10% Rule for Trusts: How Charitable Trusts Meet IRS Requirements

The 10% rule in charitable trusts isn’t exactly small change—it’s a make-or-break point laid out by the IRS. When you set up a charitable remainder trust, at least 10% of the initial value of what you put in has to be set aside for charity. If it falls short, the government says your trust doesn’t qualify.

This isn’t about guesswork. There’s a specific formula to figure it out, tied to things like your age, the payout rate, and even current interest rates. Seems complicated? It can be, but it’s really about making sure a substantial piece of your trust’s value does end up benefiting the charity.

Why the 10% line? The IRS wants to stop folks from using charitable trusts just to dodge taxes, with practically nothing left for actual causes. So, if you’re trying to mix generous giving with tax-smarts, the 10% rule is the guardrail you can’t ignore.

• What is the 10% Rule?
• Who Does the 10% Rule Apply To?
• How Does the IRS Calculate the 10%?
• Pitfalls and How to Avoid Them
• Tips for Setting Up a Trust

What is the 10% Rule?

The 10% rule is a hard line drawn by the IRS for anyone setting up a charitable remainder trust. Here’s the deal: when you transfer assets into this type of trust, the projected value that goes to your chosen charity has to be at least 10% of the total amount you put in on day one.

This isn’t a rough guess—there’s a math puzzle behind it. The number comes from IRS guidelines, using a formula that considers things like your age, how much income you want to take out each year, and a specific interest rate called the “Section 7520 rate.” The goal is to figure out the present value that will eventually land in the charity’s hands.

This is a big reason why the 10% rule matters. If your numbers don’t pass the test, your trust just won’t be recognized as a charitable remainder trust. That means you lose those tax perks and the whole point of the setup is shot.

To picture it, say you put $500,000 into a trust. If calculations show that less than $50,000 (that’s 10%) is likely to end up with the charity, the trust fails. The IRS is strict about this cut-off because it’s all about making sure a solid chunk helps a real cause, not just creating workarounds for taxes or family wealth.

Bottom line: the 10% rule is your trust’s qualifying ticket. Skip it, and the IRS won’t give you or your charity the green light.

Who Does the 10% Rule Apply To?

If you’re setting up a charitable trust, especially a charitable remainder trust (CRT), the 10% rule is front and center. It directly affects people or couples who want to leave some of their money to a good cause while keeping an income stream during their life, or the life of a loved one. If you’re more into private foundations or donor-advised funds, you can skip this headache—the 10% rule doesn’t stick to those.

This rule applies when the trust is first created. The IRS checks whether the amount set aside for charity (the “remainder interest”) will be worth at least 10% of what you initially put into the trust. If you don’t hit that mark, the trust can’t have the tax perks usually linked with CRTs.

So, who falls under this rule?

• Anyone setting up a charitable remainder annuity trust (CRAT)
• Anyone creating a charitable remainder unitrust (CRUT)
• Those who want an income stream from the trust for themselves or others before any charity gets a share

The age of the income beneficiaries matters a lot here. The younger they are, the lower the likelihood the trust will meet the 10% test, since the payout for them could stretch for decades, shrinking what’s left for charity. The IRS uses interest rates and special tables to run these numbers. Here’s a quick breakdown of current rules for CRTs (as of 2025):

Family trusts, revocable living trusts, or estate trusts aren’t affected. The 10% rule is unique to trusts that split benefits between people and charitable causes. If you’re not sure if your trust qualifies, get a pro to help—messing up means you lose both the tax break and the charity donation.

How Does the IRS Calculate the 10%?

This part can get tricky, but it’s how the IRS decides if your charitable trust really passes the test. The 10% rule isn’t just you promising to give a piece to charity. The IRS wants concrete math.

Here’s what actually happens: Right when you transfer assets into the trust, a calculation is done based on a few moving pieces. They look at things like the age of the people receiving the income, the amount or percentage getting paid out every year, and even the IRS’s published interest rate when the trust starts (that’s called the Section 7520 rate).

So, the IRS figures out the present value of what’s left for charity after everyone else gets their payouts. It has to be at least 10% of whatever you put in.

• Age of income recipient: The younger the person, the smaller the remainder for charity, since payments go on longer.
• Payout rate: A higher payout to the non-charity person lowers what’s left for the charity.
• 7520 rate (the IRS rate): Changes monthly. Higher rates usually mean a bigger remainder for charity.

Let’s say you put $500,000 into a trust. If the calculation says only $40,000 will be left for charity, you flunk the test. You need at least $50,000—that’s your 10% minimum.

The IRS also requires this calculation be done up front—with a signed statement from a qualified financial advisor or lawyer. If the numbers don’t check out, your trust doesn’t get those nice tax perks that make it all worthwhile.

So, before you even finish setting up the trust, double-check the math—don’t just wing it. That way, nobody gets a nasty surprise down the road.

Pitfalls and How to Avoid Them

Mistakes can quickly mess up a charitable trust, especially with the 10% rule. The IRS won’t cut you slack if you don’t meet the requirements right from the start. Your trust could lose its tax benefits, or worse, be considered invalid. Here are some of the most common trip-ups and how to dodge them.

• Misjudging the initial value: Some folks overestimate what’s left for charity after setting up payments to themselves or others. If you set the payout rate too high, the 10% minimum may slip out of reach.
• Poor timing on interest rates: The IRS has a specific interest rate (called the Section 7520 rate), and it changes every month. If you don’t check the rate at the time you set up your trust, you might not hit the 10% mark.
• Ignoring age or payout terms: The age of the income beneficiary and the payout period affect the numbers. If you miss these details, you could blow past the cutoff without realizing it.
• DIY documents: Trust templates online look easy, but they rarely factor in the 10% rule. Without professional help, it’s easy to overlook required IRS language or calculations.

How do you get it right? Work with a CPA or attorney who knows the ins and outs of charitable trusts. Double-check calculations using the latest numbers, and don’t be afraid to run the math more than once. Ask for a written confirmation that the trust meets IRS standards before signing anything. Finally, always use up-to-date software or services. This is one case where cutting corners can get expensive—fast.

Tips for Setting Up a Trust

If you’re serious about putting together a charitable trust, you have to do more than just fill out a few forms. Getting the details right—especially the 10% rule—is the difference between IRS approval and an expensive do-over.

First, always work with somebody who knows their stuff. An experienced estate attorney or tax advisor isn’t just a luxury here—it’s a necessity. They’ll run the official calculations, usually with IRS software or handbooks. Even small tweaks in interest rates or payout percentages can majorly shift how much goes to charity.

The IRS uses something called the Section 7520 rate. It changes every month, so the timing of when you set up your trust actually matters. Say you’re setting up a trust in May 2025—the rate is published online and shapes what meets the 10% minimum. Here’s a look at how the numbers could stack up for a $500,000 trust:

See how the payout rate matters? The higher you set it, the harder it gets to clear that 10% threshold. You might want to be generous with payouts to yourself or a loved one, but go too high and the charitable piece drops below the IRS minimum. That’s when the whole trust could get disqualified.

Here’s what you should absolutely do before you sign anything:

• Get the calculations done with actual numbers—don’t eyeball it.
• Check the current Section 7520 rate and ask how it affects your trust.
• Ask your advisor to show you, in writing, how your trust meets the 10% test.
• Review beneficiary details. If you change who gets payouts, rerun the math every time.
• Document everything—this is what helps if the IRS ever audits you.

One pro tip: Don’t rush into funding a trust at year-end just to catch a deduction. If that month’s 7520 rate is low, it could make passing the 10% test harder (especially for younger beneficiaries with longer trust terms).

As legal expert Conrad Teitell puts it,

“Even a trust with the purest charitable intent can trip up on technicalities. You either hit the IRS rules, or the trust fails.”

Always check in with your advisor after any big financial change. The rules aren’t one-and-done. A trust that worked three years ago might need tweaks if the law or rates shift. Stay updated and keep your trust airtight.