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What is the Five and Five Rule in Estate Planning?

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By Fate Kersey
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What is 5 or 5 rule in estate planning

The “Five and Five Rule” is an estate planning tool used to give a trust beneficiary the power to exert some of the controls over an asset. This tool can also be used to impose certain conditions on an estate plan. Lastly, it can be used to review an estate plan every two to five years.

Beneficiary designations trump directions in a will

A beneficiary designation is a form of legal instruction that describes how assets should be distributed in case of death. Beneficiary designations are used to transfer bank accounts, IRAs, annuities, and other assets to a designated party. These documents are important when it comes to estate planning.

As with wills, you need to review your designations regularly to ensure they still fit your goals. You may also want to update them after a major life event, such as a marriage or divorce.

If you make a mistake in naming your beneficiaries, you could end up leaving your estate to your former spouse. This may seem like a small detail, but it can actually affect the outcome of your estate.

The process of probate can take a long time and cost a lot of money. You may want to consider a revocable living trust to help you control the disposition of your assets.

While you can use a will to direct your inheritance, a beneficiary designation is more convenient. It allows you to leave an inheritance to your loved ones without involving the court system. However, you will still need a will if you want to designate a guardian for a minor child.

Give a “Five and Five power” to a trust beneficiary

Often, a trust beneficiary has the right to withdraw five percent (5%) of the trust assets each year. However, this right is illusory unless the Trustee has given notice to the beneficiary and the minor or adult beneficiaries.

A client may want to consider giving a Trustee the power to terminate a trust. This will add flexibility to a trust. But, it also may pose a gift tax problem. The Trustee must give notice to the beneficiary and the minor or adult beneficiary’s guardian.

To avoid this, a client can limit the five-and-five power to only one-half of the total trust income. For example, the client can give the beneficiary the power to draw down $5,000 per year from the trust.

However, the client cannot use the $12,000 per person annual exclusion. Because of this, the trust’s value may decrease. If the trust is no longer economically viable to hold the funds in the trust, the assets should be distributed outright to the beneficiary.

Impose conditions in your estate plan

For a harried harried procrastinator like me, having a foolproof estate plan is the name of the game. The best way to go about it is to hire a qualified and trusted adviser. There are plenty of benefits to be found when you have someone looking out for you. Some examples of these include: a no-hassle estate tax refund, reduced property taxes, and a reduced mortgage rate. Most of these can be found with a little planning, and some patience. In the end, the best outcome will be a streamlined life. You’ll also enjoy an improved standard of living, and a well-crafted estate plan will put the brakes on a potentially volatile future. That’s all good news for you and your heirs. And who knows, your harried harried procrastinator may just be the perfect candidate for your next family member.

Review your estate plan every 2 to 5 years

If you haven’t updated your estate plan in a while, there’s a good chance you’re missing out on important tax savings. Keeping up with changes in your personal situation and tax laws is important if you want to protect your assets.

An estate plan is an important part of planning for your retirement. It helps you keep your affairs in order, while also ensuring your wishes are carried out. Whether you’re starting a business, buying a home, or planning for your children’s inheritance, your estate plan is a key document. Review it at least every couple of years to make sure it remains current.

Major life events can cause major changes in your estate plan. Some of these changes include divorce, marriage, the birth of a child, and the death of a loved one. Other changes can include moving, changing jobs, or changing the status of your beneficiaries.

Changes in your income or value of your estate can also trigger a review of your estate plan. You should be prepared for changes in federal and state tax laws.

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