortunately, the effective date of the proposed regulations is neither immediate, nor retroactive. Depending on the provision, the regulations do not take effect until they are published in final form, or 30 days thereafter. Even then, we are not certain which provisions will survive. For now, it appears that if you are considering a family business transition

strategy, the perceived success of which could be measured by the magnitude of the valuation discount allowed, it may be time to consider action. We encourage you to engage your professional advisers to evaluate your options and define a favorable course of action. Joseph M. Mentrek, Esq, AEP®, is a partner at Calfee, Halter & Griswold LLP and is the co-chair of their Estate and Business Succession Planning Practice. Contact him at 216-622-8866 or jmentrek@calfee.com.

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ESTATE PLANNING

Proposed regulations could impact family business interests

Laws could eliminate discounts on transfers By KEVIN G. ROBERTSON

n Aug. 2, 2016, proposed regulations were released under Internal Revenue Code section 2704. The proposed regulations would eliminate most valuation discounts on redemptions and transfers of family business interests among family members when a single family “controls” the business both before and after the transfer. Congress enacted Chapter 14 (Sections 2701 through 2704) of the code back in 1990, to curb perceived abuses in the discounted valuation of property transfers between family members. For this purpose, “family members” of any individual include (i) his or her spouse, (ii) any ancestor or lineal descendant of such individual or of his/her spouse, (iii) any sibling of such individual, and (iv) any spouse of any person described in (ii) or (iii). Further, a business entity is “controlled by” members of a family if the members of a single family hold (a) at least 50% of the stock of a corporation (by vote or by value); or (b) at least 50% of the capital or profits interest in a partnership; or (c) any general partner interest in a limited partnership. Under current law, a parent may avoid a so-called control premium on transfers of equity interests in the family business as long as the parent transfers equity interests before death, so that the parent does not hold a controlling equity interest at death. Generally, equity interest transfers to children during the parent’s life may be valued (for gift and estate tax purposes) at the same discounts that an unrelated third party would apply when offering to purchase such equity interests at “fair market value.” The proposed regulations would disallow traditional valuation discounts by “disregarding” various real-world restrictions that apply to noncontrolling equity interests. The proposed regulations include several new valuation rules that would negate valuation discounts when transferring equity to a family member, even though such discounts are comparable to realworld discounts demanded by unrelated buyers when purchasing such equity interests. Similar rules would disallow or restrict discounts (and sometimes “ignore” noncash consideration paid) when redeeming a family member’s equity interest in a family-controlled enterprise. For example, the proposed regulations would impose the following new valuation rule: When an equity interest is transferred among family members in a business entity controlled by family members, the equity interest would be valued without regard

TAX PLANNING

‘‘

In the real world, no business could operate if all equity holders, at any time, could demand ‘full liquidation value’ redemption of their equity interests.

to the actual economic fact that the donee-equity holder cannot compel liquidation or redemption of his/her gifted interest (much less liquidation of the entire business enterprise). Under such new rule, any equity interest gifted among family members would be valued, for transfer tax purposes, no lower than the equity interest’s “share of the net value of the entity determined on the date of liquidation or redemption.” The proposed regulations would create an assumption that the donee-equity holder had the power to compel a liqui- Robertson dation of his/her interest in the entity at a price equal to the equity holder’s pro rata share of the net liquidation value of the enterprise. Such a new valuation rule would be unfair. In the real world, no business could operate if all equity holders, at any time, could demand “full liquidation value” redemption of their equity interests. This is only one of many examples where the proposed regulations would prohibit a family member from recognizing real-world economic discounts in determining the transfer tax value of equity

transferred between family members. The Notice of Proposed Regulations provides for a written comment period followed by a public hearing on Dec. 1, 2016, in Washington, D.C. The proposed changes, as reflected in the final version of the regulations, generally would apply to transfers of equity interests occurring on or after the date the regulations are published as final regulations. As a practical matter, final regulations under code section 2704 likely will not be issued until sometime in 2017, at the earliest. Given the broad scope of the proposed regulations, and the numerous new valuation rules they would impose, the final version of the regulations may be modified significantly. The proposed regulations will be commented on (and likely criticized) by any number of groups representing taxpayers, tax professionals and family businesses. The threat posed by the proposed regulations is considerable. If the regulations were to be finalized “as is,” the transfer tax valuation rules for equity interests transferred between family members would change dramatically. The level of discounts for lack of control, illiquidity and for the closely held nature of equity interests all could be reduced severely. Business succession planning and wealth transfer planning with closely held business interests should be considered with renewed vigor through 2016 by any individual with an estate potentially subject to the federal estate tax. If a senior-generation family member is willing to consider transferring equity interests in a closely held enterprise this year, the ideal approach would be to work with tax and business planning advisers to plan and execute such transfers before these proposed regulations become final. Kevin G. Robertson is a partner at BakerHostetler. Contact him at 216-8617977 or krobertson@bakerlaw.com.

November 7, 2016 S21

Tax buckets may help maximize retirement savings By GARY SIGMAN

“I

TAX PLANNING

t’s not what you make, but what you spend.” When applying this idea to retirement plan distributions, many individuals discover if they have not managed their distributions efficiently, they will have less money than anticipated as a result of paying higher tax. For example, you retire at age 65 with $2 million in a traditional IRA and $50,000 in other taxable income. You also Sigman have $25,000 in deductions/exemptions. In this scenario, you fall safely into the 15% tax bracket. Even if you add $25,000 in social security benefits in two years, you may still remain in that bracket. However, at age 70 ½, the required minimum distribution from your IRA could be roughly $80,000, and as a result, you move into the 28% bracket. What can you do? We advise clients of the advantages of creating tax “buckets” for their retirement savings: n Pre-tax 401(k) accounts and traditional IRAs lower taxable income and reduce current taxes. Tax is owed when money is withdrawn in retirement.

n In after-tax Roth 401(k) or Roth IRA accounts, money grows tax-free. Qualified withdrawals (in retirement) are also tax-free. n With taxable investments, taxes are due each year on investment earnings whether you are retired or still working. (Dividends or gains may be tax-free or reduced.) Going back to the example, if you were to withdraw $50,000 from your Traditional IRA at age 65, and are married, you may be at the top of the 15% bracket. While it is difficult to pay tax when you don’t have to, consider the 13% future tax savings. Doing this reduces your future required minimum distribution and the associated tax. When structured properly, buckets allow greater flexibility for reducing your tax obligation on plan distributions. Before you initiate any of these options, consult with your adviser and prepare a multi-year tax projection to ensure what you saved is maximized during retirement.

Gary Sigman, CPA, M.Tax, PFS, AEP, is a senior tax manager at Zinner & Co. Contact him at 216-831-0733 or gsigman@zinnerco.com.

independence integrity best interests For a future that amounts to more, change the equation. Partner with Glenmede, an independent, privately-owned trust company offering investment and wealth management services. Founded in 1956 by the Pew family to manage their charitable assets, we provide customized solutions for families, endowments and foundations. While others follow the beaten path, our team is free to think apart and generate ideas that power you toward your goals. To learn more, contact Linda Olejko at 216-514-7876 or linda.olejko@glenmede.com.

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S22 November 7, 2016

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There are options when investing in long-term care insurance

Chambers High Net Worth: Private Wealth (2016)

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he cost of a private room in a nursing home facility is projected to cost about $165,000 in 20 years. Therefore, many advisers encourage their clients to start planning for long-term care in their 40s and early 50s. In the 1990s and 2000s, long-term care insurance was a popular and seemingly prudent way to insure the risk of long-term Judd care. However, many of the people who purchased this coverage are facing steep rate increases, some more than 100%. For those who have traditional longterm care insurance and have received a rate increase, there is the option to pay the increased premium. There is also the option to reduce the benefit or the benefit period, drop or reduce inflation riders and/or extend the elimination period, which is the length of time one must wait before benefits begin. For those who are considering the purchase of long-term care insurance, there are a few items to consider.

INSURANCE PLANNING First, many of the large insurers have exited the market, leaving only a few who offer true long-term care insurance. These policies could be subject to future rate increases, and consumers should be aware of a carrier’s rate increase history before purchasing a policy. Second, there are alternatives to traditional long-term care insurance that offer rates guaranteed to never increase. One is life insurance with a long-term care rider. These are permanent life Insurance policies that allow the insured to take an advance of the death benefit to pay for qualified long-term care expenses. Another alternative acts more like an annuity in that a lump sum is placed with an insurance carrier. In return, the insured has a cash balance, a longterm care benefit and a death benefit that pays if the long-term care benefit is never used. James O. “Dell” Judd, CLU, ChFC , is senior vice president of Oswald Cos. Contact him at 216-367-8754 or djudd@ oswaldcompanies.com.