5-and-5 Power
A 5-and-5 power is a beneficiary's right to withdraw up to the greater of $5,000 OR 5% of the trust's assets annually. Under IRC §2514(e), the unexercised lapse of a 5-and-5 power is NOT treated as a gift from the beneficiary back to the trust — sidestepping the §2514 reciprocal-attribution problem that complicates larger withdrawal-right lapses.
Section 2514(e) creates a safe harbor: when a beneficiary allows a withdrawal right to lapse without exercising, the lapse is treated as a gift from the beneficiary to the trust to the extent it exceeds $5,000 OR 5% of trust assets, whichever is greater. The 5-and-5 power is sized exactly at that safe-harbor threshold — meaning 100% of the unexercised lapse is protected, and no portion is treated as a beneficiary-to-trust gift.
The practical use is in ILIT and similar Crummey-funded trusts where annual gifts to the trust exceed the 5-and-5 limit. Without 5-and-5 protection, a beneficiary who let a $19,000 Crummey withdrawal right lapse would be deemed to make a $14,000 gift back to the trust ($19k − $5k 5-and-5 floor). That deemed gift could then trigger §2503 reporting requirements and complicate the beneficiary's own gift-tax accounting.
Modern ILIT drafting commonly uses 'hanging-Crummey' provisions: each year's Crummey contribution creates a withdrawal right that lapses incrementally at the 5-and-5 rate. A $50,000 contribution might create a withdrawal right that lapses by $5,000 (or 5% of trust assets, if greater) each year over a multi-year period — keeping each annual lapse within the safe harbor and avoiding the reciprocal-attribution problem.
The 5-and-5 safe harbor also applies to ordinary trust withdrawal rights (not just Crummey rights). A beneficiary with a permanent right to withdraw up to 5-and-5 annually is treated as having a non-general power for §2041 purposes — meaning the trust assets are not includable in the beneficiary's estate. The safe harbor enables several common trust patterns where the beneficiary retains some discretion without triggering estate-inclusion consequences.
L = max($5,000, 0.05 × trust_assets)- L
- = annual lapse-protected withdrawal amount
- trust_assets
- = current value of trust assets at the time of lapse
Trust assets $400,000. L = max($5,000, $20,000) = $20,000. Beneficiary lapses up to $20,000 of withdrawal right per year without §2514(e) attribution.Synthetic ILIT and similar Crummey-funded trusts should include 5-and-5 hanging provisions on each annual contribution. The trust ledger should track: contribution amount, original Crummey window, lapse schedule (5-and-5 per year), and remaining un-lapsed balance. Most beneficiaries do not exercise the rights; the schedule eventually drains the un-lapsed balance.
Common pitfalls
- Letting Crummey lapses exceed 5-and-5 without hanging-power provisions — triggers §2514 deemed gift back from beneficiary.
- Computing 5% on prior-year balance instead of current-year balance — the test is contemporaneous with the lapse.
- Forgetting the 'greater of' test — both prongs apply; the larger amount governs.
- Aggregating multiple lapses across the same year — each lapse is tested separately.
Examples
ILIT receives $50,000 in 2026 (gift from grantor). One beneficiary; Crummey withdrawal right $50,000 (no exercise). Trust assets at year-end: $400,000. 5-and-5 limit: greater of $5,000 OR 5% × $400,000 = $20,000. Safe-harbor lapse this year: $20,000. Remaining 'hanging' balance: $30,000, lapses in future years subject to recomputed 5-and-5 each year. After ~2 more years (assuming similar trust value), the full $50,000 is fully lapsed without §2514 deemed gift.