What business owner wouldn’t want to save more money for retirement?

Safe to say, not even one.

After decades of hard work and sacrifices to build your business, it’s only logical to want your effort pay off later in life so you can fund a new life post-career. Perhaps, you’d like to:

set up a local foundation to help at-risk-kids in your community;

learn other cultures on your around-the-world dream trip, or

sit on the veranda of your second home in Cabo doing absolutely no-thing.

However you define a successful retirement; you cannot afford to outlive your investments. And with so many of us facing the possibility of living into our 80s, 90s, or beyond, it’s high time to get laser-focused on how we’re building wealth today.

In this post, we want to introduce you to a dynamic wealth-building tool for business owners.

The Restricted Property Trust (RPT), more than any traditional retirement plan, presents qualified business owners with a prime opportunity to participate in a stable, long-term, and conservative asset class that provides tax-favored cash accumulation and income distribution.

Who Can Participate

Designed for high-earning business owners, the RPT suits C-Corporations, S-Corporations, LLCs, and most partnerships. All may set up an RPT; however, sole proprietors cannot. What’s more, business owners can discriminate in their choice of who can and cannot participate, unlike qualified plans, which do not permit discrimination against the full employee population.

As a fully discriminatory plan, the RPT can be set up for the owner’s exclusive benefit. He or she may also select anyone they wish to include, typically those top-level executives who contribute to the growth of the business. The RPT’s level of flexibility becomes extremely attractive in certain situations.

How to Qualify

Participants must be able to commit to funding a minimum contribution of $50,000 per year for at least five years. You could contribute millions if you are able to do so. You must be confident in your income flow to fund the RPT or hold access to other assets to draw down to make your contributions.

For consideration purposes, we’ll use $100,000 as the annual contribution, of which most will be tax-deductible to you, the business owner.

How RPTs Work

Your contribution will fund a whole life insurance policy, which generates cash value and an immediate death benefit for your estate. Premiums are deductible under IRS § 162 and must be equal to the amount of premium necessary to fund the current death benefit.

When you decide to take distributions from the policy, they are tax-free

Typically, the business owner will recognize roughly 30 to 40 percent of the total contribution on his or her individual return under IRS § 83(b) election, which covers restricted property. For this reason, it is exempt from IRS § 409A and will never be considered a plan of nonqualified deferred compensation.

Once the RPT is fully funded, policy cash value distributes from the trust to you, the business owner. Then, you owe tax on a portion of the cash value, which should be nominal. Typically, the tax payment is withdrawn from the policy, and the owner doesn’t have to tap into other personal assets.

If you die within the five-year period, or during any subsequent five-year blocks of time— the RPT operates for 10, 15 or 20 years—your death benefit fully funds your trust commitment, and the trust pays the remaining balance of the death benefit to your family.

If you fail to fund your trust commitment during a five-year block, in this case, the $100,000 per year, the trust must liquidate its cash value assets, which then distribute to a public charity designated by the participant at the time the trust was established. Regrettably, you will lose all previous contributions, as well as the potential tax benefits.

Depending on your effective tax rate, roughly $70,000 of the $100,000 contribution will be tax deductible each year it is made to the trust. Looking ahead ten years, you will have created $700,000 worth of tax deductions from your business income, while setting aside hundreds of thousands of dollars for retirement.

Why RPTs Make Sense

In our $100,000 example, you will have put more money into your plan in cash value than you put into the actual plan. Over ten years, you’ve accumulated $1,000,000, which can total $1.2 million in cash value inside the plan and policy, the beauty of whole life insurance.

At this point, you shut down the RPT. However, you now personally own the life policy with its cash-rich balance and death benefit. Best of all, you pocket the cash instead of the Internal Revenue Service.

It’s difficult to argue against the benefits of an RPT:

• Attractive pre-tax contributions
• 100% corporate tax deduction and only partial current income inclusion
• Investment earnings of eight percent or more when compared to other fixed-income vehicles

Few Disadvantages

With every opportunity in life, we must weigh the upside with the downside. Fortunately, the RPT is free from most nicks or flaws. Here are a few you’ll live with:

• You cannot access the cash value during the funding period
• You cannot make loans or borrow from the trust or the policy
• You cannot use the policy as collateral in any other financial transaction

We recommend that you work with a trusted insurance professional, tax attorney, or accountant to navigate you through the process. You want to ensure your RPT remains fully compliant in the event of an IRS audit. Although, ever since the first RPT originated in 2001, data indicates they have earned a 100 percent track record of success with the IRS as to their deductibility.

What Do You Value?

For the most part, business owners value tax deductions intrinsic to an RPT, and not necessarily the value of the death benefit. In our experience, once clients own the life insurance, they welcome the death benefit and thank us for helping them make the right decision.

More importantly, where else can you earn at least 8 percent in an after-tax investment?

One that’s safe, simple, and well-vetted by the IRS.  Bonds?  So unpredictable today. CDs?

Well, the best 5-year CD rates available from banks and credit unions pay nearly 2.5 times the national average of 1.38 percent APY, according to Bankrate’s most recent national survey of banks and thrifts. Today’s top nationally available 5-year CDs pay 3.40 percent APY (for balances of $25,000 or less)

Three percent versus eight percent? You can now understand why an RPT offers a superior value proposition to business owners, especially given their very low volatility. Call us today to learn if a restricted property trust makes sense in your business environment.

To your well-being in health, wealth, and life

Joe

Joseph E. Henehan, president and chief executive officer

The Henehan Company

685 E Carnegie Dr. Suite 205 | San Bernardino, CA 92408 | 800.909.7040 or 909.383.7040 | www.henehan.com