How Californians Can Preserve Retirement in a Tough Economy

In California, throughout the US, and around the world, people are holding on tight amid inflation and an economy that could slow into a recession. The Covid-19 pandemic, supply and distribution chain disruption, world economic sanctions, and hiked interest rates are finally taking a toll. Lower profits and a distressed personal asset balance sheet are a natural byproduct of these economic variables on California business owners. This may result in putting important “can’t lose” lifestyle-sustaining retirement assets at risk of loss to future money judgments.

Last-minute asset protection planning to safeguard assets is rarely (or never) successful if fully and totally taken through the courts, given the legal landscape surrounding voidable transfers under California law. In contrast to traditional asset protection planning, exemption planning safely and effectively helps preserve wealth and is fundamental to estate planning. Well-established case precedent provides that the purpose of creditor exemptions is to permit a judgment debtor to place funds beyond the reach of creditors. With exemption planning, you can effectively prepare for the next financial disaster. This is the case whether the disaster is self-inflicted or just an unlucky roll of the proverbial dice.

California’s creditor exemption statutes are also available to non-US citizens who are residents. California law makes no distinction between US citizenship and California residency for purposes of applying these creditor exemption carve-outs. Pursuant to Section 109(a) of the US Bankruptcy Code, the only perquisite to filing for bankruptcy protection in the US (and asserting any applicable California and/or federal exemption protection) is that you are a person who resides, has a domicile, place of business, or property in the US. This means that if you are a non-US citizen living in California, you can avail yourself of California’s creditor exemption statutes, which can be asserted in either state or federal court.

So one might ask oneself, what California creditor exemption statutes afford the ability to truly plan and achieve an exemption protection result worth the effort? Unknown to many, residents of California have a creditor exemption right to protect their private retirement assets. California Code of Civil Procedure Section 704.115(b) codifies the most misunderstood and underused creditor exemption from money judgments for retirement in California: the exemption for private retirement plans.

Section 704.115(b) provides that: “[a]ll amounts held, controlled, or in process of distribution by a Private Retirement Plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a Private Retirement Plan are exempt.” This statutory exemption protection for private retirement plan assets is unrivaled, allowing California residents to convert their exposed personal assets to exempt private retirement assets. Thereafter, it shields the exempt assets from creditors if the private retirement plan is principally or primarily designed and used for retirement purposes—with the exception of IRS, family, spousal, and child support obligations.

The icing on the cake: The California Supreme Court has adjudicated that this statute is to be construed in the light most favorable to the debtor. This means a validly designed, funded, and used Private Retirement Trust can exempt (protect) retirement assets that have been proven up as needed for future retirement and survive both a civil attack (state court) and a bankruptcy (federal court) judgment enforcement. This right may be captured through the proper creation and implementation of a PRT.

The private retirement plan and corresponding PRT are flexible and powerful exemption planning tools. But as with all trust and entity planning, they are only as good as the individuals appointed within the PRT instrument, the retirement appraisal and analytics supporting the legitimacy of the plan, the integrity of the trust, and the administrative support.

Establishing a private retirement plan and PRT are not simple tasks. The process requires sophisticated exemption planning by an experienced attorney familiar with the statute and underlying case precedent to ensure that the retirement plan “is principally designed and used for retirement purposes.”

If we acknowledge that we don’t have a crystal ball for how this economic turmoil will pan out, California business owners would be remiss not to take the steps necessary to secure and insulate their retirement assets. A properly created and implemented PRT, set up in advance of any real financial or legal problems, allows the business owner to use California State Legislature-created exemption rights—aka exemption planning—and somewhat anticipate and control the potential financial impact of current and future economic crises.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Dustin I. Nichols is a partner with the Orange County, Calif., law firm of Brown & Streza LLP, where he counsels business owners on integrated exemption planning using the Private Retirement Trust. For over 27 years, he has been a speaker and has written articles and books on integrated estate and business planning strategies and structures, with an emphasis on retirement protection planning.

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