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

Estate Planning
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March 2017
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I’ll try to be specific and general at the same time with this explanation. The most general explanation of the “5 or 5 power” is it gives the beneficiary of a trust the power to withdraw the greater of $5,000 or 5% of the trust assets in any given calendar year. Did the makers of the trust pull these numbers out of thin air? No, they did not. Those parameters were decided by IRS Tax code. This is important because, in general, beneficiaries normally don’t have these types of rights. The grantor of the trust makes the rules, the trustee enforces the trust, and the beneficiaries are recipients or “benefactors” of the trust. With a “5 or 5 power”, they actually get to decide something regarding the trust. Some (the IRS) would say this gives the beneficiary power. But too much power would be a bad thing for the beneficiary. If the beneficiary were to take more than the “5 x 5”, the beneficiary might be considered to have a “general power of appointment” over the trust, which could then have the assets included in the beneficiary’s estate.

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