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Restricted Property Trust (RPT)
It is a strategy business owners and high income earners use to reduce income tax liability, protect assets, and provide a death benefit.
Here's a simplified breakdown:
Setting Up the Trust: An individual establishes a trust and funds it with a business-owned life insurance policy.
Funding the Trust: The business makes tax-deductible contributions to the trust, which are used to pay the premiums on the life insurance policy. These contributions represent a business expense and can therefore reduce the business's taxable income.
Restricted Access: The contributions made to the trust are locked in for a set period (usually ten years or more). If the business owner decides to exit the plan early, there are significant surrender charges, making it beneficial to keep the money in the trust for the agreed-upon time.
Benefits Upon Maturation: At the end of the set period, the trust assets (i.e., the life insurance policy's cash value) can be distributed to the trust's beneficiary, typically the business owner, with favorable tax treatment. The benefits received from the life insurance policy are partially tax-free, reducing the overall tax liability.
Death Benefit: In the event of the business owner's death, the policy's death benefit is paid out to the named beneficiaries, generally tax-free.
While the RPT can offer several benefits, it's unsuitable for everyone. The strict surrender conditions benefit those who are confident they can make the required contributions for the trust period. It's essential to consult with a knowledgeable tax advisor or financial planner to understand the specific implications for individual situations.
As laws and regulations around these strategies can change over time, it's also important to ensure that the information is still current and applicable to your situation. As of my last training data in September 2021, you should check for any changes that might have happened post this period.