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Trusts: 5 by 5 power inclusion

On behalf of Kadish & Associates Law Group posted in Estate Planning For Business Owners on Friday, February 8, 2019.

One of the biggest considerations when you are trying to determine how to handle your estate plan as a small business owner is determining how assets should be divided. This isn’t always easy, but having a solid plan in place can help you feel more peace as you live your life. Many company owners choose to set up trusts to care for their loved ones.

Sometimes, trusts include a term for “5 by 5 power,” which is a special set of instructions. It requires that the beneficiary receives whichever is greater of these two annually:

  • 5 percent of the fair market values of the trust
  • $5,000

If you choose to include this in your estate plan, you should remind your loved ones that they might face tax consequences if they don’t take what they are supposed to take each year.

Oftentimes, the individuals who choose this option are ones who are passing down significant wealth to their loved ones. They might not want the person to reap the full benefits all at once.

The 5 by 5 power can help care for them for a longer period of time, but the support isn’t necessarily going to be comprehensive. Unless the estate is very large, they will still have to provide some level of support for themselves.

If you are considering including this in the trusts you create, make sure you fully realize how it will impact your loved ones. While it is a valuable tool, it might not be appropriate to include in all estate plans, so consider your circumstances.

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