How to Preserve the Value of a Trust: The 5×5 Rule
A trust can be a great tool for protecting assets. A trust only protects wealth if it is properly structured and maintained. One important tool trustees and beneficiaries should understand is the “5×5 rule.” It is a strategy that can help to preserve the long-term value of a trust. Here, our St. Petersburg asset protection attorney explains the key things to know about the 5×5 rule for trust preservation.
What is the Five By Five Rule?
Investopedia explains that the five by five rule is a broad principle that can be used to help preserve the value of a trust. It gives a beneficiary the right to withdraw the greater of $5,000 or five percent of the trust’s value in a single year. The rule balances access and protection. Beneficiaries gain some liquidity without undermining the long-term value of the trust.
Note: You may also sometimes hear this concept referred to as the 4×4 rule. Instead of $5,000 or five percent, the amount might be $4,000 or four percent. The underlying principle stays the same. The trust provides limited access to funds while protecting the larger pool of assets.
Understanding the 5×5 Rule Through an Example
Consider a trust valued at $200,000. Under the 5×5 rule, the beneficiary may withdraw up to $10,000 in a year because that amount equals five percent of the trust. If the trust value were only $60,000, the beneficiary could withdraw $5,000 because the fixed dollar amount is greater than five percent. How does this help protect the value of the trust? As a general rule, there is an assumption that a trust can safely earn around five percent in returns each year. If a $200,000 trust earns a five percent return and five percent ($10,000) is also withdrawn, the value at the end of the year will still be approximately $200,000.
Trusts Can Be Customized to Meet Your Needs and Goals
To be clear, the 5×5 rule is not mandatory. Quite the opposite, a trust does not have to have any restrictions on withdrawals at all. Still, it is one tool that can be added to a trust agreement. Families have different needs. A trust should reflect those priorities. Some trusts emphasize immediate access to funds. Other trusts instead stress preservation for future generations. A skilled and experienced St. Petersburg, FL estate planning lawyer can help draft or amend provisions to meet your goals. The key takeaway is that the 5×5 rule can preserve value, provide flexibility, and safeguard the long-term purpose of a trust.
Get Help From an Asset Protection Lawyer in St. Petersburg, FL Today
At Fisher & Wilsey, P.A., our St. Petersburg estate planning attorney has the legal expertise that you can trust. If you have any questions or concerns about trusts, we can help. Contact us today for your completely confidential, no obligation case review. With an office in St. Petersburg, our firm handles asset protection cases throughout the region in Florida.
Source:
investopedia.com/terms/f/five-by-five.asp
