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.

RELATED FAQS

  1. What's the difference between a financial advisor and a financial planner?

    Seeking professional advice from a financial advisor may involve asking for financial help from a certified financial planner, ...
  2. What effect will a prenuptial agreement have on a 401(k)?

    Courts have ruled that a prenuptial agreement for qualified plan (including 401(k)) assets is invalid. The logic is that ...
  3. What is a good book on creating a trust that would qualify as the beneficiary for ...

    "Life And Death Planning For Retirement Benefits" has all you need and more. If you read this book, you won't need any luck.To ...
  4. Can 529 plans be used to transfer wealth to other family members if the original ...

    Yes, the 529 plan (also known as a "qualified tuition program") allows you to distribute and roll over funds from one 529 ...
RELATED TERMS
  1. Guarantee Company

    A form of corporation designed to protect members from liability, ...
  2. Laughing Heir

    A distant relative who has inheritance rights despite not having ...
  3. Ultimogeniture

    A system of inheritance whereby the youngest son gains possession ...
  4. Crummey Trust

    An estate planning technique that can be employed to take advantage ...
  5. Gift Letter

    Written correspondence to a lender stating that money received ...
  6. Beneficial Interest

    The right to receive benefits on assets held by another party. ...
Related Articles
  1. How Advisors Can Protect Inherited IRAs
    Investing Basics

    How Advisors Can Protect Inherited IRAs

  2. Top 10 Money Mistakes New Parents Make
    Personal Finance

    Top 10 Money Mistakes New Parents Make

  3. Why Your Will Should Name Designated ...
    Home & Auto

    Why Your Will Should Name Designated ...

  4. Should You Convert Your IRA?
    Retirement

    Should You Convert Your IRA?

  5. 10 Sources Of Nontaxable Income
    Taxes

    10 Sources Of Nontaxable Income

Trading Center