Maximum Benefit Rule

Maximum Benefit Rule

Maximum Benefits: The Internal Revenue Code permits a beneficiary to receive significant benefits from a trust without causing the trust or its assets to be considered part of the beneficiary's estate. Unless the assets were contributed by the beneficiary, the assets will not be considered part of the beneficiary's taxable estate if even the beneficiary has the right to:

i. Receive all trust income;

ii. Receive payments from trust principal for health, education, support, and maintenance;

iii. Withdraw 5% of principal per year. A right of withdrawal held at the time of death will trigger an estate tax on the amount over which the right might be exercised (currently 5 million per spouse). Because of that, it may be advisable not to include this right. Tax law permits withdrawals of $5,000 or 5%, whichever is greater, and so some planners refer to this as a “5 or 5 power”.

iv. Direct distributions of the principal during life (to recipients other than the beneficiary and the beneficiary's creditors);

v. Direct distributions of the principal after death (to recipients other than the beneficiary's estate or creditors); and

vi. Act as a trustee.

A trust which gives a beneficiary all of those rights is often referred to as a "maximum benefit trust". A maximum benefit trust gives most of the flexibility that would come from outright ownership without subjecting the assets to the claims of creditors, the claims of disgruntled spouses in a divorce proceeding, or the obligation to pay federal estate taxes.