A client from Manhattan came to our office recently with a common concern. He wanted to set up trusts for his two adult children, but he was torn. “I don’t want to lock the money away so tightly that they can’t access it for a small emergency,” he said, “but I also don’t want to just hand them a blank check.” He wanted to provide a safety net, not an unearned lifestyle. He was wrestling with one of the central questions of stewardship—how to provide support without undermining the very responsibility he hoped to cultivate.
This is a conversation I have often. Families want their legacy to be a source of security and opportunity, not a burden or a temptation. For situations like this, one of the most effective tools we consider is a “five by five” power of withdrawal. It is a deliberately crafted provision that balances a beneficiary’s need for liquidity with a grantor’s desire for long-term preservation.
What is a “Five by Five” Power?
A “five by five” power—or 5×5 power—is a clause written into an irrevocable trust that gives a beneficiary the legal right to withdraw a certain amount of money each year. The amount is limited to the greater of two figures: $5,000 or 5% of the trust’s principal value at the end of the year.
This is not a suggestion or a request that requires a trustee’s approval. It is an absolute right held by the beneficiary. If they choose to exercise it, the trustee must comply. If they fail to exercise it by the end of the calendar year, the right for that year lapses, and a new one begins on January 1st.
From a family perspective, this power acts as a predictable financial resource. A beneficiary knows they can access a modest sum annually for any reason—to cover an unexpected expense, invest in an opportunity, or supplement their income. It provides a degree of autonomy and financial agency without giving them control over the entire trust. The rest of the trust assets remain under the prudent management of the trustee, protected for the long term according to the grantor’s original wishes.
The Real Purpose: A Tax Law Safe Harbor
While the family benefits are clear, the 5×5 power exists primarily for tax reasons. When you give someone the right to withdraw money from a trust for their own benefit, the IRS calls this a “general power of appointment.” If that power is unrestricted, the entire portion of the trust subject to that power can be included in the beneficiary’s taxable estate. It can also create immediate gift tax consequences for the person who created the trust.
The “five by five” provision is a specific exception carved out in the Internal Revenue Code. It creates a “safe harbor.” By limiting the withdrawal right to the greater of $5,000 or 5%, the annual lapse of that power is not considered a taxable gift by the beneficiary. More importantly, it prevents the entire trust from being pulled into their estate. Only the amount they could have withdrawn in the year of their death is included—a far better outcome.
New York law works in concert with this federal framework. Our state’s Estates, Powers and Trusts Law (EPTL) Article 10 provides the legal structure for creating and administering these powers within a trust. This coordination between the federal tax code and state trust law is what allows us to draft these provisions with confidence, knowing they will function as intended for the families we represent.
Prudent Use and Important Contingencies
A 5×5 power is a powerful tool, but it is not right for every trust or every beneficiary. Its inclusion must be a deliberate, intentional choice based on the family’s specific circumstances.
For a responsible beneficiary, it offers a balance of freedom and protection. It allows them to feel a sense of ownership and access without exposing the bulk of their inheritance to risk. We often use it in trusts designed for multiple generations, giving each successive beneficiary a reliable, yet limited, source of funds.
However, I would be cautious in recommending this for a beneficiary who struggles with financial management or has significant creditor problems. Because the 5×5 power is an absolute right, that portion of the trust is vulnerable. A creditor could potentially force the beneficiary to exercise their withdrawal right to satisfy a debt. In those cases, a purely discretionary trust—where the trustee has sole authority over all distributions—is a much stronger shield for the assets.
Stewardship. It’s about more than just drafting documents. It is about anticipating these human factors and building a plan that protects the family’s legacy not just from taxes, but from foreseeable risks. The choice of a trustee, the structure of distributions, and the inclusion of powers like the 5×5 are all part of that careful, generational thinking.
If you are creating or reviewing a trust, the degree of control given to a beneficiary is a critical decision. It’s a conversation about your values and your vision for the future. A review of your intentions can help determine if a provision like the “five by five” power aligns with the legacy you hope to build. You can schedule a session with our firm to map your goals for your beneficiaries and discuss the trust structures best suited to achieve them.
