California Private Retirement Plans: Asset Protection Benefits
California allows for the creation of ‘Private Retirement Plans’ for not only retirement planning and funding, but for asset protection planning from future creditors.
If this type of plan is created for and proven to the court that they were established for ‘retirement’ purposes, including the amount in the plan, these type of plans are exempt to such extent from judgments and bankruptcy. The trust document should explicitly describe how the trust will be used for retirement and how retirement needs will be determined.
These types of plans are retirement savings plans that are not IRS Qualified Plans. Non qualified means they do not meet certain tax and ERISA law requirements giving favorable federal tax treatment. However, such trusts may be protected under state law, if certain requirements are satisfied.
Case law is still developing. As a result, these plans must be carefully drafted and maintained. However, when feasible, they
- are highly flexible in design,
- need not cover other employees, and
- can include annual contributions that can substantially exceed those available under the qualified plans or IRAs.
No tax deduction is available for these contributions. As a result these plans are not subject to the strict funding and compliance rules of ERISA and the Internal Revenue Code.
These plans are potentially completely exempt from creditors and their judgments. As a result, the amounts in these plans may be highly valuable in a wide variety of circumstances and can be characterized as a stand-alone asset protection plan or in conjunction with a tax deferred account such as IRAs and 401ks.
The state of California exemption from judgment also applies to distributions from the Private Retirement Plan. As a result, the funds are protected while in the plan and later on in retirement, when the proceeds are withdrawn. This is a valuable trait that makes these plans somewhat more valuable than other types of asset protection strategies. Often this type of plan is used in conjunction with other types of strategies to provide enhanced asset protection.
As long as the funds can be traced to a distribution from the plan, they can be invested in any manner. For example, if you purchase a home or a boat or gold coins or any other asset with the proceeds, those assets are exempt from judgment.
California Private Retirement Plan Advantages
California residents are permitted by law to establish Private Retirement Plans which are exempt from creditor claims and judgments.
In the right circumstances, potentially, all assets in the plan are completely protected from lawsuits and judgments—even in bankruptcy.
The contributions to the plan are not tax deductible so:
- No maximum limit on contributions.
- No requirement for covering other employees.
- No annual IRS filings.
A Private Retirement Plan can be used instead of or in addition to an existing qualified plan.
You can maintain plan funds at whatever financial institution you choose, and you can choose to manage all investments.
Private Retirement Plan Example
Assume that the person setting up the plan is forty-five years old, married with three children, and earns about $300,000 per year as an owner of a local business. Assume his goal was to save as much as he could for retirement in a protected vehicle. A Qualified Plan wasn’t feasible because of limitations on contributions and the cost of covering other employees. He wasn’t sure whether his current income would increase or decrease over time so we established a flexible formula in his plan based on a percentage of his net income over a certain threshold that allowed him to contribute a larger or smaller portion of his surplus cash each year, based on his circumstances at the time.
The client hopes to retire at age sixty or earlier, and the plan documents provide that the proceeds can be distributed to him whenever his actual retirement occurs. In these particular circumstances, where the client wanted maximum but flexible contributions in a protected form, without additional employee or administrative costs, the Private Retirement Plan was a good fit with his financial goals. Also considered the fact that for business owners potential liability may continue even after retirement as the statute of limitations can be lengthy. With continuing liability for an extended term, the ability to withdraw funds at retirement with the proceeds fully protected was an additional benefit of the plan.
A Private Pension Plan must be operated strictly for retirement purposes and misuse of the Plan will disqualify it as exempt under California law.
About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.
Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:
- Estate Planning & Administration
- Asset Protection Planning
- Tax Planning, Tax Debt Resolution and Tax Litigation
- Business & Corporate Law and Planning
- Real Property Law & Planning
As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.
Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.
Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction). Mr. Yahnian also has an MS in Taxation* from UCLA (with Distinction).