When someone has, through hard work and good fortune, built up substantial assets, the threat of losing a substantial chunk of it to creditors or as the result of a lawsuit looms large. While California is often regarded as being unfriendly to those seeking to preserve their wealth due to higher taxes, tough regulations, and a high cost of living, it also offers unusual opportunities to protect assets. One of these is the ability to create a California Private Retirement Plan (PRP), as permitted by the Code of Civil Procedure Section 704.115. Properly structured and administered, such a plan can effectively shield assets, distributions, and even death benefits from lien or seizure. However, while a PRP can be a flexible way to gain greater asset protection, its complex legal structure requires the assistance of a knowledgeable attorney to ensure that it achieves the desired goals.
How Does a PRP Work?
The purpose of the California law is to allow individuals to identify and protect certain assets so they can be used in retirement. To set up a PRP, a person creates a Private Retirement Trust and retitles the assets into that trust, with a written actuarial plan to control the assets over time.
This type of plan can be especially useful for those investing in real estate, businesses, or other private equity ventures, all of which can potentially increase the likelihood of lawsuits that can put assets at risk.
Per the statute, the amounts held in such a plan to provide benefits are exempt, which means they are fully shielded from legal or financial challenges, including seizure in bankruptcy proceedings or to satisfy a judgment in a lawsuit. The plan must meet certain requirements to do so, though, including:
- It must have an independent trustee and an independent plan administrator.
- It must be created primarily to fund retirement, not to evade creditors.
- It must be an actual plan with an actuarial basis for funding.
- Each participant must have a trust with a clear tax intent.
One of the most important things to note is that like other strategies designed to shield assets from creditor claims, a PRP cannot be put in place after trouble threatens. When created in advance, though, it provides a flexible opportunity to protect vital assets, including savings and home equity. And unlike qualified retirement plans like 401(k)s or IRAs, a PRP can be set up as a non-qualified plan that does not limit the value of assets that can be set aside to fund anticipated needs in retirement. However, the amount contributed must bear an actuarial relationship to those retirement needs and when they are anticipated to be paid out.
A well-crafted PRP can also be structured to take advantage of tax benefits, including deductions, deferrals, and credits. The exact strategy will depend on your unique circumstances, so consulting an attorney experienced in tax minimization strategies when creating a PRP is highly advised.
Is a PRP All I Need?
In short, probably not. While a PRP is one of the safest and most affordable wealth preservation strategies available to Californians, it should form part of a larger comprehensive asset protection plan that provides the right balance of flexibility and control for each individual’s needs and goals.
Innovative Asset Preservation to Protect Your Hard-Earned Wealth
The more complex your assets, business interests, and investments, the greater the potential for unanticipated liabilities to have a serious financial impact. At Bridge Law LLP, our asset preservation experts are well-versed in the legal tools available to help protect your wealth now and in the future, not only to position you to reach your financial goals but also to preserve your legacy for future generations. If you are interested in exploring a California Private Retirement Plan (PRP) as part of a holistic asset preservation plan, our team can help ensure that it is structured and administered effectively to provide the maximum benefit. To schedule your consultation, contact us here today.