Understanding the 5 by 5 Rule in Florida Estate Planning

What is the 5 by 5 rule in estate planning? It is a withdrawal right that some trusts include. It lets a beneficiary take out the greater of $5,000 or 5% of the trust’s value in a given year. That applies only if the trust document says so. Whether a particular trust has the right, and how it works, depends on the governing instrument and applicable law. If you found this clause in a parent’s trust or a draft, this guide explains it in plain language.

What the 5 by 5 rule means

The 5 by 5 rule is also called the 5 and 5 power or the five-or-five power. The name refers to its two figures. The power belongs to a beneficiary, and the trust sets the period in which it can be used. Many of these clauses run on a yearly basis, but the trust document controls the timing. People often read the label as a fixed rule. It is really a provision a drafter writes into a trust, so the exact wording matters more than the nickname.

The greater-of measure works in two steps. Under IRC § 2514, the rule applies where property exceeds in value the greater of the amounts the statute specifies (IRC § 2514). The larger figure is the limit. A small trust may find the dollar figure is the larger one. A larger trust may find the percentage figure is larger. The trust instrument defines the value and timing, so the exact amount depends on those terms and applicable law.

How the withdrawal right works in practice

The right works through the steps the trust document sets out. The instrument may say when a beneficiary can ask for funds, how notice is given, and which value is used. Those terms control the mechanics. Think of the notice and exercise steps as the practical part. The clause may require written notice before funds are paid, or set a window for asking.

Planners call the base the trust total. Because the percentage is measured against the trust’s value, the trust’s definition of value matters. Check that definition before assuming a result. A power that goes unused during its period may lapse. Under IRC § 2514(e), a lapse of a power created after October 21, 1942, during the holder’s life is treated as a release. That rule applies only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the amounts the statute sets out (IRC § 2514). How that applies depends on the instrument, federal law, and the particular facts.

Trusts may tie the right to a specific gift or contribution. The document controls those mechanics. Two terms help here. The settlor is the person who creates the trust. The beneficiary is the person who may receive trust benefits.

Why estate planners use the 5 by 5 provision

Planners may include this provision to give a beneficiary limited access to funds. The rest of the trust can keep its longer-term purpose. A stated, limited amount also gives trustees and beneficiaries a clear framework. That may or may not suit a given family. The fit depends on the family’s goals and the trust’s terms.

In gift planning, withdrawal rights are often called Crummey powers. The federal regulation describes a present interest as an unrestricted right to the immediate use, possession, or enjoyment of property or its income. An exclusion is allowable with respect to a gift of such an interest, but not in excess of the value of the interest (Treas. Reg. § 25.2503-3). Whether a limited withdrawal right fits that description depends on its exact terms and federal law.

Does the 5 by 5 power offer tax advantages? Any tax effect depends on the governing instrument, federal and Florida law, and the particular trust. No single answer covers every trust. A trustee or personal representative (often called an executor) who reviews these clauses may bring administrative skills to the work. What that role involves depends on the instrument and applicable law.

Trade-offs and limits to consider

A withdrawal right gives the holder access to money. That access can cut against a settlor’s goal of keeping assets for later use or for other beneficiaries. Whether it does depends on the trust’s purpose. A settlor may see the right as a tradeoff. A beneficiary who needs cash may see it differently. Both views depend on the terms written into the document.

The 5 by 5 framework can balance limited cash against the trust’s long-term aim. The balance depends on how the clause is drafted and what the settlor intended. Florida’s spendthrift rules add another layer. A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest (Fla. Stat. § 736.0502). A court may authorize a creditor to reach an interest that is not subject to such a provision (Fla. Stat. § 736.0501).

Creditor, divorce, and public benefits effects depend on the trust terms, applicable Florida law, and the holder’s circumstances. Whether a creditor can reach a withdrawn amount is one example. These points are for a qualified lawyer to review, and they are not fixed outcomes.

How the 5 by 5 provision fits into an estate plan

A 5 by 5 rule in estate planning sits inside a larger plan. It may appear in a revocable trust or another trust, depending on the drafting. Its place in the plan depends on the governing instrument. The clause can also work alongside a will, and how the two fit together depends on the documents and Florida law.

Florida’s trust statute addresses revocable trusts. Fla. Stat. § 736.0603 states that while a trust is revocable, the trustee’s duties run to the settlor. It also states that a holder of a power of withdrawal has settlor rights, to the extent of the property subject to the power, during the period the power may be exercised. Both points depend on the trust terms and applicable law. Read more about revocable trusts in Florida.

Some families compare a will with a trust. The better fit depends on the family’s assets, goals, and governing documents. See will or trust in Florida. Choosing a trustee and personal representative is a separate question. Whether one person can hold both roles, and what each role involves, depends on the instrument and Florida law. See trustee and personal representative roles. For the broader overview, see professional trustee services.

Reviewing a trust that contains a 5 by 5 clause

Start with the clause and the sections around it. Look for the withdrawal language, the notice and exercise period, the valuation date, any limits, and how unused amounts are handled. Each part depends on the governing instrument and applicable law. Bring the full document, including any amendments, when you review it with a lawyer.

Deadlines in the clause can matter. How a deadline applies depends on the trust’s wording, applicable law, and the circumstances. No single timeline applies to every trust.

The firm’s lawyers may advise or represent beneficiaries, heirs, trustees, and personal representatives on what a clause means. That work is subject to the governing instrument and applicable law. Trust Counsel’s attorneys can serve individually as trustee or personal representative. The firm advises and represents trustees, personal representatives and beneficiaries.

Frequently asked questions

Talk with a Coral Gables trusts and estates attorney

If a parent’s trust, or a draft you’ve been handed, has a yearly withdrawal clause, you may not know what it allows. You may also wonder what it could change for the rest of the family. Those questions are worth raising before anyone acts on the clause.

To have a Coral Gables attorney review that clause with you, call (305) 707-7126 or schedule online.

The first consultation is free, confidential and carries no obligation to continue. Fees are agreed between the client and the attorney according to the scope of work.

We serve clients in Florida from the firm’s Coral Gables office. Responsible attorney: Leslie V. Marenco, Trust Counsel, PL, Coral Gables, Florida.