How The 5 x 5 Rule Helps To Preserve The Value Of A Trust
Trusts can be extremely effective estate planning tools. It is not uncommon for people to put restrictions on trusts that are designed to protect the value. The 5 x 5 rule is a provision in trust law that allows a beneficiary to withdraw the greater of $5,000 or 5 percent of the trust’s assets annually. It helps maintain flexibility for beneficiaries while preserving the long-term value of the trust. Within this article, our Boston estate planning attorney highlights key points to know about the 5 x 5 rule for trust preservation.
What is the 5 x 5 Rule?
Broadly explained, the 5 x 5 rule for trusts refers to a relatively common provision that allows a beneficiary to withdraw either 5 percent of the trust’s value or $5,000 annually—whichever is greater. The provision is commonly used in irrevocable trusts to provide beneficiaries with limited access to funds while maintaining asset protection and estate tax efficiency. The creator of a trust may opt to structure a trust in this type of manner in order to help ensure that the beneficiary can receive controlled financial support while still preserving the trust’s principal.
Are there Tax Advantages Associated With a 5 x 5 Plan?
Yes—or at least there can be. When a beneficiary exercises their right to withdraw up to 5 percent of the trust’s value or $5,000, it typically does not cause estate inclusion issues for the trust’s principal. Why is that important? It means that the remaining assets in the trust can continue growing outside the beneficiary’s taxable estate. Among other things, that could potentially reduce estate tax liability. Beyond that, because this withdrawal amount is considered a general power of appointment, it allows for controlled access to trust funds without triggering a taxable gift. Of course, taxes are also case-specific. A Massachusetts trust planning lawyer can help you and your family determine the best option for your specific situation.
Do You Have to Put Restrictions On Trust Distributions?
No. You have flexibility to create a trust that is consistent with your goals and your interests. Although the 5 x 5 rule sets a standard withdrawal limit, trust creators can impose additional restrictions on distributions to align with their estate planning goals. Alternatively, they may also opt to put no restrictions on the trust at all. In some cases, trusts in Massachusetts include discretionary provisions. They may require trustee approval before distributions occur. In other cases, access to the funds within a trust may be restricted until certain milestones are met—such as age or educational achievements.
Contact Our Boston Estate Planning Lawyer Today
At Fisher Law LLC, our Boston estate planning attorney is a skilled, solutions-forward advocate for people and families. If you have questions about trust planning, we are here as a resource. Contact us today for a fully confidential, no obligation initial consultation. Our firm provides estate planning representation in Boston and throughout the region in Massachusetts.
