Understanding the Restricted Property Trust: A Strategic Solution for High-Income Business Owners

For successful business owners with annual earned income exceeding $700,000, reducing income taxes while building long-term wealth is a constant challenge. Most traditional retirement strategies—such as 401(k)s, profit-sharing plans, or defined benefit plans—offer limited tax savings due to relatively low contribution limits and mandatory employee participation. While helpful for some, these plans often fall short for those seeking to move large amounts of capital into a more tax-efficient structure.

This is where the Restricted Property Trust (RPT) comes in. Structured correctly, the RPT allows business owners and partners to make meaningful tax-deductible contributions, grow wealth in a conservative vehicle, and access long-term tax-advantaged income — all outside the limitations of a qualified plan. The RPT is designed for high-income business owners who want a more efficient way to protect and preserve their wealth over time.

What Is a Restricted Property Trust?

A Restricted Property Trust is a non-qualified, employer-sponsored benefit plan designed primarily for business owners and key executives. Its core value lies in allowing for larger, deductible contributions that fund a whole life insurance policy within a trust structure. The contributions reduce the business’s taxable income, while the underlying policy grows on a tax-deferred basis and offers tax-advantaged access to distributions later in life.

Unlike qualified plans, the RPT is not subject to ERISA regulations. This means a business does not have to include rank-and-file employees in the plan. Owners can set up the plan solely for themselves or a small number of key individuals. Each participant has the flexibility to choose their contribution level — independent of what others contribute.

The RPT is established by the business entity (S Corp, C Corp, LLC, or Partnership) and must meet certain structural and funding requirements. A minimum commitment of $50,000 per year for five consecutive years is required, though many participants choose to contribute substantially more and for a longer period of time. The plan is not available to sole proprietors.

Who Is a Candidate for the Restricted Property Trust?

The Restricted Property Trust is best suited for high-income-earning business owners and professionals who are looking for more effective ways to reduce taxable income while building long-term, tax-advantaged capital. Ideal candidates typically earn at least $700,000 in annual income and are already maximizing contributions to qualified plans like 401(k)s or profit-sharing plans. They are often frustrated by the limitations of traditional retirement strategies and are seeking an option that allows for larger contributions with meaningful deductions.

Common candidates include physicians, dentists, attorneys, high-income executives, and owners of closely held companies with consistent cash flow and a long-term outlook. These individuals understand the value of conservative planning and are financially positioned to commit to a minimum annual contribution of $50,000 for at least five years.

The RPT is also particularly valuable for those residing in high-tax states, where combined state and federal income tax rates often exceed 45%. In these situations, the tax arbitrage created by the plan can lead to immediate and material financial benefits. Additionally, the plan may be used selectively within a business to retain and reward key employees or partners without triggering broad-based plan requirements under ERISA.

How the Restricted Property Trust Works

The mechanics of the plan are relatively straightforward but require disciplined execution. Each year, the business makes a contribution to the Restricted Property Trust on behalf of the participant. The full contribution is tax-deductible to the business. A portion of that contribution — typically around 30 to 35 percent — is reported as taxable income to the participant. The remaining amount goes to fund a conservative, high-quality whole life insurance policy inside the trust.

The use of whole life insurance is key. Unlike variable or indexed policies, whole life provides predictable premiums, guaranteed growth, and a permanent death benefit. It is this conservative structure that allows the RPT to maintain credibility with the IRS and offer long-term financial stability for the participant.

After five years of contributions (or longer, depending on the selected funding schedule), the policy is distributed from the trust to the participant. At that time, a portion of the policy’s cash value — reflecting a portion of the previously deducted contributions — will be taxed as income. However, this tax is often manageable and can typically be paid using the policy’s own cash value.

Once the policy is owned personally, the participant can access its cash value through policy loans or withdrawals, both of which can be structured to be tax-free if managed correctly. Alternatively, the participant may choose to keep the policy for estate liquidity, exchange it for additional insurance, or retain it for long-term legacy planning.

What Happens If a Contribution Is Missed?

A key compliance feature of the RPT is the forfeiture provision. If a participant fails to make a required contribution during the funding period, the policy is surrendered, and the net cash value is forfeited to a pre-selected 501(c)(3) charity. This risk of forfeiture is not only real but intentional—it helps demonstrate that the plan is not merely a tax shelter, but a legitimate trust arrangement with economic substance and enforceable terms.

This provision underscores the importance of working with a knowledgeable advisor to assess your ability to make ongoing contributions. Business owners should enter the plan only if they have the income consistency and long-term planning commitment to fully fund it as agreed.

IRS Considerations and Legal Framework

Over the years, the IRS has scrutinized various tax strategies involving life insurance, particularly those structured as welfare benefit plans or Section 419 arrangements that lacked compliance integrity. While the Restricted Property Trust involves many of the same elements — namely, employer contributions and life insurance funding — it is not a listed transaction and does not require special disclosures when properly implemented.

The difference lies in the legal structure and plan design. The RPT’s conservative use of whole life insurance, combined with the mandatory forfeiture provision and limited participant pool, places it on solid ground from a tax compliance perspective. That said, implementation matters. The IRS is more likely to challenge arrangements that fail to meet structural guidelines or appear to lack economic substance.

This is why we advise business owners and their tax counsel to conduct proper due diligence and work with firms that understand the technical requirements of the RPT. Done correctly, it is a highly effective and well-supported tax strategy.

Why High-Income Earners Should Consider a Restricted Property Trust

Business owners earning $700,000 or more annually often feel frustrated by the lack of meaningful tax planning options. Qualified plans are capped. Charitable giving may reduce current income, but not everyone wants to give away assets today. Other advanced strategies — like captive insurance companies or defined benefit plans — come with high administrative burdens or regulatory complexity.

The Restricted Property Trust offers a compelling balance of simplicity, control, and tax efficiency. You decide how much to contribute (within reason), you retain access to the assets in the future, and you secure permanent life insurance protection in the process. The ability to make large, tax-deductible contributions and turn those into long-term, tax-advantaged capital is a rare opportunity in today’s planning environment.

For business owners based in high-tax states like California or New York, the RPT can be especially valuable. State and federal tax savings often exceed 45 cents on the dollar — creating an immediate and measurable financial benefit in the first year alone.

What About the Life Insurance Component?

Some business owners hesitate when they hear that life insurance is involved. But it’s important to understand that the life insurance policy used in the RPT is not designed for high-risk investing or speculative returns. It is a conservative funding vehicle that provides predictable cash value growth, permanent protection, and favorable tax treatment.

Whole life insurance also plays a crucial role in protecting the economic legitimacy of the plan. The guarantees built into these policies — including fixed premiums and a guaranteed death benefit — help meet the trust’s compliance requirements while providing long-term value to the participant and their family.

In most cases, policy performance—even on a net-of-tax, net-of-expense basis—compares favorably with alternative investments earning 7% to 8% pre-tax. But unlike traditional investment accounts, the policy’s value is not subject to market volatility and offers creditor protection in many jurisdictions.

Is the Restricted Property Trust Right for You?

The Restricted Property Trust is not for every business owner. It requires meaningful income, a long-term perspective, and a commitment to annual contributions. But for those who qualify, it can create one of the most tax-efficient wealth-building tools available.

If you’re a business owner earning $700,000 or more annually, have already maximized your qualified plans, and are looking for a smarter way to reduce income taxes while preserving wealth, the Restricted Property Trust may be worth exploring.

We help clients evaluate the financial impact, walk through contribution scenarios, and coordinate with tax advisors to ensure the structure is implemented correctly.

Next Steps

If you’re interested in learning more, we invite you to explore the next two steps:

Download the Restricted Property Trust Case Study

See how one business owner used the RPT to reduce taxable income while building long-term wealth.

Schedule a private consultation

In 15 minutes, we’ll walk through whether the RPT makes sense for your situation and how it could fit into your broader planning strategy.

 

DISCLOSURE

TAX ADVICE

Any tax advice contained in this communication is not intended or written to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

These materials are not intended to be opinions or advice on legal, tax, accounting, or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Last Updated May 7, 2025