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What do you need to know about 5 by 5 power in trusts?

On Behalf of | May 10, 2022 | Trusts |

Trusts are a possible way to avoid probate in Maryland. There are many different types of trusts and conditions for controlling the withdrawal of assets. Five by five power is one clause to consider including in a trust you set up. This would mean that beneficiaries can withdraw $5,000 or 5% of the fund’s fair market value each year, depending on which is higher.

Five by five power rules

Fair market value is the price at which the fund’s assets would sell if you sold them immediately on the open market. When you set up trusts, you could put additional restrictions in place around what the beneficiary can use the money for and when they can withdraw it. You could limit them to using the money on education, healthcare needs, emergencies or first-time home purchases. 5 by 5 power trusts are suitable for beneficiaries who are irresponsible. They allow you to pass on wealth to your loved one without concerns about them wasting it.

Income taxes

It’s important to know that 5 by 5 power trusts may result in higher income taxes if the beneficiary doesn’t touch the money in a while. They may have to pay taxes on capital gains and income.

Existing trusts

If you have a trust set up that doesn’t have five by five power, you might be able to add this clause. You’ll need to check the terms to know if you can add 5 by 5 power to the guidelines.

5 by 5 power trusts are a solution to wanting to pass on wealth to beneficiaries who aren’t good with managing money. They limit how much they can withdraw each year. If necessary, you could add additional guidelines to the trust for limiting what they can use the money on as well.