Private Retirement Plans as an Asset Protection Tool Overheard in Bankruptcy

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After years of hard work and planning, or perhaps through the timely entrance into a fledgling market, your business is thriving.  With day-to-day operations running smoothly, you begin to consider how to best plan ahead to protect your newly-accumulated capital in a landscape of ever-changing consumer taste and hefty uncertainty.  The number of asset protection measures may seem daunting, ranging from the perplexities of spendthrift trusts to the somewhat questionable practice of offshore accounts.  One often overlooked asset protection option is the creation of a private retirement plan through your company.

California Code of Civil Procedure (“C.C.P.”) Section 704.115 exempts “[a]ll amounts held, controlled, or in process of distribution by a private retirement plan”.  C.C.P. § 704.115(b).  Amounts held in “[p]rivate retirement plans” “established or maintained by private employers” including “closely held corporations,” are fully exempt from levy. C.C.P. § 704.115(a)(1) & (b).

In order for any private retirement plan to qualify as exempt under C.C.P. Section 704.115, the plan must be “designed and used primarily for retirement purposes.”[1]  Even a private retirement plan “used in part to shield assets is still exempt” if it satisfies this fundamental requirement.  Id.

Determining whether a private retirement plan is designed and used primarily for retirement purposes is a fact-based inquiry and courts consider the totality of circumstances.[2]  All factors must be considered and not one is dispositive.[3]  Relevant factors include the following:

  1. the “debtor's subjective intent” in designing and using the plan or account.
  2. the “chronology” or timing of the creation of the plan or account vis-à-vis other events.
  3. the degree of control the debtor maintains “over contributions, management, administration, and use of funds” in the plan or account.
  4. whether the debtor violated or complied with Internal Revenue Service (IRS) rules or the plan's rules in contributing to the plan.
  5. if the debtor withdraws money from the plan or account whether those funds were used for retirement or instead some other, non-retirement purpose.[4]

As long as a private retirement plan is designed and used primarily for retirement purposes and passes muster under the above factors, the private retirement plan will be completely exempt under California law, even if the plan is established solely for the benefit of a company’s principal.  As such, it is an effective tool for those principals wishing to protect their assets today for an uncertain tomorrow. 

[1] In re Rucker, 570 F.3d 1155, 1160 (9th Cir. 2009) (emphasis original); see also Yaesu Elecs. Corp. v. Tamura, 28 Cal. App. 4th 8, 14 (1994).

[2] O'Brien v. AMBS Diagnostics, LLC, 38 Cal.App.5th 553 (2019); Rucker, 570 F.3d at 1161.

[3] In re Bloom 839 F.2d, 1376, 1379-80 (9th Cir. 1988).

[4] O'Brien, 38 Cal.App.5th at 561 (listing factors and authorities applying each). 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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