Does a tax deduction ever hurt you?

The Incredible “Non-Tax” Tax Benefits of a Private Retirement Trustsm

Ok, so when clients come in our door, they always seem to ask if they can get a tax-deduction for funding in their private assets to their PRT.  I ask always ask “Why would you want to slit your own throat?”  Then they always look at me perplexed.  But we then start a key discussion on how they perceive their tax plan.  It usually flushes out that they either don’t understand their long-term tax plan and they’ve just been trained to seek tax deductions without knowing what the future liabilities will be.  And then it further ferrets out they are getting passive or defensive tax planning advice and may have outgrown their current advisors.

Tax Deductions Are Not Always a Great Thing

When would you want a tax deduction in a retirement plan?  When the assets inside a retirement plan are tax-weak and need tax fuel to improve the net benefits using compounding as a factor of return.  This usually is the case with passive investment portfolios that are tax-inefficient and/or are being churned.

Another issue is the compounding tax liabilities associated with retirement plan deductions.  Tax Deductions are really only Tax-Deferrals – contributions to a Qualified Retirement Plan (QRP) or IRA are deducted against current income, but all distributions from such plans are fully taxed upon distribution – yes 100% taxable with no basis.  So you end up paying the tax on the tree, not the seed.

So when would you NOT want a tax-deduction in a retirement plan?  When the assets being funded already have substantial tax benefits and you don’t want to mess a good thing up.

The PRT is the “Switzerland” of Retirement Plans because it is “Tax-Neutral”

A PRT is tax-neutral thereby offering no tax deduction.  And its specifically designed that way. Why?

Because it seeks to honor an asset’s current favorable tax characterization and avoid all the negative future tax liabilities.

Key Point: the assets that are funded into it already have inherent tax benefits:

  • Business assets can still get business expenses and more importantly fully secure tax credits which usually are a permanent dollar-for-dollar reduction of taxes, not fractional deduction $.
  • Real Estate retains its capital gain character and accommodates tax deferral planning, including allowing for 1031 exchanges.
  • Other tax-deferred or tax-free vehicles like annuities, life insurance and muni-bonds retain their preferred tax character.

While clients enjoy these powerful savings opportunities, there is also a dual-side to PRT tax-neutrality.  A PRT also tactically avoids a plethora of negative tax triggers, which may include converting capital gain assets into ordinary income taxation, unnecessarily reducing basis, increasing estate taxation, and probably the worst of all, triggering property tax reassessment – or all of the above.

Our philosophy is that the best tax management plan is driven by a forward-thinking CPA who understanding business and can cultivate all the tax advantages to managed down the long-term negative impact on cash flows and net benefits.  But this CPA will need a PRT guide to understand how they can take advantage of all these planning opportunities.  Need a proactive CPA?  We know some great ones!  Click here to learn more…

Leave A Comment?