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 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 ... Read Answer >>
  2. 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 ... Read Answer >>
  3. Do beneficiaries of a trust pay taxes?

    Learn how interest income from a trust is taxed, and understand when this money is taxable to the trust and when it is taxable ... Read Answer >>
  4. What is the difference between revocable and irrevocable intervivos trusts?

    Learn what an inter-vivos trust is, the difference between an irrevocable and a revocable inter-vivos trust, and why it is ... Read Answer >>
  5. What is the difference between a revocable trust and a living trust?

    Learn how a revocable trust and living trust are two terms used to describe the same thing and what the key provisions are ... Read Answer >>
  6. What are the pros/cons of naming a trust as the beneficiary of a retirement account?

    This has been the topic of an ongoing debate in the financial community between estate planning attorneys and financial advisors. ... Read Answer >>
Related Articles
  1. Retirement

    How To Set Up A Trust Fund In The U.K.

    A guide to the whys and wherefores of setting up this most versatile of estate-planning instruments in the United Kingdom.
  2. Professionals

    Trust Beneficiaries: Income and Remainder

    Trust Beneficiaries: Income and Remainder
  3. Retirement

    How To Set Up A Trust Fund In Australia

    No, they're not just for the super-rich. But you need to know the rules.
  4. Financial Advisors

    Passing an IRA to a Trust: The Good and Bad

    Creating a trust is a common estate planning tactic, but naming a beneficiary to an IRA to a trust may have unintended consequences.
  5. Retirement

    Surprising Ways a Trust Could Help Your Family

    Everything you always wanted to know about setting up trusts, in handy glossary form.
  6. Professionals

    Trust Income

    Trust Income
  7. Professionals

    Types and Basic Provisions

    Types and Basic Provisions
  8. Retirement

    Advanced Estate Planning: Using Trusts

    By Steven Merkel While making a will is one of the most important documents in estate planning, there are typically always a few items, property, or accounts that while they're included in your ...
  9. Products and Investments

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  10. Investing

    How Trust Funds Can Safeguard Your Children

    Certain types of trust funds can help to protect your assets from bankruptcies and civil actions, and can be established to safeguard your children and designated beneficiaries.
RELATED TERMS
  1. 5 By 5 Power In Trust

    A common clause included in many trusts allowing for beneficiary ...
  2. Beneficiary Of Trust

    A beneficiary of trust is a person for whom a trust was created, ...
  3. Blind Trust

    A trust in which the executors have full discretion over the ...
  4. Bare Trust

    A basic trust in which the beneficiary has the absolute right ...
  5. Alimony Substitution Trust

    A trust agreement in which a divorced person agrees to pay spousal ...
  6. Credit Shelter Trust - CST

    A type of trust that allows a married investor to avoid estate ...

You May Also Like

Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center