What is ‘5 and 5 Power’ in a trust document?

What You Need to Know About the 5 and 5 Power Rule for Trusts

When setting up an estate plan, your attorney may recommend a trust for some of your assets. A trust is a way to protect your assets from going through probate and ensures the beneficiary can have access to them as quickly as possible. It also allows you to customize the terms of the trust, such as adding 5 and 5 power. Learn more about the 5 and 5 power, whether it makes sense for your situation, and how an estate planning attorney can help you put it in place.

What Is the 5 and 5 Power Rule?

When you set up a trust, you have to make several decisions. You must determine who you want the beneficiary to be and who will be the trustee. The trustee manages the trust’s assets and ensures they get dispersed to the beneficiary according to the trust’s terms. These terms are also entirely customizable, which is one of the benefits of trusts. One of the terms you should consider adding is 5 and 5 power.
The 5 and 5 power rule limits how much a beneficiary can take from the trust while still providing multiple options. It is called the 5 and 5 rule because the beneficiary can take out $5,000 or 5 percent of the total trust’s value each year, whichever is greater. Here are some examples to better illustrate how this works:

• The trust has a total value of assets of $10,000. In this case, 5 percent would only be $500. But the beneficiary could also choose to take out $5,000 instead, even though this is half the value of the trust.
• The trust has a total value of assets of $50,000. Five percent is $2,500, but $5,000 is still greater, so the beneficiary could take out that much annually.
• The trust has a total value of assets of $500,000. Here the 5 percent equals $25,000, which is more than the $5,000 and would be the maximum amount the beneficiary could withdraw.

Remember that these are not mandatory withdrawals. The beneficiary is also free to leave the money in the trust.

Reasons to Include the 5 and 5 Power Rule in Your Trust

One of the main benefits of using the 5 and 5 power rule is to provide the beneficiary more freedom in how they make withdrawals to ensure they have what they need. It also continues to provide some parameters so that you do not have to worry about a beneficiary going through their inheritance too quickly because of poor decision-making.

The 5 and 5 power rule is also beneficial because it doesn’t require mandatory withdrawals. This allows the beneficiary to leave the assets in the trust to continue growing if they are invested, which can lead to greater financial security over the long term.

Potential Drawbacks to Consider

Just like with any other estate planning tool, the 5 and 5 power option may not be right for every situation. For example, this rule has particular parameters, which means there isn’t a lot of flexibility if the beneficiary needs to take out more than $5,000 or 5 percent. If the value of the trust is on the lower side, the beneficiary being able to take out $5,000 per year could also diminish the trust at a faster pace than intended.

For example, if a trust has $50,000 in it, taking out $5,000 per year would only last 10 years. If you intend for this money to last longer or to be used for a specific purchase, such as a house, you may need to set up different terms to accomplish this.

What to Consider Before Setting Up a Trust

It is essential to understand how a trust works and its benefits and advantages before using it as part of your estate plan. For example, while it can keep your assets out of probate and provide some tax advantages, a trust can also be complex to create and for the trustee to administer. You will need to consider who you believe has the capability to act as a trustee and decide which setup you want, such as a revocable or irrevocable trust.

It’s also necessary to consider how the trust will function as part of your estate plan. You will need to decide if any assets will be distributed as part of your will in probate or if you want to use other tools, such as transfer-on-death accounts.

Getting Help With the 5 and 5 Power Rule and Other Estate Planning Tools

Estate planning is complex, and every person has their own unique needs and goals when it comes to preparing one. If you’re not sure what you need or how to get started, talking with an attorney is the first step. Estate planning lawyers have the necessary knowledge and experience to help you set up a comprehensive estate plan that fits your needs and can help you understand if more obscure rules like the 5 and 5 power are right for you.

If you’re ready to discuss your estate plan, call Nery Richardson & Konewko LLC at 773-232-6643. An experienced estate planning attorney can walk you through all of your options and help you decide which tools can help you accomplish your goals.