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CHARITABLE REMAINDER TRUSTS(j) Charitable DeductionsThe federal income tax charitable contribution deduction is limited to the fairmarket value of the remainder interest of a CRUT, regardless of whether a charitableorganization also receives a portion of the unitrust amount. 232 A federalincome tax charitable contribution deduction is available for a gift of an undividedfractional share of the donor’s unitrust interest in a CRUT. 233 This type ofcontribution does not cause disqualification of the trust.§ 12.4 ISSUESThe creation and utilization of CRTs continually generates new legal issues.These are usually reflected in private letter rulings issued by the IRS; on occasion,the matter is reflected in a court opinion. A summary of the issues of thisnature follows.(a) Transfers of OptionsThe IRS ruled that the transfer of an option to a CRT is a transaction that maycause the trust to lose its remainder trust tax status. 234 This is certainly so when itwould be inappropriate to transfer the underlying property to the trust.In the subject case, an individual created a CRUT, funding it with a smallamount of money. Subsequently, this donor transferred certain unencumberedreal property to the trust. The contributor, as income beneficiary, was entitled toan annual unitrust amount of 9 percent.The donor proposed to enter into an agreement with the trustee by which thetrust would possess the right (but not the obligation) to acquire an interest in certainencumbered real property from the donor for a sum of money (an option).The grant of this option would be gratuitous, in that the donor would not receiveany financial compensation in exchange for the transfer. The encumbered realproperty was contiguous with the unencumbered real property previously contributedto the trust. The donor was personally liable on the underlying mortgageon the property that would be the subject of the option.The trust’s rights under this option agreement would be assignable by itand by any third-party assignee. It was not anticipated that the trust wouldexercise this option. Rather, the plan was that the trust would assign it to a232 Reg. § 1.664-3(d). The IRS ruled that a retired individual, with a qualified (IRC § 401(a)) retirement plan permittinga participant to have any portion of an eligible rollover distribution paid directly to a single eligibleretirement plan, and who was entitled to a distribution including employee stock ownership plan stock, coulddirect a rollover of a portion of the stock to his individual retirement account and transfer the rest of the stockto a CRUT, without recognizing net unrealized appreciation because the plan distribution was a lump sum(IRC § 402(e)(4)(B)). Priv. Ltr. Rul. 200038050. A charitable contribution deduction was allowed for the contributionof shares of stock to the CRUT equal to the fair market value of the remainder interest in these securities.See Chapter 11.The rules for calculating this deduction are summarized in § 12.11(b). For the rules relating to the reductionof the amount of a charitable contribution deduction with respect to a contribution of certain ordinary incomeproperty or capital gain property, see §§ 4.4, 4.5. For rules for postponing the time for deduction of a charitablecontribution of a future interest in tangible personal property, see § 9.21.233 See, e.g., Priv. Ltr. Rul. 200205008.234 Priv. Ltr. Rul. 9501004. 442