I have written extensively on Malta Pension Plans ("Plan"). In many respects, the Plan has many similarities to a Roth IRA except that the Plan has no contribution limits and is not restricted to cash contributions. As a result, a high net worth taxpayer has the ability to contribute appreciated assets to the Plan without triggering taxation on the contribution. The investment advisor within the Plan has the ability to sell appreciated capital assets within the Plan without taxation. The investment earnings within the Plan accrue on a tax-deferred basis. The Plan offers the participant various methods of distributing tax-deferred benefits on a tax-free basis similar to a Roth IRA.
The Plan offers a participant who is at least age 50 to distribute up to 30 percent of the account value on a tax-free basis. The Plan offers the participant the ability to take additional lump sum distributions up to 50 percent of the account value, three years after the lump sum distribution and every year thereafter. The Plan may always make taxable distributions to the participant. The Plan is treated as a foreign grantor trust for tax purposes. Appreciated assets are subject to a one-time mark-to-market tax under IRC Sec 684. The Plan death benefit to beneficiaries receives tax-free.
The Malta Freeze addresses the problem that all deferred compensation benefits provide to taxpayers. Deferred compensation benefits such as qualified plan, non-qualified, and IRA benefits subject the taxpayer to income and estate taxation on deferred benefits. This tax erosion can dissipate 70-80 percent of the deferred compensation benefits. It has been my experience implementing Plans that many high net worth taxpayers already have ten lifetimes worth of benefits. Consequently, a significant planning opportunity exists to restructure Plan benefits so that the growth of Plan benefits is controlled or effectively frozen using a Freeze Partnership. The Plan's assets are typically held in a wholly owned limited partnership or limited liability company within the Plan. The wholly owned investment company within the Plan is reorganized so that the Plan owns preferred interests after the reorganization. The preferred returns feature a cumulative investment return with a liquidation preference. The excess investment growth (common interest) above the preferred interests are owned by the taxpayer or even better, a family trust. These common interests provide for investment accumulation outside of the Plan and outside of the participant's taxable estate. These assets may be further structured within a PPLI policy owned within the Trust. The Trust may be structured to provide asset protection and income tax-free benefits for the participant. In summary, the Malta Freeze Partnership may provide tax-deferred benefits within the Plan and income and estate tax-free benefits within the Trust.
Conclusion
The Malta Pension Plan has unfairly suffered from the dual maladies of "Not invented Here" and "Too good to be true." Fortunately, it is true! The Malta Freeze maximizes benefits for the high net worth taxpayer providing tax deferred benefits up to a "cap" level and pushing the excess investment growth income and estate tax-free outside of the Malta Pension Plan for the benefit of the participant.