High-earning business owners and executives are often limited by contribution caps on traditional retirement plans. One overlooked strategy, Restricted Property Trusts (RPTs), offer a way to lower today’s tax bill while building long-term, tax-advantaged wealth – when structured and maintained correctly.
What Exactly are Restricted Property Trusts?
Restricted Property Trusts are employer-sponsored benefit arrangements designed for closely held businesses. They allow owners or key executives to contribute substantial amounts, typically funded with pre-tax corporate dollars, into a trust that purchases a specially structured life insurance policy. The trust is subject to a vesting schedule and includes a risk of forfeiture clause, which helps it comply with the rules under Section 83 of the Internal Revenue Code. These rules govern how and when property transferred in connection with services, like equity or insurance benefits, is taxed.
The employer deducts the full contribution, while the participant recognizes only a portion of it as taxable income each year, typically 30% to 40%, depending on the plan structure. Once the trust term is fulfilled and the policy vests, the participant can access the policy’s growing cash value on a tax-favored basis.
Why It Matters: RPTs as a Tax and Wealth Lever
For those who are already maximizing contributions to qualified plans (401(k)s, profit sharing, or defined benefit plans), RPTs offers something unique, additional tax-deferred accumulation without the drag of nondiscrimination testing or contribution limits.
Key Benefits:
1. Immediate Tax Deduction for the Business
Each annual contribution (often between $100,000 – 500,000) is deductible to the sponsoring business. This is especially valuable for businesses structured as S-corporations or partnerships, where minimizing pass-through income can reduce both personal income tax and exposure to the net investment income tax.
2. Limited Taxable Income for the Executive
While the executive must recognize income under IRC §83(b), only one third currently is taxable. For high earners in top brackets (37% for individuals), this creates a significant arbitrage opportunity between the deduction and the recognition.
3. Tax-Deferred Growth and Flexible Income Options
Once the policy vests, the cash value grows tax deferred. The participant can later use the funds through loans or withdrawals or convert them into retirement income. Meanwhile, the death benefit offers a potential estate planning upside.
4. Creditor Protection and Asset Segregation
Life insurance cash value is often protected under state asset protection laws, potentially offering insulation from creditor claims in many cases. If you areFor executives concerned about lawsuits, business risks, or professional liability, this may offer unique asset protection advantages not easily replicated in other planning vehicles.
5. No ERISA Complexity
Restricted Property Trusts are considered non-qualified plans, which means they operate outside the rules of the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that governs most workplace retirement plans. ERISA imposes strict requirements around plan administration, including broad-based employee participation, annual Form 5500 filings, and fiduciary responsibilities.
Since RPTs are not subject to ERISA, business owners can limit participation to themselves or select key employees without triggering compliance burdens. This makes RPTs especially appealing for closely held businesses looking for flexibility and control in their benefit design.
Who Should, and Shouldn’t, Use RPTs
RPTs are not one-size-fits-all. RPTs are best suited for business owners earning at least $500,000 annually, with a stable income stream, who already max out qualified retirement plans and are comfortable with a multi-year funding commitment. They’re not ideal for those seeking near-term liquidity or whose income is highly variable.
When It Works – A Hypothetical Example
A 45-year-old business owner with $1 million of annual income seeks additional tax deductions and long-term, tax-favored retirement income. By contributing $150,000 annually to an RPT for five years, the business deducts $750,000 over time. The executive recognizes about $300,000 in total taxable income during that period. After vesting, the life insurance policy may contain over $500,000 in cash value, accessible tax-free through loans and withdrawals.
At death, the remaining life insurance benefit, net of any outstanding loans or withdrawals, is paid to the beneficiary, and if structured properly, remains outside of the taxable estate. This can provide both a source of liquidity and a valuable tool for legacy and estate planning.
Final Thoughts
Restricted Property Trusts aren’t widely known, but for the right business owner or executive, they can be one of the most effective planning tools available. By combining immediate tax deductions, long-term tax-deferred growth, and built-in asset protection features, RPTs offer a unique blend of benefits not found in traditional retirement plans.
That said, they require careful design, a multi-year funding commitment, and a close understanding of your financial picture. When thoughtfully integrated into a broader wealth strategy, RPTs can help transform today’s tax dollars into tomorrow’s financial freedom.
If you’re a high-income business owner looking for more tax-efficient ways to grow and protect your wealth, it may be time to ask your CPA or Wealth Advisor about whether RPTs fits into your broader financial plan.
Disclosure: This material is for informational purposes only and should not be construed as personalized tax, legal, or investment advice. The example is a hypothetical and provided for illustrative purposes only. Actual outcomes will vary. Aldrich Wealth is not licensed to recommend or transact insurance products. If this strategy appears applicable to your specific situation, we will introduce you to a trusted insurance professional to provide further evaluation and complete any transaction.