Restricted Property Trust; a Tax Mitigation Plan for Shareholders

Restricted Property Trust; a Tax Mitigation Plan for Shareholders

The Restricted Property Trust (RPT) is a way for highly taxed business owners to mitigate income taxes and safely grow assets.  The plan allows for substantial Pre-Tax Contributions, Tax-Deferred Growth, & Tax Advantaged Distributions. Recent IRS guidance & rulings have allowed for a turn-key RPT plan offered through select advisors such as myself.  For high earning Shareholders who need to mitigate taxes, the RPT can be an extremely powerful asset accumulator.


How it works

First, any corporate entity other than a Sole-Proprietor is eligible. But unlike Qualified Retirement Plans, only Shareholders are allowed to utilize the RPT.

It requires a minimum funding period of 5 years, at a minimum of $50k per year.  Maximum Contributions are based on what is considered “reasonable & customary” for your level of income . So an amount that is actually appropriate to your income level can be used.

Contributions are 100% deductible to the business, and up to 70% deductible for the employee/shareholder. Needless to say, this is a huge tax savings for high earning business owners. But we all know that taxes can’t be avoided, only deferred & minimized. So when the funds are paid out, the portion that was initially deducted is then taxed. But the good news is the original 30% which was initially taxed (plus it’ earnings), is received tax-free.


How can it do all this?

The Restricted Property Trust is technically classified as a “Welfare Benefit Plan”. Welfare Benefit Plans are nothing new. They actually date back to 1928, & come in many forms. 34 States currently use some form of a Welfare Benefit Plan for State employees.

But all Welfare Benefit Plans must be related to “welfare” ie. death, disability, or disease. The RPT Plan utilizes a specially designed Cash Value Whole Life Insurance Policy to stay compliant with the “welfare” requirements. It’s expected yield is approximately 4% over 5 years and 6% over 10 years.

Traditionally, cash bearing financial products have been excluded from Welfare Benefit Plans. But recently, the IRS issued new guidance on funding options for Welfare Benefit plans. This has allowed Penn Mutual (an A+ rated Insurer) to allow their Whole Life Policy to be used by select advisors to fund the RPT plan. This Whole Life Policy not only accumulates substantial cash values, but it provides a Tax-Free Death Benefit to your chosen beneficiary.

Utilizing the Whole Life Policy is what allows the RPT Plan to grow Tax-Deferred. And since the policy is held in a Trust, it is 100% protected from creditors & lawsuits while the plan is active.


What happens when the Plan ends & is “paid out”?

Once the plan ends the funds are “paid out”. In actuality, Policy Ownership is just transferred from the Trust over to the Shareholder. At that point, the taxes owed can be paid from the tax-free portion of the policy cash value. After taxes are paid, the cash value will continue to grow tax-deferred & can even be accessed tax-free. The policy will be fully “paid-up” at this point, & no more premiums are needed. The policy will continue to grow at the pace it did before.

The Shareholder then has a choice of keeping the policy and using it for it’s tax-deferred growth & tax-free access. Or they can choose to do a tax-free transfer to another Insurance product such as an Annuity.


What tax code does this fall under?

Some of the more tax savvy readers might be curious exactly what tax codes allow for all of this. There are 21 applicable sections of tax code for the RPT Plan. But the main sections that allow the Welfare Benefit Plan are sec 419 & 419(A).  There are also two IRS rulings stating that the RPT Plan is compliant. The deductions are allowed under IRC 83 & 162. And on top of all this, the system is Patented.

If you think that all of this makes for a complex accounting situation, your right! That is why this turn key system utilizes a team of CPAs & Attorneys to handle all of the administration and accounting for your RPT Plan. At tax time, they provide your accounting & admin team with the needed forms and info.  They also show them exactly how to integrate the needed forms into your yearly return.  This makes the process seamless and does not burden your staff with time intensive ongoing admin.


What are the downsides?

Well, we all know that it is give and take with the IRS. And they never allow a good thing without attaching some conditions to it.

The largest downside is that the IRS requires a “substantial risk of forfeiture”. The RPT Plan meets this requirement in 3 ways:

  1. The Plan must be funded and exist for no less than 5 years; any extensions must be made in 5 year increments.
  2. Funds are not accessible until the Plan is terminated.
  3. If a contribution is not made every year during each 5 year period, the policy will lapse, and the accumulated funds lost. If this happens the funds are donated to a charitable organization which you must choose when the Plan is set up.

Yes, #3 is a bit different. But this aspect is critical in helping the RPT Plan meet the IRS’s standards for “substantial risk of forfeiture”. So if there is any uncertainty in the businesses ability to maintain contributions, you should consider an alternative such as an Executive Bonus Plan.

But for the business owner who has consistent cash flow, and a need to defer income above & beyond their current retirement plans; the RPT is extremely effective.

Do you think the RPT Plan might be right for your business? Just ask us for a RPT Consultation. We can help you decide if it is right for you, & if so, we will guide you through every step of the process and ensure it is seamless & easy.

-Tyler Maddox-


Ask us for a free RPT Consultation

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