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. How does the trust maker transfer funds into a revocable trust?

    Learn how revocable living trusts are established, how the trust maker transfers funds into the trust, and the advantages ...
  2. 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 ...
  3. How exactly does one go about revoking a revocable trust?

    Learn more about revocable trusts, including the necessary legal procedure that a grantor must go through to revoke a revocable ...
  4. What is the difference between a revocable trust and an irrevocable trust?

    Find out more about irrevocable trusts, revocable trusts and the main differences between them.
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

Related Articles
  1. Entrepreneurship

    MLPs: How They Are Taxed

  2. Chart Advisor

    Short-Term Silver Bottom? Mining Stocks ...

  3. Chart Advisor

    Strategy Based ETFs to Consider in 2 ...

  4. Chart Advisor

    Four Ways To Trade Silver Near Support

  5. Investing Basics

    Passing Boomers Will Leave A Big Economic ...

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!