Charitable Remainder Trust 10% Rule: Variables and Fixes

The 10 percent rule for a charitable remainder trust requires that, on the day you fund the trust, the present value of the charity’s future remainder interest equal at least 10 percent of the net fair market value of the property you transferred in.¹ Miss that floor and the trust doesn’t qualify under Section 664: no tax-exempt status, no charitable income tax deduction. The calculation is actuarial, and it turns on four things — the payout rate, how long payments will last, the age of any lifetime beneficiary, and the IRS’s Section 7520 interest rate, which has run between 4.6 and 4.8 percent through the first months of 2026.²

What the Rule Actually Measures

The 10 percent test is a snapshot, not a promise. It doesn’t measure what the charity actually receives when the trust terminates years later. It projects, based on assumed investment growth and life expectancy tables, what the charity’s future share is worth in today’s dollars, and it compares that figure to the value of what you contributed.¹

The rule exists to keep people from labeling a trust “charitable” while funneling nearly all the value to the income beneficiary. Ten percent is the statutory floor for the charity’s share. Because your income tax deduction equals the present value of that remainder, the 10 percent threshold is also the smallest deduction you can claim on a qualifying trust.³

When the Test Applies: CRATs and CRUTs

For a charitable remainder annuity trust, the 10 percent test runs once, at creation, against the initial net fair market value of the property placed in the trust.¹ CRATs can’t accept later contributions, so that single calculation settles the question.

Charitable remainder unitrusts work differently because they can take additional contributions after funding. Each new contribution must independently satisfy the 10 percent test as of the date it is added.¹ A CRUT that comfortably cleared the test at creation can fail on a later addition if the 7520 rate has dropped or the beneficiary has aged in a way that alters the actuarial math. It’s an easy thing to overlook, especially with long-running trusts.

One related rule sits alongside the 10 percent test rather than inside it: CRATs must also satisfy an exhaustion test, meaning the probability that annuity payments will drain the trust before the term ends cannot exceed 5 percent.⁴ The two tests are independent. A CRAT can clear the 10 percent floor and still fail exhaustion, particularly with a high payout and a young lifetime beneficiary. CRUTs don’t face the exhaustion test because their payments float with the trust’s annually revalued assets.

The Four Variables That Decide the Outcome

The 10 percent calculation is mechanical once you fix its inputs. Three of those inputs are choices you make in drafting; the fourth is set by the IRS.

Payout Rate

The annual payout must be at least 5 percent and cannot exceed 50 percent of the trust’s value.³ Higher rates draw down principal faster and shrink the projected remainder. In practice the 10 percent requirement caps the payout well below the statutory 50 percent ceiling for most trusts.

Trust Duration

You can structure the trust for a fixed term of up to 20 years or for the lifetime of one or more beneficiaries.³ More years of payouts means less left for charity. A 20-year term depletes more than a 10-year term, and a lifetime payout to a 45-year-old depletes far more than the same payout to a 75-year-old.

Beneficiary Age

For lifetime payouts, the IRS uses mortality data from Table 2010CM to project how long payments will last.⁵ A younger beneficiary means a longer expected stream of payments, which pushes the remainder value down. This is where the 10 percent test bites hardest. A healthy 50-year-old who wants a 7 percent lifetime payout may find the numbers simply won’t work, while the same payout for a 70-year-old passes without trouble.

The Section 7520 Interest Rate

The one variable you don’t control is the Section 7520 rate. The IRS publishes it monthly, set at 120 percent of the applicable federal midterm rate, rounded to the nearest two-tenths of a percent. A higher 7520 rate helps you pass the test because it raises the assumed growth rate of trust assets and inflates the projected remainder. When the rate sat near 1 to 2 percent in 2020 and 2021, trusts that would have passed easily a few years earlier couldn’t clear the threshold. At 4.6 to 4.8 percent through early 2026, the test is meaningfully easier to satisfy.²

You have a narrow choice of which month’s rate to use. Federal regulations let you elect the 7520 rate from the month of the transfer or from either of the two preceding months.⁶ For a trust sitting right on the edge, that three-month window can decide it.

What Happens If the Trust Fails

A trust that doesn’t clear 10 percent isn’t a qualifying charitable remainder trust. Two consequences follow.

The trust loses its income tax exemption. A qualifying CRT pays no federal income tax on its earnings.¹ A failed trust is taxed as an ordinary trust, and trust brackets are compressed hard. For 2026, a trust hits the 37 percent rate on taxable income above just $16,000.⁷ The 3.8 percent Net Investment Income Tax can also apply to undistributed net investment income above the threshold for the highest bracket.⁸

You also lose the charitable income tax deduction. The deduction equals the present value of the charity’s remainder interest; without a qualifying trust, there is nothing to deduct. If you already claimed it on a prior return and the trust is later found noncompliant, expect amended returns, back taxes, and possible penalties.

Fixing a Trust That Doesn’t Qualify

Section 2055(e)(3)(J) offers two paths for a trust that fails the 10 percent test: reform it or void it as if it had never existed.⁹ Both routes require you to start a judicial proceeding within 90 days after the later of two dates: the due date (including extensions) for the estate tax return, if one is required, or the due date (including extensions) for the trust’s first income tax return, if no estate tax return is required. Miss that window and neither option is available.

Reformation

Reformation is a court-ordered modification of the trust terms, typically reducing the payout rate, shortening the payment duration, or both, until the remainder interest reaches 10 percent.⁹ Drafting mistakes, such as a missing clause or an incorrect payout percentage, can also be corrected this way. Courts have granted these petitions where an attorney’s affidavit shows the trust was meant to qualify but a scrivener’s error prevented it. For these fixes, the reformed charitable interest generally cannot differ by more than 5 percent from the actuarial value of the interest under the original terms.

Voiding

If reformation isn’t practical, the trust can be declared void ab initio and treated as though it never existed. No charitable deduction is allowed, and any transactions the trust entered into are attributed back to the transferor.⁹ The grantor can then reclaim the assets and, if it makes sense, start over with a structure that works under current rates. The same 90-day filing window applies.

Levers for Getting Over the Threshold

If a first pass of the numbers puts the remainder interest below 10 percent, several adjustments can pull it back over the line before you commit.

Lower the payout rate. Dropping from 7 percent to 5 percent often changes the outcome on its own.
Shorten the term. Moving from a 20-year term to 15, or choosing a term of years instead of a lifetime payout for a young beneficiary, reduces the projected drawdown.
Pick the best available 7520 rate. Check the current month and the two preceding months, and elect the highest of the three.⁶
Delay funding. If rates are climbing, waiting a month or two may bring a more favorable rate into the election window.
Use a CRUT instead of a CRAT where flexibility matters, remembering that each new CRUT contribution must independently pass the 10 percent test.

The 10 percent test doesn’t recognize “close enough.” Run the numbers before signing anything, and run them again if more than a few weeks pass between planning and funding. A rate move of two-tenths of a percent can flip the result.

1
Office of the Law Revision Counsel. 26 U.S. Code 664 – Charitable Remainder Trusts
2
Internal Revenue Service. Section 7520 Interest Rates
3
Internal Revenue Service. Charitable Remainder Trusts
4
Internal Revenue Service. Rev. Proc. 2016-42
5
Internal Revenue Service. Actuarial Tables
6
eCFR. 26 CFR 25.7520-2 – Valuation of Charitable Interests
7
Internal Revenue Service. 2026 Form 1041-ES
8
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
9
Office of the Law Revision Counsel. 26 U.S. Code 2055 – Transfers for Public, Charitable, and Religious Uses