Restricted Property Trust: Concept Overview and Illustrations

Prepared for: Private Client

The Restricted Property

Trust (RPT) is a vehicle for

successful business owners

to mitigate income taxes

and appreciate assets. This

plan offers considerable Pre-

Tax Contributions, Tax

Deferred Growth, and Tax

Advantaged Distributions.

What is a Restricted Property Trust (RPT)? What are the objectives of an RPT?

The RPT is an employer-sponsored plan for owners and/or key executives. The

primary objective of an RPT is to provide tax-favored long-term cash accumulation

and income distribution in a conservative vehicle. An RPT can provide better

results than an alternate investment earning 8%.

What are the tax characteristics of an RPT?

Each annual contribution is fully deductible by the employer and only partially

taxable to the participant. Asset growth is in the cash value of a life insurance

policy and is, therefore, tax-deferred. The policy is distributed to the participant at

plan termination, at which time a portion of the cash value is taxable.

How does an RPT achieve these results?

Fully tax-deductible contributions are made by the business to an RPT for a select

group of participants. Of this, a portion is considered current taxable income to

the participant. The remaining contribution funds the life insurance and is not

considered taxable income to the participant.

The RPT tax treatment depends on two things: the provisions of the life insurance

contract and the provisions of the trust. One key trust provision is that the

employer must make the selected annual contribution each year for the restricted

period. Failure to make the annual contribution causes both the policy to lapse

and the surrender proceeds to be given to a preselected charity. This creates a

critical “risk of forfeiture.” 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.

Who can participate in an RPT? Are there limits on participation?

This plan is available to anyone with earned income, whether from an S-Corp,

partnership or other business entity. An RPT is not a Qualified Plan, so participant

limits and tests do not apply, and contributions to an RPT do not impact any

Qualified Plan contributions. Each participant in an RPT can select their own level

of contribution regardless of what other participants contribute.

F

1. Non-Taxable disbursements to Participant of $895,100. 2. Tax-free Death Benefit to Beneficiary. 3. Nontaxable exchange to other insurance products.

Business Entity makes deductible contribution of $50,000 annually to Restricted Property Trust for 10 years. Asset grows

tax-deferred. Participant recognizes income on $15,000 of contribution (making 83(b) election) and on Economic Benefit cost of death benefit.

Restricted Property Trust distributes policy to Participant at end of trust period. After distribution and withdrawal for tax payment, the death benefit is still in force.

Non-taxable disbursement of $113,618 to Participant to fund estimated tax cost of trust distribution.

Summary: Male, Age 45

RESTRICTED PROPERTY TRUST

$1,990,899 Whole life Policy

If Business Entity fails to make an annual contribution, the Restricted Property Trust surrenders policy and distributes trust corpus to charity.

Death benefit distributed to trust beneficiary named by Participant if death occurs during trust period.

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.

$50,000 Contribution to Restricted Property Trust

Deductible Contribution from Business

10 Year Plan; 5 year Commitment at a time

$350,000 Total Net Deductible Contributions

$1,990,899 Initial Policy Death Benefit

Payable to Participant’s Chosen Beneficiary

Increases to $2,599,959 by end of year 10

$1,093,811 (if) RPU after Distribution, Net of Tax

Supplemental Income: (Flexible and Optional)

Illustrated from age 61-80 (20 years)

$895,100 of Supplemental Income Illustrated

Income Tax Free

Residual benefit to Age 100

$258,822 Income Tax Free Death Benefit

$186,355 Policy Cash Value

Immediate Tax Efficiency

Tax rate during Plan Participation 15.1% vs. 45.0%

$149,616 Net tax savings during Plan Participation

$50,000 Annual Deduction for Business

$15,000 Taxable to Participant under 83(b) Election

$1,234 Initial Taxable Economic Benefit to Participant

$2,270 Final Year Taxable Economic Benefit to Participant

Individually Controlled Whole Life Policy

BUSINESS ENTITY

Restricted Property Trust: Cash Flow Comparison

Year Age Premium IncomeIncome

TaxesCash Value

Death

BenefitContribution

Investment

BalanceNet Income

1 46 50,000 - - 14,347 2,037,963 34,250 35,945 -

2 47 50,000 - - 34,650 2,087,331 34,250 73,670 -

3 48 50,000 - - 83,979 2,136,528 34,250 113,262 -

4 49 50,000 - - 138,371 2,188,474 34,250 154,814 -

5 50 50,000 - - 196,099 2,247,151 34,250 198,423 -

6 51 50,000 - - 257,268 2,308,509 34,250 244,190 -

7 52 50,000 - - 323,831 2,374,427 34,250 292,223 -

8 53 50,000 - - 394,240 2,446,454 34,250 342,633 -

9 54 50,000 - - 468,707 2,521,603 34,250 395,539 -

10 55 50,000 - - 547,304 2,599,959 34,250 451,063 -

11 56 - - (113,618) 460,738 1,093,811 - 473,391 -

12 57 - - - 488,641 1,125,248 - 496,824 -

13 58 - - - 518,081 1,157,779 - 521,417 -

14 59 - - - 549,178 1,191,403 - 547,227 -

15 60 - - - 582,017 1,226,108 - 574,314 -

16 61 - (44,755) - 569,240 1,164,944 - 555,773 (44,755)

17 62 - (44,755) - 555,539 1,104,971 - 536,313 (44,755)

18 63 - (44,755) - 540,849 1,046,174 - 515,890 (44,755)

19 64 - (44,755) - 525,131 988,503 - 494,456 (44,755)

20 65 - (44,755) - 508,301 931,791 - 471,962 (44,755)

21 66 - (44,755) - 490,288 875,817 - 448,353 (44,755)

22 67 - (44,755) - 471,002 820,356 - 423,576 (44,755)

23 68 - (44,755) - 450,356 765,175 - 397,573 (44,755)

24 69 - (44,755) - 428,105 722,470 - 370,283 (44,755)

25 70 - (44,755) - 403,910 694,712 - 341,641 (44,755)

26 71 - (44,755) - 377,847 665,184 - 311,582 (44,755)

27 72 - (44,755) - 349,706 632,822 - 280,035 (44,755)

28 73 - (44,755) - 319,250 597,524 - 246,926 (44,755)

29 74 - (44,755) - 286,372 559,220 - 212,179 (44,755)

30 75 - (44,755) - 250,910 517,751 - 175,711 (44,755)

31 76 - (44,755) - 212,537 472,794 - 137,439 (44,755)

32 77 - (44,755) - 171,068 424,119 - 97,271 (44,755)

33 78 - (44,755) - 126,301 371,624 - 55,116 (44,755)

34 79 - (44,755) - 77,983 315,210 - 10,874 (44,755)

35 80 - (44,755) - 25,752 254,661 - - (10,874)

500,000 895,100 113,618 342,500 861,219

Whole Life Insurance in Restricted Property Trust versus a 9% Taxable Investment at 45% Tax Rate

TAX ADVICE DISCLOSURE

Any tax advice contained in the communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or

recommending to another party and transaction or matter addressed herein.

Pre-Tax Equivalent of $62,273

Restricted Property Trust

Current Assumption (6.34%) Whole Life

Totals:

Taxable Investment Comparison

9% Rate of Return

What is a Restricted Property Trust (RPT)?

The RPT is an employee benefit plan that provides a 100% corporate tax deduction and only a partial current income inclusion, resulting in a significant net current deduction to owner- employees.

Is the RPT a qualified plan?

No, the RPT is governed under other Tax Code sections. These code sections do have certain limitations.

What types of corporate entities are able to fund an RPT?

C Corporations, S Corporations, LLC’s, and Partnerships may set up a Restricted Property Trust. Sole proprietorships cannot.

Is a Restricted Property Trust a form of deferred compensation?

No, in a deferred compensation plan the corporation only receives a deduction equal to the inclusion of the participant. In other words, deferred compensation cannot provide for a net current tax deduction.

Can the RPT be set up in favor of owners and key employees?

Yes, unlike qualified plans, the Restricted Property Trust may be used exclusively to benefit the owners of the company. It is fully discriminatory.

What is the annual contribution limit?

The annual contribution limit is tied to “reasonable compensation.” This would typically allow a high-income-earning business owner to contribute several hundred thousand dollars per year or more.

Does the Restricted Property Trust have a death benefit?

Yes, should a participant die prior to completing the funding, a death benefit will be paid to the named beneficiaries, thereby self-completing the plan design.

Why doesn’t everyone set up an RPT?

The RPT is not for everyone. First, the planned funding period and any plan extensions must be for no less than five years. If the company is unable to make the annual contribution to the RPT the assets inside the plan are forfeited to a predetermined charity of the owners’ choice.

Why is the RPT so strictly governed?

In order to achieve the benefits of the strategy the RPT is subject to the rules governing “property transferred in connection with goods and services.” If the owner is deemed to have “constructive receipt” of the property, or control over the asset, there is no current tax deduction. This is called a ‘substantial risk of forfeiture’ and is what prevents the plan from being considered deferred compensation.

Benefits of Restricted Property Trusts include annual income tax savings, tax-deferred asset growth, fully deductible contributions for employers, creditor protection, flexible participation parameters, death benefit protections and greater returns on plan assets.

Frequently Asked Questions

Contact us to learn more and find out if a Restricted Property Trust strategy may be right for you.

DISCLAIMER

TAX ADVICE DISCLOSURE

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and can not 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.

To the extent that this material concerns tax matters, it is not intended or written to be used, and can not be used, by a taxpayer for the purpose of

avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual

circumstances.

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.

MOMENTUM ADVANCED PLANNING 55 W. Monroe, Suite 1650

Chicago, IL 60603

312.626.1241

www.momentumap.com