Lack of Flexibility of Restricted Property Trust
A Restricted Property Trust can only be established by an S-Corp, C-Corp, LLC or Limited Partnership. Contributions to a Restricted Property Trust are a 100-percent deductible contribution under Internal Revenue Code (IRC) 162 to the business. The participant will typically recognize 30-percent of the total contribution on their individual return in the form of an 83(b) election.
Following completion of the 5-year commitment, the participant has the option to continue funding for an additional 5-years.
Since we are using whole life insurance major issue with using a Restricted Property Trust is the lack of flexibility. You must put at least $50K a year into it and you must do so for at least five years. One of the biggest problems that people run into with whole life insurance policies is that life changes, and now they’re stuck with big fat premiums. We routinely underestimate how different our future will be from how we imagine it.
What happens if you can’t make the premium payment one year, all of a sudden all of your past payments are given to charity? What’s up with that? There is no such requirement on any other type of investing account. Why risk that much loss for such terrible returns?
Your premium payment is not completely tax-deductible to the business. It is only 70% deductible. This is very different from a 401(k) or cash balance plan contribution that is 100% deductible. So now you’re not only getting a crummy investment, but you’re not even getting a full deduction for it! Are you really sure you want to do this instead of just paying the taxes and investing in a taxable account?
Perhaps after 10 years of $100K contributions it’s now worth about $1 Million. You now owe taxes on $1 Million! You can either pay them from the policy or you can pay them from other assets, but pay them you will.