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Sometimes a gift plan is like a jigsaw puzzle: the various pieces must fit together perfectly to complete the picture. Such was the case with the plan to meet Jim’s objectives. 

Jim, aged 69, is single and owns and manages five rental properties. Two of the properties are mortgaged, and three of them are owned free and clear. During the many years he has owned them, they have appreciated considerably in value—and he has been depreciating them on his tax returns. Jim has a regular IRA with a balance of about $1 million, and he is thinking about creating a Roth IRA.

As he enters retirement years, he would like to sell the rental properties, travel, and be free of management responsibilities. However, he realizes that a sale of the properties would result in considerable tax on the capital gain, reducing the after-tax proceeds available for investment. He would not need as much total income if a portion of it were tax free, and one way to have tax-free income is to transfer funds from his regular IRA to a Roth IRA. However, that conversion entails a tax cost.

Jim has a close relationship with our organization, and he greatly admires how we have transformed lives—including his own. He wants most of his estate to eventually pass to us. One of the professionals he has turned to for assistance is a gift planner on our staff. The other professionals he has assembled include his attorney, his financial advisor, and his accountant. He hopes that by working together they can help him devise a gift plan with all the interlocking pieces fitted together. Following are the key components of their collaborative plan:

• Jim transfers the nonmortgaged properties to a charitable remainder unitrust that will pay him income for life. The capital gain in the properties is not taxed to Jim when he transfers them nor to the unitrust when it sells them, and Jim receives an income-tax charitable deduction for the present value of the remaining assets that will be distributed to us when the unitrust terminates at Jim’s death. (Note: Transferring mortgaged property to a charitable remainder trust is not permitted when the owner is liable for the indebtedness. That is why mortgaged property usually cannot be transferred to a charitable remainder trust unless the mortgage is first removed.)

• Jim sells the two mortgaged properties, pays the mortgage balances, and has a significant amount of cash remaining.

• Jim converts a portion of his regular IRA to a Roth IRA. After satisfying the waiting period, he can start tax-free withdrawals from the Roth IRA.

The income-tax charitable deduction from the unitrust will offset a significant portion of the tax on the Roth IRA conversion and on the capital gain from the sale of the two properties. Jim’s accountant will determine how much of the cash from the two property sales must be retained for tax, taking into consideration the deduction offsets. Possibly, the accountant will recommend that these transactions occur over a two- or three-year period rather than all in a single year.

Because Jim wants to manage the unitrust, he names himself as trustee and retains his financial advisor to invest trust assets and his accountant for trust accounting. His attorney drafts the unitrust agreement and the various documents pertaining to the transfer of the properties. The gift planner helps coordinate the planning process, works with the accountant regarding deduction calculations, and prepares an agreement providing that the unitrust remainder will eventually be used to continue Jim’s support of his favorite programs at our organization.

Together, all of the pieces form the picture Jim desired: 

1. He realizes his dream for a charitable legacy
2. He simplifies his life as he transitions into retirement
3. He can count on income for life (part of his future income will be tax-free)
4. He reduces taxes he would otherwise have paid

Jim illustrates how pieces can be fitted together to create a gift plan mutually beneficial to individuals and the charitable causes they want to support.