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. Can trust funds be activated before the grantor intended?

    Trust law gives the grantor specific rights over the release of assets and therefore it is not possible to change the stipulations ...
  2. What are the keys to setting up a trust fund?

    Setting up a trust to secure your assets for a beneficiary allows you to set the terms under which the beneficiaries are ...
  3. What are typical trust fund management fees?

    Learn about trust fund management fees, such as the annual management fee, annual expense ratio, brokerage commissions and ...
  4. How are trust fund earnings taxed?

    Trust fund earnings that are distributed are paid by the beneficiary. The trust pays taxes on retained earnings and principal ...
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. ...

You May Also Like

Related Articles
  1. Investing Basics

    How Advisors Can Protect Inherited IRAs

  2. Personal Finance

    Top 10 Money Mistakes New Parents Make

  3. Retirement

    Should You Convert Your IRA?

  4. Home & Auto

    Why Your Will Should Name Designated ...

  5. Taxes

    10 Sources Of Nontaxable Income

Trading Center