What Is the 10% Rule for Trusts? A Clear Guide for Charitable Giving

When setting up a charitable trust, one of the most misunderstood rules is the 10% rule. It’s not a law you can find in a single statute, but a practical requirement built into how the IRS and UK tax authorities evaluate whether a trust truly qualifies as charitable. If you’re planning to leave money to charity through a trust-whether it’s for a local food bank, a national nonprofit, or a community foundation-understanding this rule could save you from costly mistakes.

What Exactly Is the 10% Rule?

The 10% rule says that for a trust to qualify for full charitable tax benefits, at least 10% of its total value must be distributed to qualified charitable organizations over its lifetime. This isn’t about how much you put in-it’s about how much actually gets to the charity.

Think of it this way: if you set up a trust with £500,000, at least £50,000 must go to charities before the trust ends. If less than that reaches charity, the trust may lose its charitable status. That means you could lose tax deductions, face penalties, or even have the trust reclassified as a private foundation-with stricter rules and higher taxes.

This rule applies mainly in the UK and the US, though the exact enforcement varies. In the UK, HMRC looks at the trust’s purpose and payout history. In the US, the IRS uses the Charitable Contribution Deduction rules under Section 170. Both require that the charity’s share isn’t just symbolic-it has to be meaningful.

Why Does This Rule Exist?

Charitable trusts are designed to give money to public good, not to serve private interests. The 10% rule stops people from using trusts as tax loopholes. Imagine someone setting up a trust that pays out £1,000 a year to a charity while keeping £100,000 for family members. That’s not charity-it’s asset protection with a tiny donation tacked on.

The rule ensures that the trust’s primary purpose is public benefit. If the charity’s share is too small, the government sees it as a way to avoid estate taxes, not as genuine giving. That’s why trustees need to plan carefully. You can’t just say, “I want to help,” and call it a day. You need numbers.

How Is the 10% Calculated?

The calculation isn’t as simple as 10% of the initial value. It’s based on the trust’s total assets over time, including growth, income, and distributions.

Here’s how it works in practice:

• If you start with £1 million and the trust earns 5% annually, you need to ensure that over its lifetime, at least £100,000 goes to charity.
• If the trust lasts 20 years and pays out £4,000 per year to charity, that’s £80,000 total-too low. You’d fall short.
• If it pays £6,000 per year, that’s £120,000-above the threshold.

Some trusts are structured as charitable remainder trusts, where beneficiaries get income first, and the charity gets the leftover balance. Even here, the charity’s final share must be at least 10% of the original value. So if you put £800,000 in and expect the charity to get £75,000 at the end, that’s not enough.

There’s a catch: inflation, investment returns, and changing laws can shift the numbers. That’s why many people use a fixed percentage payout instead of a fixed dollar amount. For example, setting the charity to receive 5% of the trust’s value each year ensures the 10% minimum is met over time-even if the trust grows.

What Happens If You Break the Rule?

Breaking the 10% rule doesn’t mean the trust vanishes. But it does mean you lose the benefits.

• In the UK: HMRC may revoke charitable status, meaning the trust is taxed like a private trust. Estate taxes could rise sharply, and donors lose income tax relief.
• In the US: The IRS can reclassify the trust as a private foundation. That triggers excise taxes on investment income and strict reporting rules.
• Both systems may audit past returns, demanding back taxes and penalties.

One real case from Edinburgh in 2023 involved a trust that left 8% of its value to a local animal shelter. The trustees thought it was generous-until HMRC ruled it didn’t meet the threshold. The trust was reclassified, and the family paid £18,000 in back taxes.

How to Stay Compliant

Don’t guess. Plan. Here’s how to make sure your trust passes the test:

1. Use a fixed percentage-like 5% annual payout to charity-instead of a fixed sum. This automatically adjusts for growth.
2. Set a minimum endowment-make sure the charity’s final share is clearly written as at least 10% of the original trust value.
3. Choose qualified charities-not every nonprofit qualifies. In the UK, check the Charity Commission register. In the US, use the IRS Tax Exempt Organization Search.
4. Get legal advice-a solicitor who specializes in charitable trusts can run projections and draft clauses that meet the rule.
5. Review every 3-5 years-if the trust’s value changes dramatically, adjust the payout to stay above 10%.

Many people use charitable lead trusts instead, where the charity gets income first, then the remainder goes to family. Even here, the charity’s share must still meet the 10% minimum over the trust’s life.

Common Mistakes to Avoid

Even experienced trustees trip up. Here are the top three errors:

• Assuming “most of the money” is enough-If 95% goes to family and 5% to charity, that’s not compliant, no matter how noble the intent.
• Using non-qualified beneficiaries-Some trusts name “my favorite cause” without naming a registered charity. That’s too vague. HMRC and IRS need exact names and registration numbers.
• Ignoring inflation-A £10,000 annual gift in 2020 might seem generous, but by 2030, it’s worth less. Use percentage-based payouts to keep up.

One client in Glasgow set up a trust that paid £2,000 per year to a local arts group. At first, it looked fine. But over 15 years, the trust grew to £2 million. The charity’s share dropped to just 0.1% of the total value. HMRC flagged it. The trust had to be restructured.

What If You Want to Give More?

The 10% rule is the minimum. You can-and should-give more. Many people choose 20%, 30%, or even 50% to make a bigger impact. Higher giving often means bigger tax savings. In the UK, donations over £1,000 can reduce inheritance tax from 40% to 36% if 10% or more of the estate goes to charity.

There’s no penalty for generosity. The rule is there to prevent under-giving, not to cap it.

Where to Get Help

If you’re setting up a charitable trust, don’t rely on online templates. Use:

• A solicitor with experience in charitable trusts (look for those registered with Law Society Scotland or the Law Society of England and Wales)
• The Charity Commission’s guidance on trust structures
• The IRS Publication 526 (for US-based donors)
• Charity advisors from organizations like the National Council for Voluntary Organisations (NCVO)

Many banks and wealth managers also offer free trust reviews if you’re a client. Ask for a compliance check on your charitable clause.

Final Thought

The 10% rule isn’t about being stingy. It’s about making sure your gift actually does what you intend: help others. Too many trusts fail because they’re written with good intentions but poor math. Don’t let your legacy be undone by a simple oversight. Calculate it. Document it. Review it. And make sure your charity gets what you meant to give.