California provides an exemption for Private Retirement Plans, including - almost uniquely among states - plans that are not tax-qualified. This creates the potential to use the exemption for asset protection planning, if properly done. However, it is that last phrase "if properly done" which causes considerable angst for proper planners, but unfortunately little for the numerous promoters of such plans that are out there hawking them as a cure-all "bulletproof" asset protection device (which they are not).
A California Private Retirement Plan ("PRP") typically involves an agreement between an employer and an employee, whereby the employer will set up a Private Retirement Trust ("PRT") for the benefit of the employee (or some or all employees, depending on the type of plan), and will regularly fund the Trust according to some schedule. When the specified retirement event occurs, the Trust will then begin to make distributions to the employee, also according to schedule. There are several ways for creditors to successfully bust these plans, not the least of which being, as amply demonstrated by the case-law:
The exemption arises under CCP § 704.115, which is reprinted in full below.
One more thing: The legislative history of CCP § 704.115 shows that this section was adopted in 1982, became effective in 1983, and the first opinion regarding the statute was handed down in 1985 in the federal bankruptcy case of In re Daniel. The point is that CCP § 704.115 is hardly anything like new law, but instead has been around in substantially the same form for over 30 years. It is only in the last few years, however, that private retirement plans have become a "hot topic" for asset protection planners, which is something attributed far more to aggressive marketing by promoters than the statute or the wealth of case law on the subject.
The more realistic view of private retirement plans is that they can be an important piece of an asset protection plan when conservatively utilized, but should only be that: a subsidiary piece of the plan, and not the central piece de resistance of a plan. As the case law demonstrates, overloading a private retirement plan just for creditor protection is an inherently bad idea. Yet, this is exactly what is being widely marketed today. Caveat emptor!
TEXT OF CCP § 704.115
California Code of Civil Procedure § 704.115.
(a) As used in this section, “private retirement plan” means:
(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986, as amended, including individual retirement accounts qualified under Section 408 or 408A of that code, to the extent the amounts held in the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code.
(b) All 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.
(c) Notwithstanding subdivision (b), where an amount described in subdivision (b) becomes payable to a person and is sought to be applied to the satisfaction of a judgment for child, family, or spousal support against that person:
(1) Except as provided in paragraph (2), the amount is exempt only to the extent that the court determines under subdivision (c) of Section 703.070.
(2) If the amount sought to be applied to the satisfaction of the judgment is payable periodically, the amount payable is subject to an earnings assignment order for support as defined in Section 706.011 or any other applicable enforcement procedure, but the amount to be withheld pursuant to the assignment order or other procedure shall not exceed the amount permitted to be withheld on an earnings withholding order for support under Section 706.052.
(d) After payment, the amounts described in subdivision (b) and all contributions and interest thereon returned to any member of a private retirement plan are exempt.
(e) Notwithstanding subdivisions (b) and (d), except as provided in subdivision (f), the amounts described in paragraph (3) of subdivision (a) are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires. In determining the amount to be exempt under this subdivision, the court shall allow the judgment debtor such additional amount as is necessary to pay any federal and state income taxes payable as a result of the applying of an amount described in paragraph (3) of subdivision (a) to the satisfaction of the money judgment.
(f) Where the amounts described in paragraph (3) of subdivision (a) are payable periodically, the amount of the periodic payment that may be applied to the satisfaction of a money judgment is the amount that may be withheld from a like amount of earnings under Chapter 5 (commencing with Section 706.010) (Wage Garnishment Law). To the extent a lump-sum distribution from an individual retirement account is treated differently from a periodic distribution under this subdivision, any lump-sum distribution from an account qualified under Section 408A of the Internal Revenue Code shall be treated the same as a lump-sum distribution from an account qualified under Section 408 of the Internal Revenue Code for purposes of determining whether any of that payment may be applied to the satisfaction of a money judgment.
COURT OPINIONS RE CALIFORNIA PRIVATE RETIREMENT PLANS
In re Daniel, 771 F.2d 1352 (9th Cir., 1985).
In re Bloom, 839 F.2d 1376 (9th Cir., 1988).
In re Crosby, 162 B.R. 276 (Bk.C.D.Cal., 1993).
Yaesu Electronics Corp. v. Tamura, 28 Cal.App.4th 8, 33 Cal.Rptr.2d 283 (1994).
Schwartzman v. Wilshinsky, 50 Cal.App.4th 619, 57 Cal.Rptr.2d 790 (1996).
In re Friedman, 220 B.R. 670 (9th Cir.B.A.P., 1998).
In re Phillips, 206 B.R. 196 (Bk.N.D.Cal., 1997).
In re Stern, 345 F.3d 1036 (9th Cir., 2003).
McMullen v. Haycock, 147 Cal.App.4th 753, 54 Cal.Rptr. 3d 660 (2007).
In re Rucker, 570 F.3d 1155 (9th Cir., 2009).
In re Segovia, 404 B.R. 896 (2009).
In re Simpson, 557 F.3d 1010 (2009).
In re Beverly, 374 B.R. 221 (9th Cir., B.A.P., 2011).
Marriage of La Moure, 221 Cal.App.4th 1463, 15 Cal.Rptr.3d 417 (2013).
Salameh v. Tarsadia Hotel, 2015 WL 6028927 (S.D.Cal., 2015).
Only published court opinions are included; non-published opinions are not useful as legal precedent and should not be relied upon.
ARTICLES ON CALIFORNIA PRIVATE RETIREMENT PLANS
The California Private Retirement Plan: Separating Fact From Fiction (Jay Adkisson, Forbes.com, Dec. 28, 2015)
MAIN SECTIONS OF THIS WEBSITE
Leading Court Opinions and Legislative History of CCP § 704.115
The published court opinions, both state and federal, and the legislative history of CCP § 704.115 give valuable insight into how California private retirement plans should be properly structured and used. See Court Opinions and Legislative History
Voidable Transactions Issues (formerly: Fraudulent Transfers)
As amply demonstrated by the case law, the law of voidable transactions (formerly: fraudulent transfers) has frequently and successfully been used by creditors to avoid transfers made to California Private Retirement Plans. Please see our Voidable Transactions page for more.
Plan Defect Issues
Creditors have frequently been successful in busting California Private Retirement Plans because either (1) there was no real "plan", or (2) the plan was not substantially followed by the debtor. Read more on our Plan Defect Issues page.
ERISA, Tax-Qualified Plans and Non-Tax Qualified Plans
Considers the types of private retirement plans as measured by ERISA and tax law, including ERISA-qualified plans, tax-qualified plans, and non-qualified plans. Read more on our ERISA and Tax Issues page.
Post-Distribution Exemption-Tracing Issues
Considers the application of the exemption tracing statute, CCP § 703.080, to California Private Retirement Plans. Please visit our Post-Distribution Exemption-Tracing Issues page.
Services & Contact Information
Jay Adkisson assists clients in creating California Private Retirement Plans in appropriate circumstances, and reviews existing plans for their defensibility against creditor challenges. Jay is also involved with litigation in attacking PRPs from the creditor's side, and defending them from the debtor's side. Please see our Services & Contact Information page.
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