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CHARITABLE REMAINDER TRUSTSEXAMPLE 12.22 (CONTINUED)One day, they attend a financial planning seminar sponsored by their church. There they learnabout CRTs and ways to utilize this type of trust and avoid the capital gains tax. Later, they meetwith the financial planner and identify the following objectives: (1) sell the land and avoidcapital gains tax; (2) generate maximum income with moderate risk by managed investment ofthe proceeds; (3) leave major gifts to their church and some other favorite charitableorganizations; and (4) replace the value of the land as an inheritance for their children.The plan ultimately adopted (developed by additional consultation with a lawyer and anaccountant) consists of the following steps: (1) C and M will establish a CRT, with themselves asthe trustees; (2) they will contribute land valued at $250,000 to the trust; (3) a specialindependent trustee, appointed by them, will oversee the selling of the land; (4) because thetrust will be tax-exempt, the entire before-tax proceeds will be invested; (5) for making thiscontribution, C and M will receive an income tax deduction of approximately $31,000; (6) theywill also receive income from the trust of about $20,000 for each year for the remainder of theirlives; (7) they will use $8,600 of this income for 10 years to fund a wealth replacement trust fortheir children; (8) when C and M both die, the assets remaining in the trust will pass to theirchurch and some other charitable organizations; and (9) at the death of the second of them todie, the wealth replacement trust will provide about $250,000 to their children, free of incomeand estate taxes. aaThe illustration in Example 12.22 was provided by Lane Planning Co., Bethesda, Maryland.§ 12.11 CALCULATION OF CHARITABLE DEDUCTIONThe amount of the charitable contribution deduction for a gift to charity bymeans of a CRT essentially is equal to the value (as of the appropriate valuationdate) of the remainder interest in the trust property. 405 The value of the remainderinterest, then, is equal to the fair market value of the property placed in trust,less the value of the income interest.If, however, the probability that the charitable organization will receive theremainder interest is negligible, the charitable deduction will not be allowed. 406In one instance, when the likelihood that the remainder interest beneficiarywould receive the interest was not in excess of 5 percent, the IRS disallowed thecharitable contribution deduction. 407The rules as to valuation of a remainder interest in a CRT vary, dependingon whether the trust is a CRAT or a CRUT. The process by which this type ofremainder interest is valued is discussed elsewhere. 408(a) Charitable Remainder Annuity TrustsThe fair market value of a remainder interest in a CRAT is its present value. 409 Forpurposes of the charitable contribution deductions, the fair market value of theremainder interest in a CRAT is the net fair market value—as of the appropriate405 IRC § 664(e); Reg. §§ 1.664-2(c); 1.664-4(d), (e); 1.7520-1(a)(3); 20.2031-7(d)(2)(i). The deduction is, ofcourse, also subject to other rules governing the extent of the charitable deduction, such as the percentage limitationsin the case of the income tax charitable contribution deduction. See Chapter 7.406 Reg. § 1.170A-1(e).407 Rev. Rul. 77-374, 1977-2 C.B. 329.408 See Chapter 11.409 Reg. § 20.2031-7(a), (d)(2)(i). 472