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 I put my IRA in a trust?

    You cannot put your IRA in a trust while you are living. You can, however, name a trust as the beneficiary of your IRA and ... Read Full Answer >>
  2. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  3. What is the difference between a revocable trust and a living trust?

    A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed ... Read Full Answer >>
  4. How exactly does one go about revoking a revocable trust?

    The basic steps involved in revoking a revocable trust are fairly simple, and include transfer of assets and an official ... Read Full Answer >>
  5. What is the difference between a revocable trust and an irrevocable trust?

    An irrevocable trust and a revocable trust are differentiated through the ability to change the trust. With an irrevocable ... Read Full Answer >>
  6. What is a family Limited Liability Company (LLC)?

    A family limited liability company (LLC) is formed by family members to conduct business in a state that permits such form ... Read Full Answer >>
Related Articles
  1. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  2. Taxes

    How to Tell if You Need an Estate Planning Lawyer

    Estate planning is an important and often neglected part of financial planning, which can be costly when avoided or done improperly.
  3. Retirement

    Inherited IRA and 401(k) Rules: Don't Run Afoul

    What you need to know when it comes to the complex rules for inherited IRAs and 401(k)s.
  4. Professionals

    How to Avoid the Inheritance Nobody Wants: Debt

    With the biggest transfer of wealth underway, advisors need to ensure that clients don't also inherit debt.
  5. Professionals

    Why the Wealthy Shy Away from Inheritance Talk

    A recent survey of high-net-worth individuals shows that many avoid talking inheritance with children. Here are some ways to balance the sensitive topic.
  6. Professionals

    How to Help Retirees Manage Taxes on Distributions

    There are many variables when it comes to helping retirees manage taxes on distributions. Here's what advisors need to consider.
  7. Term

    What is Wealth Management?

    Wealth management combines financial and investment advice, accounting and tax services, and legal and estate planning.
  8. Professionals

    Top Financial Planning Issues for Older Parents

    Clients who have children later in life present an opportunity for advisors. Here are the key the financial planning issues that need to be addressed.
  9. Professionals

    Top Financial Planning Strats for Unwed Couples

    Financial planning for unmarried or common law couples can be more complex. Here are some strategies advisors can implement to tackle this.
  10. Professionals

    Top 5 Software Programs Used by Financial Advisors

    Obtain information about the top five financial planning software programs that are most commonly used by professional financial advisers.
RELATED TERMS
  1. Wealth Management

    A high-level professional service that combines financial/investment ...
  2. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  3. Settlor

    The entity that establishes a trust. The settlor also goes by ...
  4. Personal Representative

    The executor or administrator for the estate of a deceased person. ...
  5. Contingent Beneficiary

    1. A beneficiary specified by an insurance contract holder who ...
  6. Cestui Que Vie

    The individual who is the beneficiary of a trust or insurance ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!