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What Is a 5 by 5 Power in Trust?
A "5 by 5 Power in Trust" is a common clause in many trusts that allows the trust's beneficiary to make certain withdrawals. Also also called a "5 by 5 Clause," it gives the beneficiary the ability to withdraw the greater of:
FMV is the price that the property or securities would sell for at present on the open market.
How a 5 by 5 Power in Trust Works
For the purposes of income tax, if the beneficiary doesn't exercise the 5 by 5 Power, over time the beneficiary could become the owner of the trust and be liable for taxes on the trust's capital gains, deductions and income.
A 5 by 5 Power allows for more flexibility if wealthy individuals are concerned with leaving large sums of money to potentially irresponsible beneficiaries. A 5 by 5 Power can set parameters on when a beneficiary can access funds. For example, a trust owner may establish the rule that a beneficiary can only access funds if he needs to pay for graduate school or other forms of continuing education and professional development.
Other categories of parameters include funding healthcare needs, first home purchases, and/or emergencies. Many trusts with 5 by 5 Powers will also allow the beneficiary access to the income that the trust investments produce (such as rental income from properties or bond interest) each year.
A 5 by 5 Power can be added to a trust at any stage and can help guarantee a beneficiary a minimum dollar distribution.
Additional 5 by 5 Power Features
In addition, the 5 by 5 Power trusts come in many forms and have a range of specific features that can be added or customized. One popular form is a personal trust that a person creates for themselves as the beneficiary. These are separate legal entities from the trust creators and have the authority to buy, sell, hold and manage property for the trustor's benefit. Personal trusts may be irrevocable or revocable. If irrevocable, changes cannot be made. If revocable, they may be made with the support of a trust and estate lawyer.
Legal advice is often necessary when setting up any form of a trust (personal or otherwise). Custodians can also help to hold and secure the assets, while investment advisors can help manage the trust assets until it is time for withdrawal.
See also:
Porter’s Five Forces of Competition
Threat of New Entrants
Intensity of Rivalry
Threat of Substitutes
Supplier Power
Supplier Power Analysis
Porter’s Five Forces of buyer bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service, and lower prices. When analyzing the bargaining power of buyers, conduct the industry analysis from the perspective of the seller. According to Porter’s 5 forces industry analysis framework, buyer power is one of the forces that shape the competitive structure of an industry.
(See the other Porter’s 5 forces of competition.)
The idea is that the bargaining power of buyers in an industry affects the competitive environment for the seller and influences the seller’s ability to achieve profitability. Strong buyers can pressure sellers to lower prices, improve product quality, and offer more and better services. All of these things represent costs to the seller. A strong buyer can make an industry more competitive and decrease profit potential for the seller. On the other hand, a weak buyer, one who is at the mercy of the seller in terms of quality and price, makes an industry less competitive and increases profit potential for the seller. The concept of buyer power Porter created has had a lasting effect in market theory.
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Several factors determine Porter’s Five Forces buyer bargaining power. If buyers are more concentrated than sellers – if there are few buyers and many sellers – then buyer power is high. Whereas, if switching costs – the cost of switching from one seller’s product to another seller’s product – are low, the bargain power of buyers is high. If buyers can easily backward integrate – or begin to produce the seller’s product themselves – the bargain power of customers is high. If the consumer is price sensitive and well-educated about the product, then buyer power is high. Then if the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high. If substitute products are available on the market, buyer power is high.
And of course, if the opposite is true for any of these factors, buyer bargaining power is low. For example, low buyer concentration, high switching costs, no threat of backward integration, less price sensitivity, uneducated consumers, consumers that purchase specialized products, and the absence of substitute products all indicate that buyer power is low.
When analyzing a given industry, all of the aforementioned factors regarding Porter’s 5 Forces buyers power may not apply. But some, if not many, certainly will. And of the factors that do apply, some may indicate high buyer bargaining power and some may indicate low buyer bargaining power. The results will not always be straightforward. Therefore, it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.
• Buyers are more concentrated than sellers
• Buyer switching costs are low
• Threat of backward integration is high
• Buyer is price sensitive
• Buyer is well-educated regarding the product
• Undifferentiated product
• Buyer purchases product in high volume
• Substitutes are available
• Buyer purchases comprise large portion of seller sales
• Buyers are less concentrated than sellers
• Buyer switching costs are high
• Threat of backward integration is low
• Buyer is not price sensitive
• Buyer is uneducated regarding the product
• Highly differentiated product
• Buyer purchases product in low volume
• Substitutes are unavailable
• Buyer purchases comprise small portion of seller sales
When conducting Porter’s 5 forces buyer power industry analysis, low buyer bargaining power makes an industry more attractive and increases profit potential for the seller, while high buyer bargaining power makes an industry less attractive and decreases profit potential for the seller. Buyer power is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Many respect the buyer power Porter’s five forces.
Start preparing your external analysis so you can react in realtime when the buyer’s have bargaining power over your company. Don’t loose out because of an external force. Download the free External Analysis whitepaper by clicking here or the image below.
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