A Restricted Property Trust is used by successful business owners to reduce income taxes and grow assets.
The ability to make
A Restricted Property Trust is not for everyone.
First things first. Initial funding of the Restricted Property Trust (RPT) requires a minimum commitment of $50,000 per year for five years. Failure to make an annual contribution will result in the forfeiture of RPT plan assets to a predetermined charity of the owners’ 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 an RPT is to deliver business owners 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 an 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, an RPT may be used exclusively to benefit the owner(s) of a company. Each participant is able to choose their own level of contribution despite what other participants choose to contribute.
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.
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.
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.
In order to recognize the corporate deduction in a specific calendar or fiscal
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 an RPT is used to fund a life insurance policy.
- The cash value growth of the life insurance policy is tax-deferred.
- When the policy is distributed from an RPT the participant(s) recognize income on a portion of the distribution. Any tax owed is typically paid from the policy cash value.
- 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 the 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.”
This can allow a high-income earning business owner to contribute hundreds of thousands of dollars per year.
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.
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 was 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 an RPT must be a whole life insurance policy to preserve the legitimacy of the tax benefits of the plan.
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
If you’re earned income exceeds $500k/year a Restricted Property Trust could be a valuable solution.
Check out our Restricted Property Trust Case Study.
About Jason Mericle
Jason Mericle is the founder of Mericle & Company. Partnering with a specialized team of advisors, he is able to help business owners significantly reduce taxes, protect assets, and create tax-favorable income.
He compliments his extensive knowledge of tax strategies and products with an in-depth understanding of the different tax and legal structures for which they are used.
About Jason Mericle
Jason Mericle is the founder of Mericle & Company. He has partnered with a unique team of professional advisors specializing in helping business owners significantly reduce taxes, protect assets, and create tax-favorable income.
Jason compliments his extensive knowledge of tax solutions and products with an in-depth understanding of the different tax and legal structures for which