A 5 by 5 clause provides an income beneficiary the power to withdraw from the trust the greater of: 1) $5,000 or 2) 5% of the residual trust's fair market value each year. This is a common clause included in many trusts to prevent the beneficiary from becoming the owner of the trust over time and becoming liable for taxes on the trust's capital gains, income, deductions and credits.
In the Estate of Cairns, the five by five clause was under contention and the Court of Appeal had to interpret the language of the Trust's provision. The Court had to ascertain from the whole of the trust, not just separate parts of it, the actual intent of the trustor. And such intent prevails and controls the legal effect of the dispositions made in the instrument.
To provide a brief background, Margaret Cairns (Margaret), the decedent, executed a will in 1975, and died in 1977. The will created a testamentary trust. Margaret's only child, petitioner and respondent Kenneth Grant Cairns (Grant), was appointed trustee and was income beneficiary of the Trust. The will had a five-or-five provision which states: "The Trustee shall also pay to my son during his lifetime, from the principal of the trust, such amounts as he may from time to time request in writing, not exceeding in any calendar year, non-cumulatively, the greater of the following amounts: Five thousand dollars ($5,000) or Five per cent (5%) of the value of the principal of the trust, determined as of the end of the calendar year. Grant's two children, objector and appellant Kenneth S. Cairns (Kenneth) and Nancy Christine Pace (Nancy), were designated the remainder beneficiaries of the Trust.
Tune in for more on this topic on subsequent blog.
*This blog entry was not written by an Attorney and should not be construed as professional legal advice.