13 Nov What Could You do With an Additional $339,000?
A neurosurgeon was looking for additional ways to defer tax beyond the traditional 401(k) and cash balance plan. We recommended a Restricted Property Trust (RPT) to her. Over the next 10 years, she will be able to save $840,000 in tax. She will pay $501,000 in year ten. So, net tax savings for her will be $339,000 with potential tax-free income of approximately $2,985,520.
What is a Restricted Property Trust?
The Restricted Property Trust (RPT) is an employer-sponsored plan that provides tax-favored long-term cash accumulation and income distribution. RPT is perfect for business owners who want to reduce income tax and increase tax deferral with the potential of tax-free income later in life.
The benefits of RPT for business owners include:
- Reduced taxable income
- 100 percent tax deductible to the business or partnership
- 70 percent tax deductible for the participant
- Flexibility of choosing who participants
- Plan assets fully protected from creditors
- Continuity of business guaranteed through a death benefit
- Contributions not influenced by existing qualified plans
- Can be used by any individual selected by a trustee
RPT provides a stable, conservative platform for businesses to reduce their taxes and potentially appreciate assets. This tax saving plan is ideal for financial firms, medical groups, high-profit partnerships, private companies with executives earning above $500,000, C-Corps, S-Corps, and LLCs.
How It Works
- An employer establishes two irrevocable trusts known as the Death Benefit Trust and the Restricted Property Trust.
- The Taxpayer agrees to make contributions to the Death Benefit Trust in accordance with a Death Benefit Agreement entered into between the Taxpayer and employee.
- Fully tax-deductible contributions are made by the business to the RPT for a select group of participants. Of this, a portion is considered current taxable income to the participant. The remaining contribution funds a life insurance policy.
- The participant recognizes income on policy cash value in excess of value created by 83(b) election and Economic Benefit costs. Tax due is paid from policy values.
- After the policy is distributed, the participant can maintain it for the death benefit, use it to generate non-taxable cash flow, exchange it for a larger income stream (annuity) or potentially exchange it for a larger guaranteed death benefit.