A Restricted Property Trust is used by successful business owners to reduce income taxes and grow assets.

The ability to make Before Tax Contributions, Defer Taxes on Growth, and Access Tax Advantaged Distributions makes the Restricted Property Trust an attractive alternative to other employer-sponsored plans. 

A Restricted Property Trust is not for everyone.

The Restricted Property Trust has existed for more than 17-years. During that time is has had 100-percent track record with the IRS. The reason for this is the Restricted Property Trust is a mechanism for tax deferral, not tax avoidance. In addition, the Restricted Property Trust is not a listed transaction.

Initial funding of the Restricted Property Trust (RPT) requires a minimum commitment of $50,000 per year for five-years.

Because of the cost to establish the plan, it usually makes sense to fund it at a minimum of $100,000 per year. If you intend to fund the plan for many years (10 or more) an annual minimum contribution of $50,000 will still make sense.

Failure to make an annual contribution will result in the forfeiture of RPT plan assets to a predetermined charity of the participants choice.

If you are concerned about this requirement, the Restricted Property Trust is not right for you.

What is a Restricted Property Trust?

A Restricted Property Trust is an employer-sponsored plan primarily for the owners of a business.

RPT can be established by an S Corporation, C Corporation, LLC, or Partnership. It cannot be established by a sole proprietorship.

The main goal of a RPT is to deliver business owners and key employees with tax-favored contributions, long term accumulation, and non-taxable income.

A Restricted Property Trust can deliver better outcomes than alternate investments earning at least 8%.

A Restricted Property Trust is not a qualified plan. Because of this, contributions to a RPT will have no impact on contributions to a qualified plan (e.g. 401(k), Profit Sharing Plan, SEP, Defined Benefit Plan, etc.).

Unlike many qualified plans, RPT may be used exclusively to benefit the owner(s) of a company. Each participant can choose their own level of contribution despite what other participants choose to contribute.

[DOWNLOAD] The Restricted Property Trust Case Study to learn more about how it may benefit you.

What this means is unlike a profit sharing or defined benefit plan, employers aren’t obligated to fund a benefit for the entire company. In fact, if only one owner wants to setup a plan they can. It does not limit the interested party from establishing and funding the trust.

For instance, let’s say you are physician who is an owner of a medical group. Your group has likely tried to establish some form of a pension plan, but have been unsuccessful. The most common reason it doesn’t make sense from an economic perspective. The other reason is some of the physicians in the group don’t want to do it. Because of this, the physicians who do want to participate are hindered.

The Restricted Property Trust allows physicians in the medical group to choose whether they want to participate. Each physician choosing to participate can then determine their own funding level (provided it is reasonable).

Annual contributions to a Restricted Property Trust by a business are fully deductible to the employer. A small percentage of the contribution is included in the participant’s current taxable income.

When the annual contribution is made the trust purchases a conservative, cash value life insurance policy. The cash value growth in the life insurance policy is tax-deferred. During the funding period the participant does not have access to the policy’s cash value.

Failure to make annual contributions will result in the (1) lapsing of the life insurance policy, and (2) forfeiture of policy cash values to a pre-selected charity of the participants choice.

When the funding period is satisfied and distribution of the policy to the participant takes place – a small percentage of the cash surrender value will be taxable. The taxable portion can be paid from policy cash values.

To recognize the corporate deduction in a specific calendar or fiscal year you must fund the RPT by the businesses year end.

How Does a Restricted Property Trust Work?

  • A 100% tax-deductible contribution is made to a Restricted Property Trust by the business on behalf of the participant(s).
  • Approximately thirty percent of the contribution made by the business will be included as taxable income to the participant. Contributions to a RPT is used to fund a whole life insurance policy.
  • The participant must fund the Restricted Property Trust for a minimum of 5-years. Every 5-years the participant can choose to continue funding the trust for an additional 5-year period. It is not uncommon for participants to establish an RPT with the intent of funding it for 15-years.
  • The cash value growth of the life insurance policy is tax-deferred.
  • When the policy is distributed from a RPT the participant(s) recognize income on a portion of the distribution. Any tax owed is typically paid from policy cash value.
  • A distribution of the policy from the RPT will take place when funding is complete. The participant will recognize income on a portion of the distribution. Any tax owed is often paid from policy cash value.
  • The participant then has the choice to (1) keep the death benefit, (2) access tax exempt cash flow, and/or (3) exchange the insurance policy for more death benefit.

Does a Restricted Property Trust have Contribution Limits?

Unlike qualified plans, there is no maximum contribution amount to a Restricted Property Trust. Limits are tied to “reasonable compensation” and the need for life insurance coverage.

This can allow a high-income earning business owner to contribute hundreds of thousands of dollars per year.

To contribute $100,000 to a Restricted Property Trust, you would need to gross $130,000. If you received $130,000 as gross income (assuming a 40-percent income tax rate) you would net $78,000. You would have to earn more than an 8-percent net return on your net distributions to equal the projected cash flow of a Restricted Property Trust. This also includes the cost of the life insurance coverage.

Who are Ideal Candidates for a Restricted Property Trust?

Ideal candidates for a Restricted Property Trust include:

  • Private Companies with Owners and/or Executives Earning $500k/year or more
  • Medical Groups
  • High Profit Partnerships

Note: Sole Proprietors are not eligible to establish a Restricted Property Trust. If you are interested in establishing a Restricted Property Trust you would need to establish an entity.

What are the Benefits of the Restricted Property Trust?

  • The business or partnership receives a 100% tax-deductible contribution
  • 30% of the total contribution is included in the participant’s current income
  • Reduces taxable income
  • Plan assets are fully protected from creditors
  • Does not impact any contributions to existing qualified plans
  • The continuity of the business is insured through the death benefit

Thoughts on Restricted Property Trust

When I was first approached about the Restricted Property Trust I had a number of doubts.

Those doubts were largely based on other past plans that had utilized life insurance as a funding vehicle. Many of which had been a target of the IRS as prohibitive or listed transactions.

Before using the Restricted Property Trust, I wanted to be sure of its validity for both participants and the IRS.

After several weeks of due diligence, it became apparent the founder and their legal counsel had taken the necessary steps to ensure the plan would avoid the scrutiny of the IRS.

Note: If you are considering a Restricted Property Trust for yourself or one of your clients I would suggest you complete your own due diligence. From there it is very easy to see the economic benefits of the plan. Especially in states where there is a large state tax. 

The more income taxes you pay, the more a Restricted Property Trust makes sense.

The life insurance policy used in a RPT must be a whole life insurance policy to preserve the legitimacy of the tax benefits of the plan. 

[DOWNLOAD] The Restricted Property Trust Case Study to learn more about how it may benefit you.

Whole life insurance offers predictable, conservative growth. In fact, I would suggest there are very few asset classes more conservative then whole life insurance.

Even with such a conservative funding vehicle the Restricted Property Trust continues to achieve results in excess of 8-percent compared to alternate investments.

If you’re earned income exceeds $300k/year a Restricted Property Trust could be a valuable solution.

For more information, visit our post on the Restricted Property Trust Case Study. 

This article was written for informational purposes. The material cannot be used by any taxpayer to avoid IRS penalty. It was written to support the marketing of the transactions of the subjects covered. Those interested in the information, transactions, or topics discussed should receive advice based on their specific situation from independent professional advisors.

Jason Mericle
About Jason Mericle

Jason Mericle is the founder of Mericle & Company. He has been directly involved with the evaluation, placement, and management of more than $500,000,000 of life insurance coverage over his career.

His extensive knowledge of life insurance products are complimented by an in-depth understanding of the different tax and legal structures for which life insurance is used.


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