5% Probability Test

The 5% probability test is a test described in Revenue Ruling 77-374 that requires all charitable remainder annuity trusts (CRAT) that makes payments for one or more lifetimes to have less than a 5% chance of corpus exhaustion.  A  CRAT drafted after 2016 that would otherwise fail the 5% test can be saved by including the early termination provision provided by the IRS in Revenue Procedure 2016-42. This provision forces the trust to terminate and distribute its principal to the charity if the value of its principal after its next payment would fall below 10% of its initial value, plus interest.




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