Restricted Property Trust

[speedydoc]

Long-time lurker, first-time poster.

I searched old posts and could only find one entry that applied more to a practice buy-out.

Anyone familiar with these?  I am looking for options after maxing my 401k contributions and this seems like a winner but I am waiting for the catch.

I know whole life is not an investment vehicle but with the tax savings I dont see why not.

Let me see if I can attach the illustration I was provided.

[speedydoc]

https://ibb.co/chEzd6 - here is the upload link to comparison chart.  

Background: Bought out retiring solo physician 2-3 years ago and have grown practice during that time.  I am organized as PA which files as S corp for tax purposes.

Emergency funds: I have 500K cash in my business account

Debt: 70K in student loans remaining at 2.75%; 30 year mortg 365K at 4%; 40K car at 0%.  2 boats/2 cars owned outright.

Filing status: married/joint              Rate: 39.6%/TX no state

Age 41 Healthy stable marriage, wife on office payroll for contributions but really stays home.  3 kids age 17, 15, 13 - no college savings to date.  Was thinking it's a little late for 529 plan.  Kids will attend state school - cash flow/scholarship.  Oldest will start college in 2 years.

I have 25K in a rollover IRA from previous job at Wealthfront.  Started my 401K for my practice at end of 2016 at max with Raymond James - aggressive growth strategy I think its 85/15.  Its a lumped account with my funds and employees' funds together currently 90K.  We rushed to get it in place for last tax year so I haven't really sat down to review in detail.  I went with who my CPA recommended/affiliated with.  Pretty sure paying 2% but was just going to wait and see how they performed vs market return to see if they could justify their fee.  So far showing a 3 year alpha of 5.5  Between my wife and I and match we are putting 44K/year.  This is year 2.

So last year my AGI was just under 400 and now this year we are projecting 700+ and I am dreading this tax bill so I started researching real estate heavily until we flooded, and I decided that's not a headache I ever wanted.  I asked my CPA if there were any other options for tax shelters and was given this RPT as an option.  Can't find anyone who is familiar with it but at first glance I can't see the problem.  I assume there is a big commission for the agent but I still think the math works potentially because of the tax benefit.  Or am I getting ahead of myself?              

[speedydoc]

[The White Coat Investor]

This is the first time I've heard an insurance policy be called a "restricted property trust." But I can tell you this- if you ask for a tax shelter you get a tax shelter. If you ask to pay less in taxes, people will help you do that. So you need to be careful what you ask for. What you should ask for is how you can have the most money after tax, and the answer to that for most doctors who have already maxed out their available retirement accounts the answer is to invest in a taxable account.

You have maxed out your available retirement accounts, right? That includes all possible 401(k)s (did you know you could have more than one, plus one for your spouse), defined benefit/cash balance plan, Backdoor Roth IRA for you and your spouse, and maybe an HSA.

Also, bear in mind paying your spouse when your spouse doesn't do anything is fraud. She's got to do something to justify her being put on the payroll. 

All right, with those preliminaries out of the way, let's figure out what a restricted property trust is and how its related to a more typical whole life insurance policy. 

From this link: http://lwa.finlsite.com/advisorpdfs/256306/LWA_Restricted_Property_Trust.pdf we learn

The Restricted Property Trust (“RPT”) is a way for highly
taxed business owners to mitigate income taxes and
safely grow assets. The RPT plan allows for substantial
Pre-Tax Contributions (Tax Deductible Savings), Tax
Deferred Growth, and Tax-Free Distributions. Any corporate
entity other than a Sole-Proprietor is eligible and only
Shareholders/Partners are allowed to utilize the RPT.
Because the RPT is not subject to ERISA, participation and
contribution limits do not apply.
A minimum funding period of 5 years is required with a
minimum annual contribution of $50,000. Further plan
funding must be done in additional 5 year increments. The
maximum contribution is based on what is considered
“reasonable and customary” for the level of income
earned. For multiple Shareholders/Partners, each may
elect their contribution levels, or even elect not to
participate in the plan.
We all recognize that income taxes can’t be avoided, only
deferred and minimized. Plan contributions are 100% tax
deductible to the business entity, while the participant is
required to report as income up to 30% of the contribution.
Assuming a maximum 50% tax bracket, the effective tax
cost on the plan contribution would be 15%.

Okay, this is starting to sound familiar. I think I've written something up about this in the past. Let me see if I can find it on the blog. 

Here it is: A section 79 plan: https://www.whitecoatinvestor.com/the-6-catches-of-section-79-plans/ 

Be sure to read this comment: https://www.whitecoatinvestor.com/the-6-catches-of-section-79-plans/#comment-390070

If I were you, I'd pay the taxes and invest this in taxable before starting one of those plans. The taxes on $700K might seem like a lot to you, but it could be worse.  But hey, if you decide to do it, let us follow along with regular updates to this thread and see how it turns out.