Trusts as a wealth building and wealth preservation tool have been around for centuries. Every specific trust has a specific purpose for why it is set up and how it is utilized. There is one that is designed for high income business owners to be able to put away more money for retirement than they possibly could with a traditional retirement plan.This trust will also allow the business owner to do this on a tax deductible basis.

This also allows the business owner to legally “discriminate” against their current employees or co owners so if they choose; the owner can be the only one who participates in the plan. This is very different from traditional retirement accounts where most full time employees must be given the opportunity to participate in the retirement plan.

The name of this trust is a “Restricted Property Trust” and is a very powerful tool for the right business owner.It basically works like this:

• A successful business owner is allowed to fund from $50,000 (minimum) to millions of dollars per year for at least 5 years into a restricted property trust. We will use $100,000 contributions for our examples
• Most of this contribution will be tax deductible to the business owner because of the nature of the Restricted Property Trust
• That contribution will be used to fund a Whole life insurance policy creating cash value and an instant death benefit for the business owner’s estate. If the business owner should die during the initial 5 year period (or subsequent 5 year blocks of time in which the trust operates 10,15, or 20 years) the death benefit finishes off the funding of the trust commitment and the balance of the death benefitgoes to the business owners family
• The business owner makes a firm commitment to fund the trust for those 5 years with $100,000 per year and if the business owner fails to make that contribution they forfeit all previous contributions to a charity. This creates a chance of loss necessary to make most of these contributions tax deductible.Needless to say the business owner who sets this up is confident in their income for the trust period and/or they have significant assets in other places they could easily draw on to make these contributions.
• Depending on the situation about $70,000 of the $100,000 contribution will be tax deductible every year the contribution is made into the trust. Over 10 years this would create $700,000 worth of tax deductions directly off of your businesses income putting hundreds of thousands of dollars in your bank account (depending on your effective tax rate)
• Also at the end of the 10 years (in this example) you will have more money in your plan in the form of cash value than you put into the plan. Let’s assume you have put in $1,000,000 into the plan over 10 years, you now might have $1,200,000 in cash value inside the plan and the life insurance policy.The trust is collapsed and you now own the life policy personally along with all the cash and death benefit.You have also pocketed hundreds of thousands in dollars of cash that you would have paid to Uncle Sam without this unique and powerful structure.

There are some taxes to be paid out of the cash value at the end but the balance of the cash value is all tax free and can be an entirely new tax free income stream for the business owner.

This is not simply a deferred comp plan or is it a traditional retirement account.It is much more high level than either one of those programs.Now let’s answer some of the most common questions we receive about this program.

Q: I already have other retirement accounts I am funding, can I still fund this trust in addition to my other accounts?

A: Yes you can.

Q: Can I be a partial owner of my business with partners?If yes, do my partners have to participate in the program as well?

A: Yes you can be a partial owner of the business and no your partners don’t have to agree to the plan (but don’t be surprised if they want to set this up for themselves as well) and your employees do not share in this benefit at all

Q: How much money do I have to make to be able to qualify for this trust?

A: There is not a specific income level but the minimum contribution to the trust is $50,000 annually for 5 year increments.

Q: if I have the resources can I put in $300,000 or even more a year into the program?

A: Yes

Q: What happens if I can’t make the contribution during that 5 year term?

A: You contributions will be forfeited to a qualified charity

Q:Why is life insurance a part of this plan?

A: For various tax and trust reasons a properly structured whole life policy is a must for this program to be implemented

Q: If I should die during one of the 5 year trust periods, who gets the death benefit from the life insurance policy?

A: Your estate collects the death benefit during the trust periods and after the trust periods when you take control of the policy after the trust is dissolved

Q: Can I have access to the cash value in the life policy during the trust period?

A: No there is no access to the cash value during the trust period.

Q: I am a salaried employee who makes big income but am issued just a W2 at the end of the year.Do I qualify to participate in this program?

A: Unfortunately this type of trust is just for business owners or partial business owners.It is possible to receive a W2 as a salary and own the business as well.You must own a part of the business to be eligible to participate in this plan.

Q: Because life insurance is included in this plan do I have to qualify physically as well as financially for this program?

A: Yes there will be a physical required to qualify for the underlying life insurance policy. Most people who use this program are in their 50’s or 60’s and the vast majority get approved physically for the policy.

In closing, a restricted property trust can be a great benefit for the right established business owner with disposable income and/or other assets they can draw upon to fund the trust. It is not meant for spotty incomes or low asset business owners. If the business owner is stable and confident in their ability to fund the trust during the trust periods it can be a great tool.