Estate Planning 2015 by Crain's Cleveland Business

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ESTATE PLANNING Looking to the future: Investors can maximize wealth while leaving a tangible legacy

Retirement planning in a low interest rate environment

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Estate Planning Council of Cleveland

Estate Planning

S2 November 9, 2015

Estate Planning Council Delivers Well-Rounded Expertise By michael t. novak

he Estate Planning Council of Cleveland is pleased to once again partner with Crainâ&#x20AC;&#x2122;s Cleveland Business in presenting our annual estate planning special section. The purpose of this collection is to provide the business community and area readers with timely information and resources related to a wide range of estate planning areas, including financial, insurance, business succession, and estate and charitable planning. We are fortunate to be able to tap some of the regionâ&#x20AC;&#x2122;s most experienced professionals to help answer estate planning concerns, or perhaps start you on your personal estate-planning journey. Please be sure to select an advisor that best fits with your situation. Estate planning can be overlooked when engaging in personal financial management. Millions of Americans do not have an up-to-date estate plan or even basic necessities such as a power of attorney and/or medical directives. Absence of these documents can create difficulties for your family in the event of your illness, accident or untimely

, president s letter death. Committing a modest amount of time to putting these important documents in place can save much time and expense for you and your loved ones, and bring certainty to what your representatives should do in giving attention to your needs and assets. The bright side to gridlock in Novak Washington is that few tax laws have changed. Those that affect estates and lifetime giving remain essentially the same. Our low interest rate environment continues unabated, and certain types of estate planning transactions work very well when interest rates are as modest as they continue to be. There has actually been more change in state laws regarding the administration of trusts. If you have old trust documents, seek advice from an estate planner on how you might make changes for the benefit of your

family and heirs. Be sure to engage an estate planner who has experience in advising clients on the types of issues that you will confront. Plenty of such experienced professionals make up the membership of the Estate Planning Council, and they can help you evaluate how your personal financial goals have been affected by market and law changes in the United States, as well as events on the world stage. Even before working through decisions based on market and law developments, you might first need discussion and advice on determining your estate and financial planning goals. You might need to first focus on your financial security through your projected lifetime. You may have family members with special needs. You may have a family business that requires succession planning, or preparation for sale. You might decide that there are charitable opportunities you would like to pursue. Our members can help you with the methods, techniques and documents that will enable you to attain these and other goals. In existence and serving the community for over 70 years, the Estate

Your legacy helps create a healthier community.

Millions of Americans do not have â&#x20AC;&#x153; an up-to-date estate plan or even basic

necessities such as a power of attorney and/or medical directives. Planning Council of Cleveland has over 400 members, having grown to become one of the largest councils in the United States. We have a uniquely diverse membership, including attorneys, accountants, financial planners, investment advisors, bankers and trust officers, insurance representatives, appraisers and professionals engaged in the operation of charitable organizations. Some are nationally recognized for expertise in their respective fields. A significant benefit of membership in the Estate Planning Council is that on a continuing basis our member professionals are afforded the opportunity to interact with council members in other fields. A client estate plan often requires the involvement of several types of advisors, and our members are very familiar with each other through Estate Planning Council activities and programs. When engaging an Estate Planning Council member for your planning,

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you will work with someone who is committed to their clients and their community, and is here to provide you with the assistance you need to safeguard your familyâ&#x20AC;&#x2122;s financial future. Our website, www.epccleveland.org, is a valuable resource that can help you identify the professionals you will need to handle your unique situation. We are pleased to provide you with this special section in Crainâ&#x20AC;&#x2122;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 advisors to plan a sound financial future. Michael T. Novak, CPA, PFS, AEP, is president of the Estate Planning Council and Managing Director for Wellspring Financial Advisors. Contact him at 216-367-0680 or mnovak@wellspringadvisorsllc.com

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

Trusted Advisors. Respected Advocates.

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Estate Planning

November 9, 2015 S3

Estate Planning is Still Vital in the Current Tax Environment By stephanie m. glavinos

here is a popular misconception among clients that repeal of the Ohio estate tax, the rise in the federal estate tax credit to $5,430,000 per person, and spousal portability have made estate planning less relevant. Although the minimization of estate taxes remains an important planning goal, there are still many important non-estate tax reasons to revisit a client’s estate plan. Minor children Clients with young children have a strong motivation for making sure that

tax planning they have an updated estate plan. A last will and testament designates who should physically care for their minor child following the client’s death. A client must also consider who will be in charge of that minor child’s assets. A trust is ideal for those who want to ensure that a minor child’s assets will be held and protected for the benefit of the child until they reach a suitable age and maturity. Additionally, a trust may create a family legacy and keep assets within the client’s bloodline. Many clients

wish to keep their assets in the family and protected from outsiders, including in-laws. By leaving assets to children through a trust, the trust assets are protected from any potential creditors, including a beneficiary’s spouse in the event of a divorce. A trust may Glavinos also be used to protect a beneficiary from their individual issues by preventing a spendthrift from prematurely exhausting their inheritance. Second marriage situations Furthermore, an estate plan can be

crucial when dealing with secondmarriage family situations. In a first marriage, many clients prefer a surviving spouse to inherit all of their assets at death. With the second marriage, however, this may not be the desired outcome for the client and the children from the first marriage. Some clients may pursue life insurance to provide for the second marriage spouse and devise their remaining assets to children from a first marriage. Other clients may utilize a trust plan. By transferring assets to a trust for the surviving spouse and/or children, the transferor can be certain that the assets will be distributed in

accordance with a client’s wishes. Avoid probate Moreover, a proper estate plan will address the titling of assets to avoid probate. Probate is the court-mandated process of transferring assets from an estate to the beneficiaries at death. This procedure can be time-consuming as well as expensive. Probate can be avoided to the extent that assets are transferred by beneficiary designation or to a trust. Stephanie M. Glavinos is Counsel with Ulmer & Berne LLP. Contact her at 216583-7230 or sglavinos@ulmer.com.

TABLE OF CONTENTS , PRESIDENT S LETTER 2

TAX PLANNING 3-4

ESTATE PLANNING 4-14

Legacy William

Family is a top priority for us. Which is why we want to know that the decisions we make now will ensure a bright future for us, our children

CHARITABLE GIVING

and our grandchildren. Our FirstMerit Client Advisor understands our aspirations and helped us develop a long-term investment plan. He also

14-21

helps us manage our day-to-day banking needs so we can focus on what’s important. We have peace of mind knowing our legacy will live on.

INSURANCE 21-22

TRUSTS 23-26

BUSINESS PLANNING 27

TO L E A R N MOR E A B O U T F I R S T M E R I T P R I VA T E B A N K , C O N T A C T :

Tom Anderson, Senior Vice President, at 216-694-5678 or tom.anderson@firstmerit.com. Follow the latest market trends @firstmerit_mkt *William reflects a composite of clients with whom we’ve worked; he does not represent any one person. Non-deposit trust products are not insured by the FDIC; are not deposits or obligations of FirstMerit Bank, N.A, or any of its affiliates; are not guaranteed by FirstMerit Bank, N.A or any of its affiliates; and are subject to investment risk, including possible loss of principal invested.

Member FDIC 2798_FM15

Estate Planning

S4 November 9, 2015

Tax Planning for Florida Snowbirds By Christopher p. bray

The Cleveland Orchestra’s endowment is supported by a group of visionary leaders whose high expectations of musical excellence, community service, and generous philanthropy continue to characterize the Orchestra’s relationship with its hometown. Now, as the Orchestra approaches its Centennial in 2018, your estate gift can provide support long into its second century – allowing new generations to enjoy everything you love about The Cleveland Orchestra. Join the many Centennial Legacy donors who are supporting the Orchestra’s future with estate gifts. For more information, please contact Bridget Mundy, Director of Legacy Giving, at 216-231-8006 or at bmundy@clevelandorchestra.com.

I BELIEVE IN

“I have included ideastream in my will so future generations can learn, enjoy and discover new interests with WCPN, WCLV and WVIZ. - Terry Kovel

Find out more at ideastream.org/support

independence E N H A N CI N G SE N IOR

IN THE

ou can now live in Ohio for most of the year and avoid paying Ohio income taxes, which can claim over 5% of your annual income. Last year, Gov. John Kasich signed HB 494, which relaxes Ohio’s residency rules for purposes of imposing Ohio’s income tax beginning in 2015. You can now live in Ohio for about seven months of the year but still Bray be considered a Florida resident for purposes of the Ohio income tax. Ohio formerly considered someone a resident for Ohio income tax purposes if they had 183 or more “contact periods” (essentially an overnight stay) in Ohio during a year. Under the new law, an individual can have up to 212 contact periods in Ohio before they will be presumed a resident for Ohio income tax purposes — as long as the individual maintains an abode outside of Ohio for the entire year. In other words, someone can now spend an extra month in Ohio while avoiding Ohio income taxes. An individual can establish a

tax planning domicile in Florida fairly easily by maintaining a permanent address in the state as well as taking some steps that demonstrate the individual’s intent to be domiciled in Florida. These steps might include filing a “Declaration of Domicile” with a clerk of court in the Florida county where the individual resides; obtaining a Florida driver license; updating an estate plan that names Florida as the individual’s state of domicile; or obtaining a Florida

Planning for Foreign Real Estate By james spallino jr.

any people own real estate in a foreign country, whether it is a cottage in Canada, a villa in France or a home in Costa Rica. In preparing an estate plan for these clients, the estate planning lawyer must consider whether the client should have one will that disposes of worldwide property, or a separate will drafted under the laws of the country where the real estate is located and a U.S. will for all other property. There are advantages to using multiple wills. Only the will created under the laws of the country where the real property is located must be presented for probate in that

estate planning country. Without such a situs will, the decedent’s U.S. executor or personal representative will have to present a certified copy of the exemplified U.S. will of the decedent and have it admitted to probate or registered in the foreign jurisdiction. This is a time-consuming Spallino and potentially expensive process. In addition, coordination among competing legal systems for probate purposes becomes unnecessary. Each

THE RETURN ON THIS INVESTMENT IS HOPE.

home care z mental health services z social work z

z z

adult day services z partial hospitalization

meals for homebound seniors z congregate meals

To make a gift today, contact Diane Tomer at 216-431-4131 x2501. Helping people triumph over mental illness, alcoholism, drug and other addictions.

low-income housing z advocacy z education and training z

social and recreational programming

To learn how your charitable gift can impact our mission, call Institutional Advancement at 216.791.8000 1955

www.benrose.org/donate

Christopher P. Bray, JD, CPA, is Managing Director of Ariel Capital Advisors, LLC. Contact him at cpbray@ arielcapitaladvisors.com.

One Will or Two?

COMMUNITY

SERVING OLDER ADULTS AND THEIR CAREGIVERS THROUGH:

homestead exemption for property owned in Florida. Imagine living in a Florida paradise from mid-November through midApril each year while enjoying the fantastic weather in Ohio for the rest of the year — all while avoiding Ohio income taxes on investment income, Social Security, and qualified retirement plan distributions. The dream can now become a reality.

60 YEARS

2015

www.recres.org

will is tailored to the substantive laws and conflicts of law rules for each jurisdiction involved. The main disadvantage of using multiple wills is that it increases the cost to the client. The client should always retain a lawyer in the country where the real property is located who can advise the client on the transfer of property and tax laws that apply to the client’s situation. This will result in the client having one lawyer in the U.S. and one lawyer in the country where the real estate is located. In addition, the two wills must be coordinated, so the two lawyers will have to spend time (and the client’s money) talking with each other and exchanging drafts of the respective wills for review. The lawyers involved must use careful drafting when multiple wills are being implemented. Each will should identify the property covered and specifically exclude property that is not covered by that will. The wills must complement each other and be consistent. The lawyers must ensure that one will does not inadvertently revoke the other will. Clauses regarding how and from what source any applicable estate and inheritance taxes are paid must be coordinated as well. Finally, the lawyers must ensure that both wills, taken together, dispose of all of the client’s assets. James Spallino Jr. is a Partner with Thompson Hine LLP. Contact him at 216-566-5865 or james.spallino@ thompsonhine.com.

THE ESTATE PLANNING COUNCIL OF CLEVELAND PRESIDENT Michael T. Novak

VICE-PRESIDENT Michael W. Matile

SECRETARY Emily Shacklett

TREASURER Julie A. Fischer

PROGRAM CHAIR Peter Balunek

Tanzie D. Adams Charles F. Adler, III 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 Gina Marie Bevack-Ciani Mohammed J. Bidar Gary B. Bilchik Michelle M. Bizily Susan P. Blankenship Alane Boffa Tami M. Bolder Daniel L. Bonder Aileen P. Bost Herbert L. Braverman Christopher Paul Bray James R. Bright Don P. Brown Kenneth B. Brown C. Richard Brubaker Robert M. Brucken Bethany J. Bryant Martin J. Burke, Jr. Eileen M. Burkhart Robert C. 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 Cheryl A. D'Amico William T. Davis Dana Marie DeCapite 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 Timothy Doyle Emily A. Drake Therese Sweeney Drake Jill Dugovics William A. Duncan Carl J. Dyczek Howard B. Edelstein Elaine B. Eisner 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 Julie E. Firestone Mary Kay Flaherty Linda Fousek Maryann C. Fremion 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 Jeanine Rae Gergel Arthur E. Gibbs, III Thomas C. Gilchrist Stephanie M. Glavinos Catherine Klima Gletherow 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 Alan D. Gross Ellen E. Halfon Patrick A. Hammer Sarah Hannibal Lorie Hart Dana G. Hastings Lawrence H. Hatch Janet W. Havener

Albert G. Hehr, III Theodore N. Hellmuth James M. Henretta Mark W. Hicks Jean M. Hillman Joanne Hindel Mark L. Hoffman Doris Hogan Ronald D. Holman Harold L. Hom Robert S. Horbaly Brent R. Horvath Michael J. Horvitz Douglas Ingold Lynnette Jackson George A. Jacobs Paula Jagelewski Christopher P. Jakyma Barbara Bellin Janovitz Theodore T. Jones 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 Lesley Keller Jonathan M. Kesselman William J. Kimball Woods King, III Amy I. Kinkaid Richard B. Kiplinger 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 Craig A. Kukla Anthony C. Kure Louis D. LaJoe Warren D. Lamberson, Jr. Gary E. Lanzen Steven P. Larson Donald Laubacher Daniel J. Lauletta Mary Lavin Paul J. Lehman Kevin J. Lenhard Wendy S. Lewis Keith M. Lichtcsien Miranda C. Licursi Dennis A. Linden James Lineweaver

Jennifer R. Loan David F. Long Ted S. Lorenzen Amy R. Lorius Janet Lowder Edward C. Lowe Robert M. Lustig James M. Mackey David S. Maher Stanley J. Majkrzak Chad Makuch Laura J. Malone Karen T. Manning Wentworth J. Marshall, Jr. Donald C. May Nancy McCann Karen M. McCarthy Robert F. McDowell, Jr. Erica E. McGregor Daniel J. McGuire Joseph M. Mentrek Lisa H. Michel Charles M. Miller William M. Mills Daniel F. Miltner 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 Kevin J. O'Brien 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 James B. Perrine Dominic V. Perry Craig S. Petti Marla K. Petti Thomas Pillari Timothy J. 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 Jeffrey H. Reitzes Linda M. Rich R. Andrew Richner Radd L. Riebe Elton H. Riemer Kathleen K. Riley Frank M. Rizzo Lisa Roberts-Mamone Kenneth L. Rogat Carrie A. Rosko Philip B. Rosplock Debbie Rothschild Larry Rothstein Alexander I. Rupert Rennie C. Rutman Kenneth J. Sable Patrick J. Saccogna Elizabeth W. Salisbury Ronald S. Schickler Bradley Schlang Michele Schrock Mark C. Schulman Dennis F. Schwartz June A. Seech John S. Seich Doris A. Seifert-Day Andrea M. Shea Stanley E. Shearer John F. Shelley Lea R. Sheptak 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 Timothy H. Stallings M. Randal Stancik Stacey Staub Kimberly Stein Laurie G. Steiner Saul Stephens E. Roger Stewart John M. Stickney Beverly A. Stiegele David J. Stokley

IMMEDIATE PAST PRESIDENT Jennifer A. Savage Diane M. Strachan Thomas E. Stuckart John E. Sullivan, III Linda DelaCourt Summers Scott E. Swartz Joseph N. Swiderski Yeshwant K. Tamaskar Richard Tanner Mark M. Tepper Barbara Theofilos James K. Thompson Donna Thrane Eric Tolbert Floyd A. Trouten, III Mark A. Trubiano Patrick J. Tulley Thomas M. Turner Diann Vajskop Robert A. Valente Mark Van Drunen Jaclyn L.M. Vary Missia H. Vaselaney Joseph Frank Verciglio Catherine Veres Mary Eileen Vitale Michael A. Walczak Kimberly A. K. Walrod Robert W. Wasacz Adam Watts 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 Erica K. Williams Geoffrey B.C. Williams Scott A. Williams J. Mark Wipper Teresa M. Wisniewski Nelson J. Wittenmyer Matthew D. Wojtowicz Carol F. Wolf Brenda L. Wolff James D. Yurman Jeffrey M. Zabor Michael J. Zeleznik David M. Zolt Jack Zugay Gary A. Zwick Donald F. Zwilling

Estate Planning

S6 November 9, 2015

Building Family Legacies Through Philanthropy By janet w. havener

xperienced family philanthropists know that engaging and educating their younger family members in philanthropy and building long-standing relationships with charities can impact the greater community. More and more families are looking to create strong, longlasting philanthropic partnerships of many kinds. Collaborations among generations and with their charity Havener of choice can expand and extend the impact of their philanthropy, leading to more robust and sustainable outcomes. I have been fortunate to work with many families to help them realize their philanthropic goals for their charity of choice. One such example is at the Cleveland Hearing & Speech Center (CHSC), which has been the recipient of several major gifts from a family foundation. Discussions with multiple family members with personal

estate planning connections to CHSC’s mission have led to significant gifts, ensuring that their family legacy will have an impact on the greater community well into the future. Such long-lasting philanthropic efforts allow for thousands of infants, children and adults to receive the services they need at CHSC. Families of wealth expect to pass their assets on to their heirs in an efficient manner while minimizing taxes and hoping for family harmony. Wealth advisors can help their clients prepare themselves and their heirs for transitioning wealth by utilizing proactive planning for clients who want to employ their wealth as a means to make a lasting impression on society, community and future generations. The true heart of translating a family’s goals and values is accomplished by developing a comprehensive wealth management plan. Discussions

with the family members about their values, principles, and virtues will help them focus and obtain a thorough understanding of their goals, objectives and charitable intentions that can be translated into a multigenerational wealth management plan.

By concentrating on the lives and needs of others, the entire family is sharing in a philanthropic mission that can be the glue that holds the family together from generation to generation and the lens that keeps them focused on a central, common family goal, allowing

them to learn about the joy of giving through personal experience. Janet W. Havener is Director of Wealth Advisory Services at Fairport Asset Management. Contact her at 216-431-3259 or janet.havener@fairportasset.com.

Retirement Planning in a Low Interest Rate Environment By saul A. stephens

ixed income has been on a bull run for three decades. But where does the road go from here? Some experts see speed bumps ahead, while others see coordinated central bank actions that will result in a long

estate planning era of low rates. While it’s impossible to predict the future with certainty, too many investors feel content to stretch for yield regardless of risk.

MY BENESCH MY TEAM

Deviani M. Kuhar, Partner Chair, Business Succession Planning & Wealth Management Practice Licensed to practice law in Ohio

Live for today. Plan for tomorrow. For all the time and effort you’ve put into building your wealth, you deserve peace of mind in return. The kind that comes from knowing your assets are protected, your wealth will be distributed as you wish, and your future is as secure as you can make it. Whether you need to build an estate plan from scratch, or ensure your current plan is in sync with today’s rapidly changing laws, our attorneys can help. We have the specialized knowledge and experience to manage all aspects of your estate.

Gary B. Bilchik, Partner Business Succession Planning & Wealth Management Practice Licensed to practice law in Ohio and Florida

Dana Marie DeCapite, Associate Business Succession Planning & Wealth Management Practice Licensed to practice law in Ohio and Florida

Chasing high yields works well during calm market periods, but in times of market stress, owning low credit quality fixed income can really hurt. That’s why investors should step back to better understand their core fixed income holdings. Fixed income plays an invaluable

Have you considered how taxes will impact your wealth? Do you have a business succession plan in place? Are you sure that your assets have been aligned properly with your estate plan? Have you planned for charitable gifts…long-term care…incapacity? We can assist in these areas and help you manage your assets in ways that will minimize the probate administration process. Live for today…plan for tomorrow. Talk to us about how to get started.

www.beneschlaw.com

role in an overall portfolio, especially during an investor’s later years. However, the confusing macroeconomic and low interest rate environment can cause investors to strive for higher yield without understanding the risks involved. Fixed income is driven by a straightforward premise. Higher risk has the potential to deliver high yield. Thus, it’s logical to assume that buying the highest yielding funds will carry the highest risk. But in an era where the risk free rate has been at or near zero, are investors forgetting this? Too many investors Stephens may not be demanding enough extra compensation for the additional risk carried in their bond holdings. It’s true that novice investors focus on current yield and recent performance in lieu of due diligence. Fortunately, most advisors dig deep and look at quantitative measures to determine fixed income safety. These include duration, maturity, credit risk and yield. To better understand the true risks in a bond portfolio, investors can conduct a more effective check by looking at the following quantitative and qualitative aspects:

Conduct a litmus test looking at how a bond performed during periods of market stress. Past performance doesn’t guarantee future results, but how a bond fared during those times versus other bonds can

provide insight into the underlying risk taken.

Review the use of derivatives and leverage. It’s also important to understand how much leverage is used. It is common for bond funds to use treasury future and credit default swaps to hedge positions and manage credit risk. Using derivatives may increase the risk profile of a bond fund.

Use of equities. Given the low interest rate environment, many managers are using common stocks and preferred stocks to boost performance. Do you want a bond manager picking stocks for you?

Review the credit rating of the bond. Average credit rating is a measure often used by investors, but is it effective? From my experience, it tells you nothing. It’s simple to use average credit quality, but a few low credit rated securities can wreak havoc on this asset class. No one can predict the next natural disaster, geopolitical upheaval, currency collapse, or recession. If you are allocating capital to fixed income during your later years for its benefit of safety and income, you need to know exactly the risks that are involved. As long as your core fixed income is true to its nature, it has the potential to perform in times of market stress. Saul A. Stephens is a Financial Advisor with The Wealth Center at Meaden & Moore. Contact him at 216-241-3272 or sstephens@meadenmoore.com.

Securities offered through 1st Global Capital Corp., Member FINRA, SIPC. Investment Management Solutions (“IMS”) Platform fee-based asset management accounts offered through 1st Global Advisors, Inc. All other financial planning services offered through The Wealth Center at Meaden & Moore. The Wealth Center at Meaden & Moore and 1st Global Capital Corp. are unaffiliated entities.

Estate Planning

November 9, 2015 S7

Proper Asset Titling for Estate Planning By linda m. olejko

reserving wealth requires the pursuit of a disciplined strategy that can protect assets from unforeseen or difficult-to-forecast events. This begins with an analysis of personal, business and property insurance coverage. It is imperative that policies remain current and that coverage adequately protects against unforeseen events. For example, insurance coverage may need to be updated if real estate is transferred to a limited liability company, if a new

estate planning household employee is hired or if the insured joins a board. Further, it is important to be mindful that outside agents must be apprised of any related activities. On this continuum is the need to ensure the proper registration and titling of assets. The legal titling of an asset can affect a client in many ways, including personal liability exposure.

For example, asset protection can be secured by establishing a particular type of entity, such as an S corporation, a limited partnership or a limited liability company. Many states offer “tenancy by the entirety” — a form of concurrent spousal Olejko ownership that provides favorable asset protection benefits. In counseling clients through the ownership structuring process, it is crucial to remain cognizant of the

potential implications for other areas of the family’s wealth preservation efforts. Minimize Taxes An ideal partner collaborates with clients to proactively review significant transactions and mitigate potential income tax implications. There are many wealth transfer strategies and techniques that can be implemented, but the key is to identify the strategy or combination of strategies that best address the client’s goals. Where there are substantial assets, one might recommend one or more of the

Are You Spending Time Planning for Retirement? By David O. Reyes

uring our working years, we devote a lot of time to retirement accumulation, how best to save, how much to save, and in what to invest. However, upon reaching retirement, many people fail to plan for their post-accumulation phase as it relates to their retirement and estate planning. The result is often that an individual’s largest asset fails to receive the proper amount of attention at its most critical time. Due to complex income and estate

estate planning tax rules, retirement assets require special attention. The distribution rules are complicated and it is critical to spend the time planning and reviewing distribution options. These distribution options affect not only the owner of the retirement account; but the timing of distributions to the beneficiaries once the owner passes. Some beneficiaries who inherit a retirement account are shocked to

discover that their distributions from an inherited traditional IRA or a qualified retirement plan, like a 401(k) plan, are subject to income tax. What are some of the considerations that you need to make? Determine who is best suited to be your beneficiary. Should it Reyes be your spouse, your children, a sibling or a friend? Have you completed a proper beneficiary designation? If not, your estate is considered the beneficiary,

which will likely accelerate distributions. For estate planning purposes, making your spouse your designated beneficiary generally offers the most favorable tax options. However, there are many other options to consider and an experienced tax advisor can provide you advice on the optimum distribution and rollover options for you and your heirs. David O. Reyes, CPA, CEBS, is a Shareholder with Maloney + Novotny LLC. Contact him at 216-344-5233 or dreyes@maloneynovotny.com.

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following tax-advantaged options: annual exclusion gifts, unlimited tuition gifts, unlimited medical gifts, transfer tax exemption gifts and taxable gifts. Depending on a client’s particular circumstances, additional strategies such as intra-family loans, grantor retained annuity trusts and intentionally defective irrevocable trusts may also merit consideration. Linda M. Olejko, CFP® is a Managing Director of Glenmede. Contact her at 216-514-7876 or linda.olejko@glenmede. com.

Estate Planning

S8 November 9, 2015

Determining a Family Mission Statement

estate planning

Planning Today for Your Family Legacy of Tomorrow

By Kaye M. Ridolfi

f you’ve ever sat down to do succession planning in your business or personally through a living will, it’s easy to appreciate the level of sophistication needed to ensure continuity beyond your own lifetime. The same level of philanthropic strategy and planning can be just as helpful to instill charitable values in the next generation and create a lasting legacy.

In addition to being easy and costeffective, your charitable giving should be strategic and focused on the causes you care about most. Determining a philanthropic mission statement is an important activity for donor families of all configurations. An optimal family mission statement is designed to evolve as time passes, community needs shift, and your successor advisors become involved in giving. A family mission statement takes into account the philanthropic passions of each member and converts them into purposeful impact in areas like basic human services, education, job creation, and arts and culture. Based on personal experiences and your life journey, it’s usually easy to determine the charitable causes that mean the most. Organizations like the Cleveland Foundation can help you understand which nonprofits — locally and nationally — are making the greatest impact in these areas, the level of support needed, and the impact such charitable investments can have in our community.

Selecting the Right Charitable Tools With a multi-generational goal in mind, there are several philanthropic tools worth considering in conjunction with the financial planning that you may already have underway with a professional advisor. These include donor advised funds and supporting organizations (family foundations), named funds, bequests, trusts and annuities. This variety Ridolfi of options can deliver over and above the value of routine “checkbook giving,” which is how people often begin their philanthropy. If you are interested in involving your children or grandchildren in giving, then the donor advised fund and supporting organization are extremely effective tools. These vehicles can be established with various liquid and nonliquid assets — including appreciated securities and even closely held stock. If you choose, family trustees and other advisors can join you in making decisions, and you may also appoint

Passing the Torch

successor advisors. Working with an organization like the Cleveland Foundation can help generations of trustees and advisors carry out their grantmaking to nonprofit organizations, matching the intent of your original gift. In other cases, you may prefer to make a gift through a designated or named fund and have the foundation carry out your wishes in perpetuity. The same is true with bequests, which

can be one of the most straightforward ways to provide for the community in the future. Tools like charitable annuities and trusts are also attractive legacy planning options, providing immediate tax benefits and also generating income to you or others. These philanthropic vehicles can also help you realize real tax advantages, especially when they are established before the sale of a

One law firm for all estate planning solutions Estate Planning and Tax Contacts

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Charitable and philanthropic pursuits

business or the transition of an estate. In certain scenarios, you may even be able to convey a tax-deductible gift without reducing the amount of your children’s inheritance. It’s important that you choose a philanthropic advisor that can design a model that accounts for certain tax situations, a time horizon and family needs to assess the advantages and predicted outcomes of a certain gift approach.

You and your family have a unique opportunity and deserve a personalized approach to legacy planning. Having proactive discussions about your longterm philanthropic goals is one of the best ways to ensure your wishes will be carried out and you and your loved ones will have the gratifying experience of supporting our community for generations to come. Kaye M. Ridolfi is Senior Vice President of Advancement for the Cleveland Foundation. Learn more at 216-685-2006 or visit www.clevelandfoundation.org.

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Working with the Cleveland Foundation offers you real tax benefits and the chance to build the greatest charitable legacy. You supply the passion and ideas. Through our knowledge of the nonprofit community and expertise with giving techniques and estate planning, we can help you achieve your philanthropic goals with purpose, so the causes you believe in can grow and prosper in perpetuity. To learn more, contact our Advancement Team at 216-685-2006 or GiveNow@CleveFdn.org.

Estate Planning

S10 November 9, 2015

How Estate Planning Can Help You Reach Philanthropic Goals By stella dilik

s we get older, we become more preoccupied about leaving a legacy. For many of us, that’s accomplished through charitable giving. Whether it takes the form of a substantial single donation during one’s lifetime, or a planned gift that funds a scholarship or an endowed professorship for decades to come, philanthropy comes in many shapes and sizes. Estate planning can help individuals figure out the best, Dilik smartest way for them to make a transformative gift to a favorite charity — often one larger than any simple cash donation they could imagine. With help from an attorney or financial advisor, would-be donors can map out the best course for them, while keeping in mind the following: n

Do I have heirs — relatives or a favorite friend — that I want to

estate planning provide for after my passing? n

Can I make a sizable gift and still have a fixed income in my retirement years?

Do I want the freedom to change my mind about how much money I want to give, and where it will go?

Do I want to lessen the estate taxes that my heirs will have to pay, and the accompanying stress?

Do I want my donation publicized, or would I rather remain anonymous?

Several creative options exist for individuals to leave a charitable legacy as part of a properly structured estate plan. Planned gifts provide flexibility for individuals to pursue both charitable and personal financial goals. By arranging a donation during your lifetime, your charity of choice can benefit from your kindness immediately.

Estate planning vehicles include various types of bequests that are stated in one’s will; gifts of life insurance policies; the creation of a charitable trust; and donations of charitable gift annuities. Some provide lifetime income for you, a family member or friend. Others allow you to enjoy different benefits – as an immediate charitable income tax deduction; the elimination of the long-term capital gains tax on appreciated securities; or being able to hand down assets to your grandchildren, tax-free. Now is the time to review your personal budget and your philanthropic goals to determine an appropriate amount for giving. The best estate plan is one that secures your own financial future as well as the future of the charity of your choice. Stella Dilik is Executive Director of Foundation and System Philanthropy for the MetroHealth System. Contact her at 216-778-5004 or sdilik@metrohealth.org

Planning for Oil and Gas Rights By dana marie decapite

racking has become a hot topic for landowners in the central and eastern parts of Ohio, as the eastern half of the state sits over the Utica Shale formation. Many landowners in this region enter into leases with the producing company (“producer”), allowing the producer to drill wells and extract the minerals. With these lucrative oil and gas leases come important legal, tax and financial considerations. These landowner must begin to think about asset protection, valuation, wealth transfer techniques and succession planning. As the lessor, the landowner must be aware of the lease conditions that allow the producer to drill on the land. In return for the ability to drill, landowners can agree to any combination of the following: n

n n n

Bonus Payments, which are typically paid up front and in a lump sum; Delay Payments, made in cases of development delay; Royalty Payments, based on the amount of oil and gas produced; Shut-in Payments, paid when production is stopped.

Various planning tools can be used to protect landowners from unnecessary tax liability based on the types of payment agreed upon in the lease. Estate Planning for these landowner clients can be complex, as oil and gas rights are considered a special asset that should be specifically referenced in the

estate planning

landowner clients’ Revocable Trust, at the very basic level. In addition to the creation of a Revocable Trust, these clients can implement a number of tax and wealth transfer techniques through the use of Irrevocable Trusts and Intentionally Defective Grantor Trusts. It is also DeCapite important that oil and gas rights and royalties are asset protected through the use of an appropriate corporate entity, such as an S-Corporation, Limited Liability Company or Family Limited Partnership. In planning for oil and gas rights, is extremely important for landowners to engage an attorney, accountant and financial advisor. Dana Marie DeCapite is an Associate in the firm's Business Succession Planning/Wealth Management Practice Group. Contact her at 216-363-4443 or ddecapite@beneschlaw.com.

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Estate Planning

November 9, 2015 S11

Tips for Naming Your IRA Beneficiary By don laubacher and andrew whitehair

hoosing an IRA beneficiary is important, yet many individuals do not understand how the IRA will pass to those intended beneficiaries — including when they can begin receiving distributions and the associated tax consequences. In short, you can leave your IRA to your spouse, a non-spouse, a trust, a charity or your estate. The following basic guidelines can help you assess your choices. Spouse Unlike anyone else, your spouse can roll your IRA into his or her own IRA. This provides flexibility, and, in all likelihood, the greatest tax deferral since he or she will not need to take

estate planning required minimum distributions (RMD) until age 70½. Non-spouse You can designate a parent, sibling, child or anyone else as your IRA’s beneficiary. In many cases, after you die, non-spouse beneficiaries must begin taking distributions immediately, although there is an option to extend them over their own life expectancies. Trust You can control post-death distributions by naming a trust as the beneficiary. Naming a trust as beneficiary raises a number of potential

Roth IRA Conversions By Gary Sigman

eciding whether to convert an IRA to a Roth can be complicated. One needs to weigh the benefits against the income tax consequences, both current and future. Remember, there is no income limit preventing one from converting. The primary advantage to converting

estate planning is that future qualified distributions will be tax-free. Many people believe, with current federal and state budget deficits, tax rates will eventually increase. Others feel that they will be in a higher tax bracket after they retire,

traps and should be done with great care and counsel. Charity IRA assets are an excellent choice to benefit a charity. Laubacher Since the charity is tax-exempt, it will receive the funds free of income or estate tax. Estate You could name your estate as the beneficiary of your IRA. This more often occurs, however, if you fail to name a designated beneficiary or if all of your beneficiaries have predeceased you. If either occurs, the IRA will have to go through the time and expense of the probate process before any

because their income is currently low. For both groups, why not pay tax on a conversion now, at a lower rate, versus taking taxable withdrawals from a traditional IRA at a higher rate down the road? Still, other wealthy individuals don’t care as much about the income tax Sigman burden as having the ability to use a Roth as a multi-generational wealth

distributions are made, and the IRA may need to be paid out in as little as five years. Naming your IRA beneficiary should not be taken lightly. Whitehair The distribution pattern and tax consequences vary widely depending on the beneficiary. It is critical to regularly review your beneficiary designations, particularly when there is a change in your personal situation, such as a divorce or death of a beneficiary. As always, consult with your professional advisors on the best course of action for your goals. Don Laubacher CFP, CPA, AEP is Executive Vice President, Family Wealth

accumulation vehicle (“stretch” IRA strategy). These folks like the idea of not having to take required minimum distributions from the Roth after age 70½, unlike with a traditional IRA. Due to the recent stock market downturn, a conversion now may generate even more potential savings, since the taxable income from the conversion would be lower than if the conversion was done weeks ago. This would also result in more tax-free growth to enjoy down the road. Finally, one may

for Sequoia Financial Group. Contact him at 330-255-2130 or dlaubacher@sequoia-financial.com Andrew Whitehair CPA/PFS, AEP is Director, Family Wealth for Cohen & Company. Contact him at 216-256-9664 or awhitehair@cohencpa.com. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. 3500 Embassy Pkwy., Akron, OH 44333. Sequoia Financial Group, LLC and related entities are separate entities from ValMark Securities, Inc. Cohen & Company, Ltd and related entities are separate entities from ValMark Securities, Inc.

convert funds in an employer retirement plan or self-employed retirement plan, e.g., a SEP or Individual 401(k). Remember, you may be able to undo, or recharacterize, a Roth IRA conversion if you later decide it is not advantageous. One may recharacterize as late as October 15 of the year following the conversion. Gary Sigman, CPA, M. Tax, PFS, AEP is an Accounting and Tax Services Manager for Zinner & Co. Contact him at 216-8310733 or gsigman@zinnerco.com.

Cleveland | Columbus | Cincinnati calfee.com

S12 November 9, 2015

Estate Planning

Trustees: How to Choose By steven hinkle

hen choosing a trustee, it is natural to think first of a family member. This can work in some cases, but can be a disaster in others. Trustees have very sophisticated tasks to perform. A trustee owes many duties to the beneficiaries of a trust, including the duties of loyalty and impartiality, the duty to keep trust property separate from his or her own, and the duty to exercise reasonable care and skill. An individual who breaches any of these duties can be personally liable for any loss resulting in that breach, even if the breach was unintentional. When an irrevocable trust is set up to avoid federal and state income, estate, or generation skipping transfer taxes, many experts recommend against naming an individual. An individual

estate planning trusteeâ&#x20AC;&#x2122;s powers must be strictly limited in such cases to avoid negating any tax savings. A trustee must have (or pay for) investment, Hinkle accounting and tax planning expertise. A trustee must be able to keep and maintain records, send trust beneficiaries statements and notifications as required by state law,

and make all required tax filings. Evan a sophisticated family member, like an attorney or accountant, might feel great discomfort when dealing with demands of family members with different needs, goals, and expectations. Also, trusts often span generations, and the right individual may not be able to serve for the entire duration of the trust. Even if it makes sense for an individual to serve, it also probably makes sense to name a corporate trustee as the co-trustee that can then assume tax sensitive powers, provide for investments and record keeping, give notices to beneficiaries, make tax filings, provide continuity over generations, and be impartial during any family conflict. Steven Hinkle is a Senior Vice President with Key Private Bank. Contact him at 216-689-0333 or steven_d_hinkle@ key.com.

The Final Steps of Estate Planning By mary eileen vitale

nce the estate planning documents are printed and signed, many think the job is done. However, this is just the beginning of the next phase of estate planning. Without follow-through you may not accomplish all you set out to do. After setting the plan in place, implementation must begin. Assets

estate planning may need to be retitled, beneficiaries updated on retirement plans, IRAs, annuities, and insurance policies. In addition, meetings may need to be held with future trustees, custodians and guardians to make sure they understand your intent and wishes.

The first step is to determine what bank and investment type accounts are in place. If you have set up a living or revocable trust, your accounts should be retitled into the trustâ&#x20AC;&#x2122;s name, if appropriate. Accounts held outside of a trust Vitale can be set to transfer on death or be payable on death to your beneficiary or beneficiaries. If this is not your intent, it can defeat your estate plan.

Real estate titles should also be checked to determine if any changes need to be made. This is a simple process and can avoid future unintended consequences particularly if the property is not located in your state of residence.

Retirement plan, IRA, annuity and insurance policy beneficiaries

should also be reviewed to determine if they agree with the estate plan. The listing of both primary and contingent beneficiaries allows for more flexibility at death on the allocation of those assets.

Meeting with future trustees and asset custodians to express your wishes and the meaning of trust provisions is helpful to them in carrying out your wishes. Discussing your thoughts, wishes and goals with guardians will allow them to better oversee your care or the care of your dependents. Providing the guardian with insight as to what assets will be provided for their chargeâ&#x20AC;&#x2122;s care is important.

Finally, making a list of where all important documents are kept and the list of your advisors is useful to your loved ones in a time of intense grief. Included should be a list of bank and investment accounts, safety deposit box information, and all insurance policy information. Following through to complete the final steps of your planning once the ink is dry on the documents is a necessary but often forgotten task that will assure your estate plan goals are met. Mary Eileen Vitale, CPA, CFP, AEP is a Principal with HW&Co. Contact her at 216-831-1200 or vitale@hwco.com.

Focus on the charitable causes you care about most. Let us focus on the paperwork. Contact us at (216) 476-7060 to learn more about Donor Advised Funds.

Jewish Federation OF CLEVELAND

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 Clevelandâ&#x20AC;&#x2122;s Legacy Society by contacting Carol F. Wolf for a confidential conversation at 216-593-2805 or cwolf@jcfcleve.org.

Estate Planning

S14 November 9, 2015

Don’t Let Health Care Costs Crack Your Nest Egg Lincoln Financial Advisors/ Sagemark Consulting

scalating health care costs can undermine the best-laid retirement plans. One of the biggest risks lies in the cost of longterm care. Unfortunately, health care costs in general have been outpacing inflation, and this trend may continue. Even if you’re currently in good health, you can’t guarantee that it’ll continue in your later years. Not being prepared can be very expensive. According to MetLife, the national average cost for a semiprivate room in a nursing home is $6,752 a month, and $7,543 a month for a private room*. At that rate, it wouldn’t take long to put a sizable dent in the most nest eggs. Most people think of long-term care as nursing home care, but, in fact, most people who need long-term care need it in their own homes or in assisted living. This means that nursing homes are only one part of the picture. About 60 percent of the population over age 75 will need long-term care for approximately three years, whether in a nursing home, assisted-living facility or at home.

estate planning The latter two alternatives — while usually less expensive than nursinghome care — are by no means cheap. Care in an assisted living unit costs $3,550 a month on average, according to MetLife.* Round-the-clock care at home can also add up fast. Insuring Against the Cost Long-term care insurance policies are designed to defray the cost of nursing home, assisted living and athome care — costs that are not covered by Medicare except in very limited circumstances. Today’s policies typically offer the same daily benefit for each level of care. Eligibility kicks in when an individual is unable to perform two out of six “activities of daily living.” These include toileting, bathing and being ambulatory. If you have $10 million in assets, you may not need long-term care insurance. But $5 million may not be enough, as comfortable as it seems, especially if half of those assets are

locked up in illiquid assets such as real estate or if you want to leave as much of your estate as possible to your heirs. The government adds an incentive in terms of partially tax-deductible premiums. For 2015, the yearly maximum deductible amount of $380 for those under age 40 rises to $4,750 for those over age 70. But don’t wait to buy long-term care insurance until age 65, because premiums then could be very high. The most costeffective purchase point is from the early 40s to the early 50s. Whenever you buy, be sure to buy a policy that increases benefits to keep pace with inflation. You can also keep costs manageable by electing a waiting period before benefits begin and by limiting the length of coverage to four or five years instead of a lifetime. Beyond Long-Term Care If you retire at age 65 or beyond, Medicare plus a Medicare Supplement

Thompson Hine LLP is pleased to announce

James Spallino, Jr. has joined the firm as a partner in the Personal & Succession Planning practice group. Jim has over 20 years of experience counseling high-net-worth individuals and families on estate planning, family business succession planning, multigenerational planning, gift tax planning, charitable giving, college savings planning, private family foundations and asset protection planning strategies. He represents fiduciaries in estate and trust administration matters, and charitable organizations in endowment fund and planned giving matters. We work with our clients on their most important and personal matters. For more information about our lawyers and what we can do for you, please contact us. James Spallino, Jr. 216.566.5865 James.Spallino@ ThompsonHine.com

Patrick J. Saccogna 216.566.5761 Patrick.Saccogna@ ThompsonHine.com

Andrew L. Fabens, III 216.566.5736 Andy.Fabens@ ThompsonHine.com

coverage outside of the United States. Long-term care insurance is designed to be flexible where you can control the costs relative to the benefits you wish to receive. Long-term care policies offer various kinds of coverage. Some offer adjustments for inflation, others pay only for a stated number of days, and others offer a lifetime benefit. When deciding on a policy, you should compare the benefits of different types of policies, the limitations and exclusions, the types of facilities the policy would cover, and the cost of the premiums. CRN-1334266-102315 policy should cover most of your medical expenses. If you retire earlier, however, you may want to purchase a personal health insurance policy. Either way, it’s crucial to select coverage that matches your lifestyle. For example, if you enjoy foreign travel, you may want to consider a policy that includes

*“MetLife Mature Market Institute” (www.metlife.com/assets/cao/mmi/ publications/studies/2012/studies/ mmi-2012-market-survey-long-termcare-costs.pdf), accessed February, 2013. ** DHHS, 2008. Statistics taken from www.longtermcare.gov.

KEEP THE CASH: Non-cash Asset Donations Can Provide Big ‘Bank’ for the Buck By laura j. malone

hile a large part of wealth in the United States is tied up in various noncash assets, these assets are often overlooked when individuals make charitable gifts. Quite frequently, not gifting all or some of these assets can shortchange both the donor and their favorite charities. Donating cash is a quick and easy way for someone to benefit his or her favorite charity. However, donating cash creates the least amount of benefit to the donor. Consider Malone the example below of gifting cash versus stock the donor may have owned for more than a year. Each gift is the same dollar amount and each gift creates a charitable deduction of $7,920 for the donor. However, by donating a stock like Apple that had significant growth in the last decade, the donor can avoid the capital gains tax and net investment income tax they may pay if they were to sell the stock. This can

charitable giving trigger an additional tax savings to the donor of about $3,570 and means that the donor really only “paid” $8,510 for that $20,000 gift. Depending on the donor, this could mean more money in their pocket or they could create more charitable impact (i.e. gift $28,400 at roughly the same cost as the $20,000 in cash). The same concepts can apply to other appreciated assets like mutual funds, real estate or other investments so long as the donor has held these assets for more than one year. Often, donors may use this strategy at larger dollar amounts and combine it with a donor advised fund to “pre-fund” multiple years of giving. In short, by thinking more strategically about gifting noncash assets, donors can do more good. Laura J. Malone, CAP®, CEPA, is Vice President of Development for the American Endowment Foundation (AEF). Contact her at 330-655-7552 or lauramalone@aefonline.org.

Charitable Gifts of Cash

Charitable Gifts of Appreciated Stock, etc.

Cash Contribution

FMV of Stock

$20,000

Marginal Tax Rate

39.6%

Amount Paid for Stock

$5,000

Income Tax SAVED

$7,920

Income Tax SAVED

$7,920

Estimated After Tax Cost of Gift $12,080

Capital Gains Tax ($15K x 20%) $3,000 Net Investment Income Tax ($15K x 3.8% Medicare Surtax)

$570

ADDITIONAL Tax Savings

$3,570

Estimated After Tax Cost of Gift

$8,510

Estate Planning

November 9, 2015 S15

The ABCs of Charitable Donations and the Appraisal By Lorie Hart

his is the time of year that clients are considering donating fine art and “passion investments,” otherwise known as collectibles, to charities, museums and other organizations. According to Wealthmanagement.com, fine art and collectibles are becoming a significant part of many clients’ investment portfolios and are a significant part of their estate. So what are they donating? Just about anything from art and antiques to coins and wine. Part of this charitable process involves an appraisal, which is a written formal

charitable giving document that describes an item, gives a value and supports the value with market analysis. Typically the donor is responsible for the appraisal. Of course, where there is a donation, there is the IRS. According to the Tax Reform Act of 1986, the IRS definition of a charitable donation permits income tax deductions for the non-cash donation of 100% of the fair market value of ownership interest in property having a related use to qualifying charitable

organizations. Two key phrases here are “fair market value” and “related use.” In the appraisal world, an item can have potentially seven (yes, seven) values depending on the appraisal use. The IRS is clear that only fair market value can be used for donation values Hart (Internal Revenue Regulation Section 1.170A-1(c)(2)). The IRS also has specific donation appraisal requirements for single items of value above $5,000, including a qualified appraisal. Section B, Part III

of Form 8283 must be completed by a qualified appraiser and the certification of the appraiser must be included. As you can imagine, the appraiser plays an important role in the charitable donation process. Because personal property appraisers are not licensed (unlike real estate appraisers), the IRS even defines who is a qualified appraiser. A qualified appraiser is defined as someone who has earned an appraisal designation from a recognized professional appraisal organization (there are three in the U.S.), has met minimum education and experience requirements, regularly prepares

appraisals for which he or she is paid an hourly rate, is not an excluded individual and writes appraisal reports according to the current Uniform Standards of Professional Appraisal Practice (USPAP). Your client put much thought, planning and passion into his or her fine art and collections. Make sure they have a qualified appraiser that will do the same when it comes to the donation appraisal process. Lorie Hart, ISA AM, is Co-owner of L&L Estate Liquidation & Appraisal Services, LLC, in Solon. Contact her at 216-4707002 or lorie@llestateliquidation.com.

Making Your Charitable Gifts Count With A Donor Advised Fund By David T. Dombrowiak

he daughter of Aggie and the late Tom Hoskin had a special place in her heart for children. When Jennifer died of breast cancer and left behind three young boys, her family wanted to honor her legacy with a charitable fund that would benefit area children living in poverty. They wanted the flexibility and freedom that comes with a private foundation without the administrative hassles of running one.

charitable giving The Hoskins established a donor advised fund that would allow them to receive an immediate tax benefit and pay out grants over time Dombrowiak in a way that’s similar to a charitable savings account. More families, philanthropists and

young professionals are using donor advised funds to maximize their contributions and meet charitable goals. Here are three key advantages they offer. FLEXIBILITY OF GIVING A donor can establish a donor advised fund at any time, with any amount, and begin giving when the fund reaches $10,000. Once the fund is established, donors can make recommendations for grants to be paid out in increments of $250 or more.

VERIFICATION OF CHARITIES When foundations receive recommendations from advised fund donors, the staff considers the donor’s request and determines if the organizations meet all IRS requirements, including taxexempt status. REDUCED ADMINISTRATIVE RESPONSIBILITIES When a donor establishes a donor ad-

vised fund through a community foundation, the foundation’s staff assumes the responsibilities of issuing checks, maintaining records and filing taxes. This is all done without administrative fees, so donors can be sure every dollar they contribute goes directly toward the charities of their choice. David T. Dombrowiak is CEO and President of Community West Foundation. To learn more call 216-476-7060 or visit www. communitywestfoundation.org/daf.

One legacy. Working together, we can make a difference. By assisting with gifts to The Power of Every One Centennial Campaign, you are helping clients make an important investment in their own lives and the lives of Cleveland Clinic patients. Thank you. Learn more at powerofeveryone.org or contact Nelson J. Wittenmyer Jr., Esq., wittenn@ccf.org or 216.444.1245.

Cleveland Clinic offers same-day appointments.

Estate Planning

S16 November 9, 2015

Getting the Most from Your Giving By amanda steyer

f you would like to help your favorite nonprofit organization while still meeting personal financial goals, you have many options to help you create a comprehensive estate plan. Better yet, you can combine more than one to achieve your overall philanthropic objectives. Families often find it challenging to take into account multiple generations as they develop their gift planning strategies. Their financial advisors can assist them in this process by working with gift planners to develop comprehensive estate plans that will improve lives, shape the future of the organizations they support, and also ensure the family’s financial security. Available gift options to meet this goal fall into three distinct categories — current, deferred and testamentary

charitable giving — each having unique benefits and tax advantages. Current Gifts Current gifts include assets such as cash/check, artwork, stock, and multi-year pledges. These outright gifts provide immediate support to the charity and generate a tax deduction to the giver for the full value of the asset in the year in which the gift is made. Almost any asset can be used for a current gift, but capital assets such as appreciated stock or artwork are good choices because of a second advantage, which is avoiding capital gains tax. Deferred or Life Income Gifts Deferred or life income gifts, which include gift annuities and charitable re-

mainder trusts, offer an income stream and a reduced current charitable deduction. A life income gift presents an opportunity to provide income to you or a family member by naming that person the income beneficiary. The ultimate use of the gift by the charity is deferred until termination of the annuity or trust. Charitable lead trusts are an excellent option to consider when the Steyer IRS discount rates are low, as they are now, because they generate a much larger charitable deduction. A trust provides immediate and sustained support to a favored charity, with current and longterm benefits for your family. Although there are several types of lead trusts, they all help lower gift and estate taxes while allowing a larger inheritance for the giver’s children and grandchildren, all while

supporting a favorite charity now. Testamentary Commitments Testamentary commitments fulfill a desire to make a significant charitable gift without relinquishing control of financial assets during the giver’s lifetime. These commitments allow a charity to be notified of a future gift without altering the philanthropist’s present financial situation. Gifts through bequests, life insurance and retirement plans are just a few of the choices that help a charity look to the future while leaving the benefactor’s financial options open. Additionally, testamentary gifts reduce estate taxes because the asset is removed from the estate. An irrevocable life insurance trust is an advanced planning technique that can help you and your family by providing the funds to pay estate taxes and protect wealth. By removing assets from

the estate and using insurance as the principal trust investment, this type of gift allows an individual to take care of his or her family and a favorite charity. Getting the Most by Giving If you take advantage of the full range of options when making a gift, you will discover benefits for you, your family and your favorite charity. These include current charitable deductions, income for life, avoiding estate tax, and having the ability to preserve assets, which will make your future — and your retirement — financially comfortable. Using a combination of charitable giving strategies, you truly can get the most out of life by giving to others. Amanda Steyer, Esq., is Director of Gift Planning at Cleveland Clinic. Contact her at 216-444-5021 or steyera@ccf.org.

Charitable Gift Annuities: The Gift That Keeps On Giving By karen kannenberg

charitable gift annuity is a gift that keeps on giving and so much more. For donors, it is a special way to utilize their resources to maximize their needs. For charitable organizations, it is a gift that helps to ensure its future. From a practical perspective, a charitable gift annuity is a contract

charitable giving between the donor and the charity. In exchange for an irrevocable gift of cash, stocks or other assets, the charity agrees to pay a fixed sum to the donor (and another person if desired) for the remainder of their lifetime. Payments are based on the age of the donor and are not affected by

any changes in the economy. In addition, a charitable gift annuity affords tax advantages when the gift is made and annual payments are partially tax-free throughout the donor’s estimated life expectancy. Charitable gift annuity payments may Kannenberg also be deferred. For example, a donor

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may decide to postpone receiving payments until retirement, which increases the amount of their payment and they are presumably taxed at a lesser rate. For a nonprofit organization, a charitable gift annuity is a testimony to its work now and in the future. It is a gift that an organization can count on to help further its mission. Whether it provides educational opportunities for the next generation, live theater or life-saving research, it is an ideal

giving option for donors and nonprofit organizations. A charitable gift annuity also demonstrates to other funders and donors that donors believe in their work and place in the community that may ultimately inspire others to give. Karen Kannenberg, CFRE, is Manager of Gift and Donor Development for Cleveland Metroparks. Contact her at 216-635-3217 or kjk@clevelandmetroparks.com.

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Estate Planning

S18 November 9, 2015

ENDOWMENT GIFTS: More Than Plug and Play by Matthew A. Kaliff

ndowment funds fulfill a variety of functions for charitable organizations, from support for current operations to reserves for unexpected contingencies. For donors, endowment gifts represent an opportunity to provide ongoing support to a favorite organization or cause while leaving a personal charitable legacy. A basic endowment gift plan may provide for an annual distribution in perpetuity. In practice there are a variety of endowment fund types, spending models, and other considerations that planners should keep in mind as they assist clients in structuring testamentary and current endowment gifts. It is important to note that the Ohio Uniform Prudent Management of Institutional Funds Act (UPMIFA) governs donor-restricted endowment funds held by charitable institutions. Among its provisions, UPMIFA provides default rules for the administration, spending and investment of donor-restricted endowment funds when the donor’s instructions in the gift instrument are not clearly specified. While UPMIFA is widely perceived as a sensible piece of regulation, its presence reinforces the importance of clearly expressing donor intent when drafting a gift instrument or endowment agreement

charitable giving in order to avoid UPMIFA’s default provisions supplanting donor intent. Donor-restricted endowments As historically understood, a donorrestricted endowment arises from a gift of property to an institution for a specific or general charitable purpose in which the principal is kept intact forever and only the income is used. However, absent clear, detailed donor instruction to limit spending to income only, a common contemporary spending practice is to distribute a percentage of the endowment fund’s average asset value over a set time period. This approach is explicitly sanctioned under UPMIFA and overrides a donor instruction such as “use income only,” or “keep principal intact,” unless a more detailed instruction is provided. When considering an endowment gift, check whether the beneficiary organization has a board-approved endowment spending policy so as to estimate the value of the distribution the endowment can be expected to generate each year. Alternatively, a donor can specify a customized spending rate for a particular endowment gift. Restrictions on endowment purpose can take several forms. A field

At a minimum, endowment gift “ documentation should describe

funding source, purpose, investment and spending policy, duration (if not permanent), timing of distributions, reporting, and recognition.

”

of interest fund specifies support for an issue or program area, e.g., “hunger relief,” “scholarship.” A designated endowment fund provides a more narrow restriction, requiring distributions to support one or more identified programs of an organization. Many community foundations accept and administer designated funds for the benefit of other qualified charitable organizations. A term endowment gift typically requires the organization to spend Kaliff all of the fund’s assets over a stated period of time. Finally, an unrestricted endowment gift gives the organization full discretion in determining what purposes will be supported with the annual distributions. While most endowment gifts may fit into one of the types described above, creative planning can result in hybrid forms. For example, restrictions could combine term, designated and unrestricted endowment features, e.g., “to

provide annual distributions to support the food delivery program for 10 years, and thereafter for unrestricted purposes.” Clear intentions For any type of donor-restricted endowment gift, it is imperative to clearly memorialize the donor’s intent with the beneficiary organization. Often instructions in a will or trust direct the establishment of an endowment gift, e.g., “…to ABC Charity to create the Smith Endowment Fund of its unrestricted endowment.” While such minimal language may suffice for a standard unrestricted endowment gift, best practice calls for more detail for restricted gifts. At a minimum, endowment gift documentation should describe funding source, purpose, investment and spending policy, duration (if not permanent), timing of distributions, reporting, and recognition. An additional critical element is direction for alternative uses in the event changed circumstances prevent the organization from carrying out the original gift purpose as intended by the donor.

Typically a gift agreement conveys donor intent and endowment gift restrictions. Some organizations prepare fund guidelines in consultation with the donor in lieu of an agreement. A fund is established by the organization, to be operated in accordance with the guidelines, and the donor then directs in a lifetime or testamentary gift instrument that the gift be added to the fund and administered according to the fund’s guidelines. For example, a donor’s will, IRA, or life insurance policy could direct proceeds for an endowment gift to a charitable organization. Meanwhile, an agreement or guideline on file with the organization could more specifically define the purpose and other terms. Either approach is a flexible planning tool because these documents may be modified later without amending the underlying planned giving documents. Separate gift documentation has the added advantage of notifying the beneficiary organization in advance of the actual gift. Early communication among the donor, estate planner and beneficiary organization maximizes the potential for smooth implementation of the gift and the preservation of the donor’s intent. Matthew Kaliff is Assistant Director for Endowment Development, Jewish Federation of Cleveland. Contact him at 216-593-2831 or mkaliff@jcfcleve.org.

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For more information, contact Nancy McCann at nmccann@wrlandconser vancy or 440.528.4153.

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November 9, 2015 S19

Estate Planning

We Can Never Say Thank You Enough by diane tomer

hat motivates a donor to support an organization may rely on many factors — the impact the gift will make toward the project, the donor’s passion for the mission, or perhaps the percentage of the gift used in comparison to the overhead cost. Another decision factor to consider is the communication the agency provides on how the donation(s) is used and the way the organization demonstrates their commitment and appreciation — the stewardship of the donor. Recently while visiting my father, who has long been a supporter of his local symphony, I came across a note wishing him a speedy recovery from his hip surgery and offering him complimentary valet parking to make his trip to the theater easier. Having worked with donors for many years, I reached out to the director with the message: “Stewardship at its best!” I was impressed to learn that the front ticket office regularly passed information to the development staff and was doubly

charitable giving impressed to know that the development staff went above and beyond to say “thank you” to their patron trying to make his experience better. For some organizations, this type of stewardship may be a regular practice, but for many others stewardship is often an afterthought or the last role to fill in the list of open positions. A forward-thinking organization will make stewardship a priority, and a good steward will have a developed outreach plan and be in touch each quarter, perhaps every other month, and will take time to recognize life events. My father may not be considered a “major” donor, but I can assure you he will be an annual donor. Giving is an opportunity, not an expectation, and it must be nurtured. Good stewardship is a win-win. Diane Tomer is Director of Development for Recovery Resources. Contact her at dtomer@recres.org.

Generosity Does Not Have to be Taxing by marta kelleher

or philanthropically minded individuals, assets that can be among the most tax-advantaged gifts to contribute to charity are those that have appreciated most in value. Gifts of non-cash assets have considerable benefit because when the appreciated asset is sold by a charity it does not pay capital gains tax. One such asset that is often overlooked is real estate. Consider that the value in real estate far exceeds any other single asset in most portfolios. Among the wealthiest households, over 30 Kelleher percent of their portfolios is invested in real estate; and for the middle 50 percent, real estate makes up over 65 percent of their wealth. And yet, very few people donate real estate to charity. Opportunities abound. There are many ways to contribute with the easiest being an outright gift. A real estate donation of your vacant land, vacation property, personal residence, commercial building or farm could present a significant financial tax benefit while advancing your charitable goals. Or, you may be interested in transferring the deed while enjoying both the use of the property for your

“Attentive, direct and pragmatic.”

charitable giving lifetime and the immediate charitable income tax deduction for the remainder interest passing to charity. If your goal is to generate income from an illiquid asset such as real estate, an ideal option is a flip unitrust: a blend of a net income unitrust and a regular unitrust. Imagine the flip trust benefit to a married couple, age 80 and 75, who purchased their vacation home for $120,000 years ago with a current market value of $550,000. If sold outright, they would incur a capital gain of $430,000, and in their 15% capital gains tax bracket, would lose $64,500 if they sold the land. By transferring the home to a flip unitrust, they have avoided an immediate capital gains tax, generated an average annual payment of $26,818, received an income tax deduction of $291,181 in the year of the transfer, saving $101,913 in their 35% federal income tax bracket, and achieved their financial and philanthropic goals. Make sure to review these impactful opportunities with your advisor and charity of choice.

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Marta Kelleher, Esq., MBA, is the Senior Gift Planning Officer at University Hospitals. Contact her at 216-844-7912 or marta.kelleher@uhhospitals.org.

Estate Planning

S20 November 9, 2015

CHEAT SHEET: CONSERVATION EASEMENTS: Charitable Planning A Versatile Estate Planning Tool for C-Suite Executives By brittany E. Neal

By dave stokley

f you are like most executives I talk with about giving, your question isn’t “Should I give?” but rather “What is the best way to give?” Below are two methods to use your wealth in a strategic way that will maximize the impact of your giving and safeguard your legacy. Smart Retirement Planning: Deferred Charitable Gift Annuities Many mid-to-late-career executives often find that they have maxed-out contributions to their qualified retirement plans but are still paying substantial income tax bills on income they do not currently need. One solution for the phil- Stokley anthropically inclined is the deferred charitable gift annuity. With a standard gift annuity, you irrevocably transfer assets to charity in exchange for guaranteed income payments. One of the most attractive planning features of gift annuities is that the amount paid to you will never change and the payments will continue for your life (or perhaps the life of a spouse or partner). A deferred gift annuity is simply a gift annuity that delays these payments until a later date of your choice, usually sometime around or after you plan to retire. The result: an income tax deduction

charitable giving today and guaranteed income in the future, both at times you need them most. Donor-Advised Funds: Simple, Flexible, Smart One of the fastest growing giving vehicles in recent years is the donoradvised fund. In short, this vehicle allows you to establish the fund at any charitable or for-profit institution that offers them, and in any given year you contribute as much as you’d like. You receive a tax deduction the year you contribute to the fund, but you can allocate gifts to specific charities at any time in the future. Donor-advised funds are especially popular among busy executives because they are easy to create, provide great tax benefits, and are very flexible. Also, the organization with which you establish the fund handles all legal and tax reporting, so very little administrative work is required from you. Contact your financial planner, attorney, or charitable gift planner for more details on whether one of these strategies might be right for you. Dave Stokley 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.

onservation easements are an often-overlooked estate planning tool. A conservation easement allows a donor who is passionate about her land, and the natural resources it offers, to make a philanthropic contribution, while at the same time permanently preserving the property and maintaining it for future generations. The IRS recognizes conservation easements that meet certain requirements as “qualified conservation contributions,” and as such, are eligible for charitable income tax deductions. Donating a conservation easement can provide an opportunity for a landowner to have the “best of both worlds” — the land they love will remain a working farm or vibrant forest with the added bonus of potential income and estate tax benefits. A conservation easement is a contract entered into between the landowner and a land trust that permanently restricts the future use of the property by removing some or all of the development rights. Land trusts are organizations that typically have a mission dedicated to protecting the natural resources within the area. Land trusts are considered a “qualified organization” by the IRS, meaning they are eligible to accept grants of conservation easements. In working with a local land trust, the donor can customize and tailor the easement to fit the specific continued use of the property. The restrictions delineated within the easement are perpetual and,

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charitable giving once finalized, the conservation easement will be recorded in the appropriate county recorder’s office. The land trust holding the conservation easement then takes on the long-term responsibility of monitoring the property to ensure that the restrictions are properly upheld. While the specific restrictions within each easement will vary, the effect is the same — Neal they serve to reduce the value of the land to some degree. This decrease in value is recognized as a charitable gift, so long as the property meets at least one of four conservation purposes as identified by the IRS. That is, the property must provide one or more of the following values: 1) recreation or education; 2) habitat protection; 3) open space protection that yields a significant public benefit; and/or 4) historic preservation. In order for a conservation easement to qualify as a qualified conservation contribution, the donor must be able to substantiate — through a qualified appraisal — that the value of the land has decreased as a result of the restrictions. That is, the difference in the “before value” of the property (without the conservation easement) and the “after value” of the property (with the conservation easement’s restrictions) make up the amount that is considered a charitable gift in the eyes of the IRS. The income tax deduction must be taken in the year that the conservation easement is granted, which is the year the gift is considered to be made. As with other types of non-cash gifts, the deduction amount cannot exceed 30% of the donor’s adjustable gross income for that year. However, any unused portion of the gift may be carried forward for an additional five years. In years past, Congress has provided for increased tax

incentives, which allowed individuals to take a charitable income tax deduction in an amount up to 50% of their adjusted gross income for the year the gift is made, with the ability to carry forward any unused portion for an additional 15 years. Congress is currently considering reinstating these increased incentives. In addition to charitable income tax benefits, there are potential estate tax savings as well. Foremost, since the value of the land under conservation easement is reduced, the overall value of the donor’s estate will be reduced, thereby limiting the overall estate tax burden. Additionally, if the land subject to the conservation easement is still owned by the decedent or a family member of the decedent for three years prior to the decedent’s death, an additional 40% of the value of the easement property can be deducted, subject to a $500,000 limit. Even if a donor is unable to grant a conservation easement over her property during her lifetime, her estate may still be able to take advantage of the potential tax savings by granting a “post-mortem” conservation easement. The decedent may grant a conservation easement through her will, or family members aware of the decedent’s desire to see the property permanently protected, may grant a conservation easement to a land trust at any time before the estate tax return is filed. Conservation easements are customized and specific to the property that a donor intends to restrict. While not all properties lend themselves to conservation easements, for those donors who do have land that fits the bill, a conservation easement can be an extremely effective and flexible tool to consider both from an income tax and estate tax standpoint. Brittany E. Neal, Esq. is a Conservation and Gift Planning Attorney with Western Reserve Land Conservancy. Contact her at 440-528-4156 or bneal@wrlandconservancy.org.

Learn more about how to use complex and noncash assets as a powerful tool in the charitable planning & estate planning process.

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Estate Planning

November 9, 2015 S21

Beyond the Pledge Drive â&#x20AC;Ś Leaving a Legacy By Mary Grace Herrington

lanned giving is simply finding the best method of making a gift. The distinction between planned gifts and other giving is that most charitable giving is income-oriented while planned giving is asset-oriented. Planned gifts can be considered once-in-a-lifetime gifts. Most often planned gifts are made by individuals who have given regularly every year to an organizationâ&#x20AC;&#x2122;s annual operating fund. The size of the annual gift is less important than the constancy of the commitment. As organizations compete for available dollars, planning and broad fundraising efforts assume greater importance. Todayâ&#x20AC;&#x2122;s legacy donors are more sophisticated, they request more information, and they are younger. Their interests, needs, and expectations reflect

charitable giving the motivations and values of their generations. Similarly, emerging demographic and economic circumstances are giving rise to a new generation of taxwise, financially savvy donors whose giving practices are based on business acumen as well as philanthropic Herrington concern. The financial needs, interest, and expectations of the 75-year-old are not the same as those of the 45- or 50-year-old donors that are forming the new donor prospect pool. In a nutshell, donors are looking for ease, choice, and expertise. A frequent â&#x20AC;&#x153;go-toâ&#x20AC;? list includes the following ways to give a planned gift:

Prepare a will. Without a will, you lose control of the possessions you worked a lifetime to acquire. Leave a gift in your will for the charitable organizations that made a difference in your life. Consider simple language such as I give _______ [the sum, percentage, or description of property] to [charity name] in [city, state] to be used for its general tax-exempt purposes, but without other restriction as to use. Consider using assets for your charitable gift. These can include but aren't limited to stocks, bonds, certificate of deposits, real estate, vehicles, art and jewelry. Such

insurance policy.

gifts may even provide tax savings. n

Name your favorite charitable organization as the beneficiary of your IRA or pension plan.

Buy a new life insurance policy naming your favorite charity as the beneficiary.

Name your favorite charity as the beneficiary of an existing life

Remember deceased loved ones with memorial gifts to charities.

Encourage family members and friends to leave gifts to charities in their wills.

As with any significant financial decision, it is recommended that donors seek counsel from their trusted advisers on timing, amounts, and type of asset to donate to maximize their charitable giving deductions and philanthropic impact. Mary Grace Herrington 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.

Insurance Policy Loans: Pay Attention to the Details By Larry Rothstein

ife insurance allows policyholders to take loans from the cash values by simply asking the insurance company to borrow on the policy. There are many in-force policies with large loans and a general lack of attention to the potential impact of these loans. If a policy loan is ignored, there is a real danger that a policy could lapse and incur an enormous phantom income tax. This

insurance happens because the loan is added back (as boot) to determine taxable gain, and gains on life insurance are ordinary income (not capital gains). A whole life policy is able to surrender a portion of accumulated paid-up additions to pay down a loan, but this amount is generally only a small portion of the total cash values.

Life can take unexpected turns. Ĺ˝Ĺś Ć&#x161; Ä?Ä&#x17E; Ä?Ä&#x201A;ĆľĹ?Ĺ&#x161;Ć&#x161; Ĺ˝ÄŤ Ĺ?ĆľÄ&#x201A;Ć&#x152;Ä&#x161; Having a plan in place can help preserve what you have worked so hard for. The CPAs and Advisors at HW&Co. can help you prepare for whatever life has in store.

dÄ&#x201A;Ç&#x2020; Ć?Ć&#x161;Ä&#x201A;Ć&#x161;Ä&#x17E; ZÄ&#x17E;Ć&#x;Ć&#x152;Ä&#x17E;ĹľÄ&#x17E;ĹśĆ&#x161; /ĹśĆ?ĆľĆ&#x152;Ä&#x201A;ĹśÄ?Ä&#x17E;

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However, a universal life policy can usually withdraw over 90% of cash values to pay down a policy loan internally over a period of years, as long as premium funding is sufficient thereafter. A good loan rescue strategy is to execute a tax-free Rothstein 1035 exchange into a universal life policy and carry over the existing loan. The policyholder can then structure

a series of withdrawals and loan repayments internally to pay off the loan while maintaining the integrity of the coverage. Most whole life policies carry a somewhat high loan interest rate compared to todayâ&#x20AC;&#x2122;s marketplace, with many in the 7% to 8% loan interest rate range. Universal life policies tend to have lower loan rates, hovering in the 4% range, and many of these have a â&#x20AC;&#x153;wash loanâ&#x20AC;? provision after 10 years. Policy loans can be a great feature of

permanent insurance, whether owned by a trust, business or an individual. However, it is extremely important to work with a qualified life insurance professional that can help navigate the intricacies of policy loan management and provide alternative solutions. Larry Rothstein,Â CLU, AEP, is Director of Advanced Marketing & Case Design for Cornerstone Consulting Group, LLC. Contact him at lrothstein@ cornerstoneconsultinggroup.net.

Joyce M. Stielau, a trained nurse, also was a volunteer at MetroHealth with Mended Hearts. For more than a dozen years, she gave her time to the support group for cardiac patients. Upon her death in 2013, she established the Joyce M. Stielau and Herbert W. Stielau Foundation. With a recent $150,000 gift from the foundation toward MetroHealthâ&#x20AC;&#x2122;s Critical Care Pavilion expansion â&#x20AC;&#x201C; where cardiac patients will continue to receive excellent care â&#x20AC;&#x201C; Joyceâ&#x20AC;&#x2122;s generosity continues to live on. For information about making a planned gift to MetroHealth, please contact Stella Dilik, Executive Director of Philanthropy, at 216-778-5004 or sdilik@metrohealth.org.

Estate Planning

S22 November 9, 2015

PREMIUM FINANCING

Seven Questions for a Safe and Sustainable Transaction By Richard Tanner

uccessful business owners and families of wealth are well versed in using others people’s money when acquiring real estate or business interests, but does this approach apply to large life insurance transactions? Structured properly, a third party loan to pay insurance premiums can facilitate a safe purchase without the need to liquidate other taxable assets or compromise cash flows needed elsewhere. Persistently low interest rates and increased appetite from lenders has contributed to meaningful growth in the number of premiumfinanced transactions seen by carriers and lenders nationally. In addition, advances in insurance products with superior risk characteristics have allowed some lenders to offer 100% collateral credit on policy cash values. Locally we are seeing more proposals from out-of-town promoters that

insurance require no upfront capital, no ongoing payments and little or no collateral outside of the acquired policy — essentially “no skin in the game.” These approaches are drawing negative attention from carriers, lenders and eventually, we believe, the IRS. Premium financing can Tanner be safe and effective when reasonable assumptions for product performance and interest rates are used.

Does it sound like free insurance?

Strategies that require little or no upfront collateral and no out-of-pocket cash may sound attractive; however, if it looks and sounds like free insurance, the plan will draw scrutiny from product

manufacturers who stand to lose if the policy lapses early. While it’s possible to pay no interest up front, often referred to “capitalize interest,” the downside risks include less attractive financing terms and added product performance pressure. Additionally, many top insurance carriers refuse to underwrite premium-financed cases where interest is capitalized and no out-of-pocket cash anticipated.

Does the underlying insurance recommendation make sense?

Recently we heard from an advisor whose client was approached by a local charity to finance $15 million of life insurance for a charitable gift. The strategy involved capitalized interest, and the advisor thought it sounded too good to be true. The client has $20 million of net worth and charitable intent but limited giving history with the charity in question. While many lenders would be happy to finance this deal, most top-tier carriers require proof

of insurable interest. Top carriers we work with would not approve a plan that anticipated fully capitalized interest and a 100% charitable beneficiary. Using a more conservative design not only would make the proposed plan safer, it would make it easier to get approved.

How will plan service be delivered?

Premium financing is more complex and requires robust and regular oversight of the loan, collateral and insurance product. Ask if the agent has a history of proactive service in this market and look for evidence of a collaborative process that includes the entire advisory team.

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What is the exit strategy?

Reputable lenders and insurance carriers prefer to see exit strategies up front before approval. If the only exit strategy is for your client to die, the plan may not be safe. Be sure to look for a lifetime exit strategy that works even if interest rates rise and product performance goes down. Beyond policy cash values, good planners can integrate other estate planning techniques such as GRATs and charitable lead trusts for a fully integrated family wealth strategy.

Is the policy fairly priced for the institutional market?

Premium financing involves larger policies where small variations in internal expenses have a big impact on long-term strategy success. Retail policies designed for the mass affluent have higher expenses and mortality

fees. As a result, they will underperform institutionally priced products like those offered through M Financial Group. M Financial is the only distribution system in the world that owns a proprietary mortality table for the very affluent market.

Is there a strategy to manage the hurdle rate?

Newer insurance product designs with guaranteed floors and caps have helped fuel greater appetite from traditional lenders. That said, a longterm strategy for managing the spread between interest costs and the net crediting rate on policy cash values is needed. Complex products that employ sophisticated indexing strategies require experienced, ongoing oversight.

What’s in it for the lender?

Premium financing is an attractive market for many private bankers. If the lender is not experienced with financed life insurance, the transaction may go slowly or wind up not getting approved. Be aware that most lenders are only interested in working with clients they hope will eventually use other bank services such as asset management. Since these are attractive loans to ideal wealth management prospects, there is strong competition in this space and advisors can add value in helping their clients to negotiate favorable terms. Richard Tanner is President of Insurance Design Group, a division of Ownership Advisors, Inc. Contact him at 216-3285534 or rtanner@ownershipadvisors.com.

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Estate Planning

Revocable Trusts Offer More Control Over Distribution of Retirement Assets , By Lacie O Daire

or many people, retirement assets such as 401(k) accounts and IRAs represent a large portion of their net worth. Since these assets aren’t always given priority treatment when addressing estate planning, they are often distributed via outright beneficiary designations. There may be familial situations, however, that would make a revocable trust the appropriate beneficiary for a retirement account. One example would be a marriage in which there are children from a prior relationship O’Daire or beneficiaries who are minors, have special needs, are spendthrifts, have creditor problems or are financially irresponsible. Another challenge is that beneficiaries will generally roll over an inherited account to an IRA and designate their own beneficiaries. That means a remarried spouse’s new partner or a child’s spouse could ultimately end up with the remaining inherited account instead of a desired beneficiary. Naming a revocable trust can allow for more control over the distribution of assets and offer protection for vulnerable beneficiaries. However, required minimum distributions (RMDs) need to be distributed annually, and the speed at which the inherited account is distributed can vary greatly depending on how a beneficiary is named. Consider this scenario: If a trust is named as a beneficiary, the RMDs may be required to be paid based

trusts on the life expectancy of the oldest beneficiary of the trust. Or worse, if there is no “designated beneficiary” as required by the stringent requirements of IRC §401(a)(9), the account may be required to be distributed over a fiveyear period. Either situation results in the loss of extended tax-deferred growth in the retirement account. It is, however, possible to use language for the beneficiary designation similar to the following: “One-third to the trust share under the X Revocable Trust created for my son, A, or his lineal descendants, per stirpes.” The same language could be used for each intended beneficiary, allowing for the RMDs allocated to that trust share to be distributed over A’s life expectancy, provided the remainder of the trust meets the “designated beneficiary” requirements. It is important to note that these directives require the RMDs to be distributed to the beneficiary, which may not be desired if the beneficiary is young, has financial/personal difficulties or special needs. Ultimately, retirement account owners may have to make a choice that is not tax advantageous in order to accomplish their estate planning objectives. Lacie O’Daire is a partner in the Tax and Wealth Management Practice Group of Cleveland-based Walter | Haverfield, LLP. Contact her at 216-928-2901 or HYPERLINK "mailto:lodaire@walterhav. com"lodaire@walterhav.com.

“

Ultimately, retirement account owners may have to make a choice that is not tax advantageous in order to accomplish their estate planning objectives.

”

November 9, 2015 S23

Three Reasons You Still Need A Trust By steven p. larson

rior to the passage of The American Taxpayer Relief Act in 2013, the majority of estate planning focused on maximizing the amount of assets that could pass tax-free utilizing the lifetime exemption. While this is still a goal for some, with current limits of Larson $5,430,000 per person and portability of this exemption between spouses, most are less concerned about estate taxes. But, even if one does not have a taxable estate, one may still desire a trust. Consider the following benefits:

CONTROL OF DISTRIBUTIONS

A trust provides control over asset distributions. The grantor can determine at what ages a beneficiary should have access to trust assets, be it all at a certain age or some percentage each year. Different distribution ages can be established for different beneficiaries, based on individual needs. Distributions can also be withheld from a beneficiary who is unable to manage his or her affairs.

trusts

ASSET PROTECTION

A trust may protect a beneficiary’s assets from divorce or creditors. Assets held in a trust are generally not subject to inclusion in a beneficiary’s divorce proceedings, assuming those assets are kept separate from marital assets. Additionally, where distributions are at the trustee’s sole discretion and the trust contains a spendthrift clause, a beneficiary’s creditor generally cannot force a distribution to the beneficiary for the creditor’s benefit.

AVOIDANCE OF PUBLIC PROBATE

Unlike wills, which are filed in probate court and are of public record, trusts are not required to be filed in probate court and may be kept private. A simple will that “pours over” the decedent’s assets into a trust is one of the easiest ways to avoid a public probate of an estate. The right estate plan can address the unique concerns of every situation. Steven P. Larson is an Attorney with McCarthy, Lebit, Crystal & Liffman Co., LPA. Contact him at 216-696-1422 or spl@mccarthylebit.com.

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Estate Planning

S24 November 9, 2015

Estate Planning Before Interest Rates Rise —

Is it Finally Time for a GRAT? By Joseph M. Mentrek

or today’s modern family, the increasing lifetime estate and gift tax exclusion amount (currently $5,430,000 per person, $10,860,000 for a married couple) often removes estate taxes as an important planning consideration. For those “fortunate” few upon whom the federal estate tax still applies, a Grantor Retained Annuity Trust (GRAT) may be worth considering. Structured properly, a GRAT is a relatively low-risk and cost-efficient means to transfer wealth from one generation to another with little or no federal gift tax liability. Considering the current state of the financial markets — with investment asset values recently trending downward and historically low interest rates — the potential tax savings associated with a GRAT become even more attractive. Add to that the fact that the GRAT is a creation of statute and recognized by the IRS, and there may be no better time than the present to take advantage of this powerful estate planning strategy. How a GRAT works The GRAT is essentially an estate freeze technique that allows the owner of highly appreciating assets to transfer the future appreciation of those assets out of his or her taxable estate in a tax-efficient manner. The GRAT typically works well with high-growth marketable securities or an interest in a

trusts high-growth closely held business. The GRAT is an irrevocable trust, authorized by statute, to which a senior generation owner of appreciating assets makes a gift of those assets while retaining an annual income payment (in cash or in kind) for a predefined period of years. At the end of the retained income term, the property remaining in the trust vests in the remainder beneficiaries (usually the children or a trust for the benefit of the children), with no further estate or gift tax obligation. While a GRAT can be structured to benefit grandchildren, special Mentrek rules in applying the Generation Skipping Tax make a GRAT less attractive for grandchildren. The owner determines the amount of the annuity payment at the trust’s inception. Logically speaking, as the value of the retained income payments over the term of the GRAT increases, the value of the remainder interest in the trust (which is the gift to the children) decreases. A GRAT works because the value of the taxable gift is based on an assumed rate of return on the trust assets, which is set by statute, governed by the markets, and revised monthly. The actual rate of return for the specific assets

Zeroed-Out GRAT with Varying Annuity Payments Year

Beginning Principal

10% Growth

Required Payment*

Remainder

$1,000,000

$100,000

$468,647

$631,353

$63,135

$562,377

$132,111

*The required GRAT payment is based on the IRS prescribed rate for October, which is 2%.

selected to fund the GRAT, however, is not used in the computation. For example, consider that the current assumed rate of return used in the IRS calculation of value of the retained income interest of a contemplated GRAT is 2.0%. If assets to be transferred are actually yielding a 10% total return, it is easy to see how the growth rate differential of the actual rate of appreciation over the IRS assumed rate could offer a meaningful opportunity for savings if it could be transferred in a tax-efficient manner. In fact, a “Zeroed-Out GRAT” generates a sizeable transfer of value without the use of any estate or gift tax exclusion. This result is achieved

”

Lincoln Financial Advisors is an industry leader in Financial Planning and advice. We develop advanced strategies to preserve, protect and grow our clients’ assets. Joel Jensen, CRPC® President's Cabinet

Thomas Craft, CPA*, PFS, AEP® President's Cabinet

Lawrence Barrett, CLU®, ChFC®, AEP® President's Cabinet

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As mentioned earlier, a GRAT is especially effective to transfer value

means to transfer wealth from one generation to another with little or no federal gift tax liability.

Look No Further...

Brent Besinger Top of Council

GRATs in business

Structured properly, a GRAT is a “ relatively low-risk and cost-efficient

LOOKING FOR ESTATE PLANNING EXPERTISE? James Schaffer, Jr., AIF®, CRPC® Top of Council

because the GRAT payments are designed to return the owner an income stream equal to the initial value of the property contributed using the current 2% rate of return prescribed by statute. For instance, if a taxpayer chose to create a two-year Zeroed-Out GRAT in October 2015 with a contribution of $1,000,000, he or she would receive cumulative annuity payments of $1,031,024, and at the end of the term, the children would receive $132,111 free of tax, with no use of his or her lifetime estate and gift tax exclusion amount.

Our Financial Planners specialize in innovative wealth creation techniques, investment planning, estate and business succession planning. We will make ourselves available for a confidential initial consultation to discuss your financial and estate planning needs. By truly serving clients first, our Financial Planners demonstrate excellence in financial planning advice and an ongoing dedication to the Financial Planning Industry and client advocacy.

using an interest in a highly appreciating closely held business. And in the context of the estate and gift tax, the transfer of an interest in a closely held business offers the transferor an additional potential advantage — the possible application of valuation discounts. The marketplace recognizes that an investor has little interest in owning a minority interest in a business that has no established market for its securities. Consequently, such an investor would only be interested in purchasing that non-marketable minority interest at a deeply discounted price, if at all. Because both the estate and gift tax measure transactions in terms of “fair market value” based on what would happen between hypothetical buyers in the marketplace, the application of sizeable valuation discounts for non-marketable minority interests in closely held businesses is permitted and accepted under current law. Be aware that rising interest rates are not the only risk we are trying to beat. There is talk that the IRS is contemplating new treasury regulations to limit the application of short-term GRATs and valuation discounts. Consequently, now may be the time to engage your advisors to determine whether a GRAT is right for you. Joseph M. Mentrek, Esq. is a Partner with Calfee, Halter & Griswold LLP. Contact him at 216-622-8866 or jmentrek@calfee.com.

When You Need to Know

The Right Value Personal Property Appraisals & Estate Sales Personal Property Appraisers Equitable Distribution Charitable Donation Insurance - Estate Sales Auction Coordination IRS Compliant Appraisals With one call to L&L, you get experts that have over two decades of experience in art, collections and home contents. L&L offers a full range of services from a professional appraisal report to an estate sale to a full clean-out of a home. Our services are customized to meet your individual needs with expert knowledge and care.

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Associates of Sagemark Consulting are registered representatives of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer. Member SIPC. Investment advisory services offered through Lincoln Financial Advisors Corp. or Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. It is not our position to offer legal or tax advice. *Licensed, not practicing on behalf of Lincoln Financial Advisors Corp. CRN-1320517-100815

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Estate Planning

by Missia H. Vaselaney

any clients express the desire that their wealth stay in the family. A dynasty trust can be structured to accomplish this goal. A typical distribution pattern is for the dynasty trust to be held for the benefit of the grantorâ&#x20AC;&#x2122;s child during his/her lifetime, and then at the childâ&#x20AC;&#x2122;s death, for the trust to be distributed to the childâ&#x20AC;&#x2122;s lineal descendants. (The child may be given limited power to rearrange his/ her share among the clientâ&#x20AC;&#x2122;s other lineal descendants.) Of course, this may frustrate the child, since he/she Vaselaney cannot leave the trust assets to his/her spouse or any other person the child desires; but this structure is necessary to keep the assets within the family. If the child is married, this prevents the assets from benefiting the surviving spouseâ&#x20AC;&#x2122;s potential new spouse. However, the child can still share the income received from the trust with his/ her spouse, or use the income to buy life insurance to replace the benefits of the trust to the spouse, should the child predecease his or her spouse. A dynasty trust can be structured to allow the beneficiary to appoint an income interest or an income and discretionary principal interest in the trust to his/her spouse for life. This arrangement usually works well for a client who wishes to provide for sons-in-law and daughters-inlaw but wants to ensure that his/ her assets will eventually benefit

DYNASTY TRUSTS: Keeping It All in the Family

the clientâ&#x20AC;&#x2122;s grandchildren and other lineal descendants. If a parent leaves a child his/her inheritance outright, the child will most likely leave the assets outright to his/her spouse. The sonin-law or daughter-in-law may have every intention of ensuring that his/her children receive the inheritance that his/her spouse received, but, either due to lack of or faulty planning (e.g., a simple will in a subsequent marriage) may inadvertently disinherit the

who has a child or children but no expectation of having grandchildren. Many clients in this situation will name a charity or charities as the remainder beneficiary. Often when I raise the issue of keeping assets in the â&#x20AC;&#x153;bloodlineâ&#x20AC;? with a new client, he/she will say that their existing simple will or trust takes care of this issue. When I review the documents, they contain the standard language that a predeceased childâ&#x20AC;&#x2122;s

Full Circle

e tiv

share passes to his or her children. The client misunderstands that this only works if the child predeceases the client, something I am sure the client hopes never happens. Only a dynasty trust or similarly structured trust will achieve this goal. Missia H. Vaselaney is a Partner with Taft Stettinius & Hollister LLP. Contact her at 216-706-3956 or mvaselaney@ taftlaw.com.

gies for you and y e t a ou str r

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intended beneficiaries. In cases where a child has no lineal descendants and most likely will never have children, a parent may wish to provide for his/her child but still control the ultimate distribution of the assets. A dynasty trust can assure that at such a childâ&#x20AC;&#x2122;s death either the childâ&#x20AC;&#x2122;s siblings, nieces, nephews or other relatives receive the benefit of the remaining assets in the childâ&#x20AC;&#x2122;s trust. This may be applicable to a client

Inn ov a

trusts

November 9, 2015 S25

Estate planning Business succession planning

Executive compensation and governance

Family and closely-held business counseling

Employee benefits Taxation

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S26 November 9, 2015

Estate Planning

Proposed Ohio Legislation Would Enable Use of Private Trust Companies by Robert R. Galloway

s of this writing, House Bill 229 is being considered by a committee of the Ohio House of Representatives. The bill, which is almost two years in the making, would allow a family in Ohio to establish its own private trust company (PTC) to serve as trustee for its family trusts. Private trust companies have seen increased use as a wealth succession planning tool in the past several years, as more states have enacted PTC legislation. Currently, over 15 states have passed such legislation, the most recent being Florida. A PTC provides the benefit of a permanent trustee (in the form of a corporation or limited liability company) along with the ability of a family to substantially control its operations. Under current Ohio law, the choice of trustee for a family trust is either: (a) Galloway one or more individuals, or (b) a commercial trustee. This means that an Ohio family seeking to use a PTC is required to form and operate the PTC in another state. Such out-ofstate operations result in increased operating costs, extra administrative effort, and an outflow of revenues from the state of Ohio.

Trust & Planning Together we provide fiduciary guidance, administrative support and tax consulting for business owners, executives and trustees. Learn more at: sequoia-financial.com and cohencpa.com 888.225.3777 | 800.229.1099

Though related entities, Sequoia Financial Group, LLC and its affiliates, and Cohen & Company, Ltd. are separate companies with common, but not identical ownership. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Certain third–party money management offered through ValMark Advisers. Inc., an SEC Registered Investment Advisor. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. 3500 Embassy Parkway, Akron, OH 44333, 330-3759480. Certain insurance products offered though Sequoia Financial Insurance Agency, LLC. Sequoia Financial Group, LLC and related entities are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc. Cohen & Company, Ltd and related entities are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc

CONGRATULATIONS TO JOSEPH M. MENTREK on receiving the 2015 Distinguished Estate Planner Award from The Estate Planning Council of Cleveland

Legislation details Similar to several other states, Ohio’s legislation allows for licensed and unlicensed PTCs. A licensed PTC would be subject to the following requirements: (1) minimum capital of at least $200,000 and up to $500,000 in the discretion of Ohio’s Superintendent of Financial Institutions; (2) may provide services to “family members,” certain non-family members and certain affiliated entities; (3) maintain office space and at least one part-time employee in Ohio; (4) hold at least two governing board meetings in Ohio; (5) perform certain administrative activities in Ohio; and (6) maintain a fidelity bond and directors/officers insurance, each in the amount of $1 million. A licensed PTC is subject to supervision by Ohio’s Department of Financial Institutions and will be audited every 18 months. An unlicensed PTC, on the other hand, may provide services only to “family members” and, since it will not be audited by the Department of Financial Institutions, must abide by restrictive SEC rules in order to provide investment advice without registering with the SEC as a registered investment advisor. While an unlicensed PTC is not subject to banking regulation, it is required to submit an annual affidavit to the Department of Financial Institutions confirming its compliance with the statutory limitations.

trusts Defining family members One of the most limiting features of an Ohio PTC is the definition of “family member.” This definition ensures that a PTC is not serving the general public (and, in fact, solicitation of trust business is explicitly prohibited in the bill). Family members are defined as a class, all of whom have a common ancestor who is not more than 10 generations apart. This so-called “designated relative” must be identified at the PTC’s inception and cannot be changed. Family members also include spouses, spousal equivalents, adopted children, stepchildren and foster children. The definition also includes the following related persons/entities: family charities, family estates, irrevocable trusts with family beneficiaries, key employees, trusts formed by key employees, and business entities wholly owned and operated by family members. These rules are intended to track the SEC’s recent definition of a “family office.” Tax ramifications Various estate tax and income tax laws also come into play. Prior to 2008, it was less clear how these laws would apply in the PTC context. The IRS addressed many of these questions through Notice 2008-63, in which it reviewed various PTC scenarios. In short, the tax rules permit a family to have substantial ownership and control over a PTC, so long as the governing documents of the PTC contain appropriate “firewalls” to separate family members from certain tax sensitive decisions, such as making distributions from trusts of which they are grantors. PTC benefits In sum, there are many reasons that Ohio’s proposed PTC legislation would benefit Ohio families: there would be no need to operate out of state; the capital requirements are relatively low, which is beneficial to small businesses and family farms; the licensed/unlicensed options provide a useful choice; the tax laws now have been clarified, and recent improvements to Ohio’s trust laws will provide a robust platform for operating longterm trusts with a PTC as trustee. A companion bill is currently working its way through the Ohio Senate with committee hearings scheduled in the near future (Senate Bill 175), so stay tuned for legislative updates. Robert R. Galloway is a Partner with BakerHostetler and co-author of H.B. 229/S.B. 175. Contact him at 216-861-7423 or rgalloway@bakerlaw.com.

Estate Planning

November 9, 2015 S27

Business Succession Planning: Why It Pays to Act Sooner By Aaron Reber

usiness succession is an inevitable, and critical, stage in the life of a company. So why do some business owners wait until the eleventh hour to start planning their exit strategy? There are many possible scenarios. Business owners can become overwhelmed with the day-today responsibilities of running the company. Pressing concerns such as growing the business, retaining talent and managing finances can take precedence over long-range planning. Constant business changes and uncertainty about the right course for the future provide owners with additional excuses to delay making decisions about choosing a successor. Further, no one likes to ponder their mortality, and entrepreneurs are no exception. Some owners can’t envision anyone else at the helm of the company they’ve worked so hard to build. Frequently, owners may find that there simply isn’t enough time to place this necessary but complex task on their schedules. If any of the above applies to you, you’re not alone. A recent survey conducted by the Exit Planning Institute’s Northeast Ohio Chapter confirmed that 83% of business owners (with most surveyed being 50-plus years of age and owning a family business) do not have a business succession plan or have not

business planning documented or communicated their transfer intentions. Of those surveyed, 13% had detailed business succession plans in place, and two-thirds indicated they did not understand all of their exit options. A mere 35% had taken steps to relay their plans to family members. When the unexpected happens Anecdotally, stories of business owners who suddenly passed away, fell ill or became incapacitated provide compelling evidence that it is never too early to begin planning an exit strategy. When a business is caught off guard and faced with such a crisis, emotions can run high, leading to hasty, ill-advised decision-making. For example, a business owner, without a documented business succession plan, may find himself responding to an unsolicited letter of interest from a private equity firm as an easy way out, forever altering the vision of the business and, perhaps, leaving value on the table. A well-thought-out succession plan can translate into a number of financial and emotional benefits: a smoother transition into new ownership; better preparation for the resulting tax consequences of transferring the business; and peace of mind for all invested parties, including owner, employees, clients, board members and family. Whether your goal is to

keep the business in the family, sell your interest to a key employee or coowner, or prepare it for acquisition by another company, it pays to act sooner than later.

business post-succession? n What

is the most ideal method of transfer: passing the business to family, transferring ownership through a management buy-out or employee buy-in, or selling the business to a third party?

So where do you begin? What most business owners don’t realize is that business succession planning is a process. Don’t expect to have all the answers when planning begins, but understand that the more time allotted to the process, the fewer surprises you are Reber likely to experience down the road. Important first steps include learning about what business succession options are available; finding a trusted advisory team; identifying your personal, family and business goals; and determining the best path to achieve them. With guidance from your advisors, a multitude of concerns can be visited early on: n When

do you plan to exit the business?

How will you be involved in the

How will disputes be resolved?

n Who

will be the key role players in the transition?

n What

will be your cash flow needs in retirement?

Is your business exit plan in sync with your overall estate plan?

In addition, contingency plans can be put in place in case of unexpected death or incapacitation. Your advisors can also assist you with developing a life-after-succession plan that outlines goals and interests, such as philanthropy and civic involvement. Whatever form your business succession plan takes, one thing is certain: Making sure all the details are properly handled demands a specialized area of expertise. Many business owners choose to partner with a company that can work with them, family members and other advisors to plan, implement

and monitor an effective and welldocumented exit strategy, as well as address personal issues that may emerge during the succession planning process. Aaron Reber is Head of Trust & Wealth Advisory for FirstMerit PrivateBank. Contact him at aaron.reber@ firstmerit.com. The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank, N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions. Please consult with your personal financial advisor before making any investment decisions. FirstMerit Bank, N.A. and its representatives do not provide legal or tax advice. Individuals should consult their personal legal/tax advisors before making legal/tax related decisions.

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Discount Planning: A ‘Must Do’ Before You Sell Your Business By Jeffrey P. Consolo

elling your business? Too often business owners wait too long to consult their estate planning counsel. This is especially true when the business owner does not need or want all of the proceeds from the sale and is willing to transfer some of those proceeds to their beneficiaries. Why plan early? Generally, the simple answer is tax savings. Currently, a married couple has approximately $10.8 million of combined exemptions from the federal estate tax. If their estates exceed that total, at the second death, federal estate Consolo tax will be paid at a 40% rate. The goal of many individuals is to reduce or eliminate that tax and to transfer more wealth to their beneficiaries and less to the federal government. This often is done by moving shares in the business to beneficiaries prior to the sale. Proper and early planning can allow the owner to transfer shares in a way that discounts the value of those shares below their date of transfer value, thus allowing the owner to shift value to their beneficiaries to avoid the tax at death. There are numerous ways to make the transfer, based on the amount of control the owner wants to place on the access the beneficiaries may have

business planning to the sale proceeds. In all cases, the fundamentals remain the same. If the owner controls 100% of the shares, he or she will be taxed on the full fair market value of the sale proceeds and any appreciation generated after sale. By transferring a minority interest in the company, those shares have a lesser value. As an example, when the transfer is made, the shares valued at fair market value ($100/share) might be valued at $70. If those same shares are eventually sold for $150, the $50 of appreciation is not included in the owner’s estate, providing a $20 tax savings. The owner has also used only $70, rather than $100 of his or her exemption from the federal estate and gift tax. If you multiply this example by the thousands, the savings are meaningful. The process to achieve the savings is significant, requiring decisions regarding the company; choices as to how and to whom transfers should be made; appraisals; and valuations. If done well, the cost to create the plan is offset by the tax savings generated. Jeffrey Consolo is Chair, Tax and Benefits Department with McDonald Hopkins. Contact him at 216-348-5805 or jconsolo@mcdonaldhopkins.com.

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ISSUE DATE: 12/28 • AD CLOSE: 12/3 CONTACT: NICOLE MASTRANGELO • 216.771.5158 • NMASTRANGELO@CRAIN.COM