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If you are a business owner or key executive at a company and have a goal of reducing either or both individual/corporate taxes, leaving a true legacy, or creating significant tax-free income then you need to know about the Restricted Property Trust (RPT).
High-net worth individuals and business owners often lack access to specialized expertise with a deeper level of sophisticated advanced planning. We are not talking about standard 401(k) plans or other qualified retirement plans. We are talking about strategies that can substantially reduce current income taxes, create larger amounts of wealth for retirement that can provide tax-free income, and be a useful tool in your business succession planning. There are several strategies to consider, but at this point we are focusing on the RPT.
A restricted property trust (RPT) is an employer-sponsored plan that provides tax-favored long-term cash accumulation and income distribution. This can be a great fit for businesses that are currently maxing their traditional 401k or profit sharing plans but would like to be able to defer more income. Contributions are 100% tax-deductible to the business or partnership, and only 30% of the contribution is taxable to the participant. Many retirement plans are subject to the discrimination rules under ERISA, requiring the owners of the business to make large contributions to all of the employees of the company. Since this plan does not fall under laws of ERISA, it is completely discriminatory, meaning you can do this for just one participant/owner or for many adding more flexibility to the design and application. The plan has zero interference with any other qualified plans that are already in place. Additionally, income generated from the strategy can be tax-free, and you don’t have to wait until age 59 ½ to access the funds. From a succession/estate planning perspective, the RPT can be a very useful tool, because the plan is using a Whole-Life Insurance Policy that provides a death benefit. The death benefit could be used to fund a buy/sell agreement, or simply leave a large payment to the owner’s heirs to cover potential estate tax liabilities, and keep the business ownership within the family. This is just a few potential issues that could be solved with the RPT.
The strategy does come with some disadvantages. To keep the plan in good standing with the IRS, a company that establishes an RPT, must commit to keeping the plan in place for at least 5 years. There is flexibility in determining the annual contribution that will be made, but once this has been determined, it cannot be changed in the future. You must use life insurance as a funding vehicle and the owner must be healthy enough to qualify for the proposed insurance.\
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Although this sounds like a great plan that should be more readily available to business owners, due to some of the complex structuring of the plan and trusts, very few advisors have the knowledge and experience to successfully design, structure, implement, and service this type of plan. Here at CIC Wealth we do, and we want more successful business owners to be able to take advantage of strategies like this. If you are a business owner or high-net worth individual, let’s have a conversation to see if any of the advanced planning that we do makes sense for your situation.