What does a "5 by 5" power in a trust document mean?

By Steven Merkel AAA
A:

It is not uncommon that wealthy individuals are concerned with leaving large sums of money to specific beneficiaries for the fear of those individuals acting irresponsibly with access to such a massive chunk of cash. To resolve this dilemma and to provide access to funds if income for a given year was low, trusts can include a "5 by 5 Power" to allow greater flexibility.

A majority of trusts are established to protect assets, and to provide for the ongoing well being of a specific loved one. In doing this, these trusts typically allow the beneficiary access to funds from the trust for an ascertainable standard relating to their health, education, support and maintenance. Many trusts will also allow the beneficiary access to the income that is produced from the trust investments each year.

In addition to this ascertainable standard and income payout benefit, the "5 by 5 Power" can be added, which allows access to the greater of: a) $5,000 per year, or b) 5% of the fair market value of the trust per year. This can help to guarantee an income beneficiary a minimum dollar distribution, regardless of the income generated from the trust. Be aware: should the beneficiary elect NOT to exercise their 5 by 5 Power over the year(s), adverse tax consequences could arise.

(Learn more about trusts by reading Pick The Perfect Trust.)

The question was answered by Steven Merkel.

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