Jul 8, 2024 | Estate Planning, Trust



What is a 5 by 5 Power in Trust?


A 5 by 5 Power in Trust is a clause commonly used in trusts. By its inclusion, it allows a trust beneficiary to take certain withdrawals from the trust.

How Does a 5 by 5 Power in Trust Work?


The 5 by 5 Power in Trust enables a beneficiary to withdraw either $5,000 or 5% of the trust’s fair market value (FMV), whichever is greater. (Fair market value is determined by the price the property would sell for on the open market.)


Why Create a 5 by 5 Power?


Wealthy individuals can use a 5 by 5 Power to craft specific parameters for when and how a beneficiary can access the trust funds. Such parameters can be very useful for trust owners who are concerned about leaving large amounts of money to beneficiaries who may be irresponsible and make poor financial decisions with the trust funds.


Examples of Potential Parameters Which Can Be Set by Trust Owners


Trust owners can set parameters on trust fund withdrawals to allow withdrawals only for:

  • Higher education.
  • Professional Development.
  • Healthcare Needs.
  • First Home Purchases.

What Happens If the Beneficiary Doesn’t Make Withdrawals?


If the beneficiary makes no withdrawals using the 5 by 5 Power, the beneficiary may become the default owner of the trust. The change from beneficiary to owner could create liability for taxes on the capital gains, deductions, and income of the trust.


When to Add a 5 by 5 Power Clause

Your attorney can help you add a 5 by 5 Power to a trust at any time.


5 by 5 Power Features


A 5 by 5 Power trust can be created as a personal trust for you yourself as the beneficiary.

The 5 by 5 Power trust is a separate legal entity. It has the authority to hold, manage, buy, or sell property for the trustor’s benefit.

Personal trusts can be either irrevocable or revocable. However, once deemed revocable, no further changes can be made to the trust without the help of a trust and estate attorney.

Need help drafting your estate documents? Adding a trust to your estate planning? 
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