Senior Planning Consultant
Most Californians don’t realize they have access to one of the greatest protections for their retirement nest egg; Greater than protections available for 401(k)s, IRAs, and other pension plans. California Civil Procedure Code section 704.115(b) provides unlimited statutory exemption from lawsuits and creditor claims for assets held in trust pursuant to a “private retirement plan”. Understanding the intricacies of this statute, case law, and best practices is crucial to maximizing benefits and avoiding potential planning pitfalls.
A California resident may have a company they own or work for sponsor a retirement plan the resident will fund themselves. With the appropriate financial and retirement planning, an appraisal is performed to determine what amount must be set aside now to fund the resident’s intended retirement support and goals in the future for their retirement life-expectancy. That present value is funded into the retirement trust via asset transfers, asset liens, or other contractual obligations in favor of the retirement trust. Once those assets are claimed for the resident’s retirement and trust, both the assets and the income derived therefrom, in an unlimited amount, are fully protected from lawsuits and creditor claims under the state statute.
Key to this unique statutory protection are the retirement purpose, appraisals, trust formalities, and administrative maintenance. Residents engaging in this planning must utilize qualified professionals to calculate and maintain the appropriate contributions, limits, perform adjustments as necessary or justified, and avoid exceeding limits. Residents are generally required to start receiving distributions after reaching retirement, which could be a certain age or event. Failure to comply with distribution requirements and other trust and administrative formalities can result in penalties and jeopardizing the trust and statute protections.
The asset protection retirement trust planning can and should be integrated with overall estate, trust, and tax planning tools to ensure the resident’s best interests, goals and opportunities are fully realized. While the primary advantage of retirement trust planning under section 704.115(b) is the protection it provides from lawsuits and creditor claims, the planning also helps with financial discipline, growth, weathering unforeseen hardships, and can provide significant tax benefits if coupled with tools such as IRAs, life insurance, irrevocable trusts, and other tools.
Costs of such planning includes the financial and retirement planning, legal review and planning for potential risks and claims and qualification for the full benefits of the statutory protections, drafting and executing the retirement plan and trust, and engaging an independent trustee to administer the same as well as storing financial records, and filing the relevant tax returns. Retirement investment accounts, mutual funds, life insurance, and annuities may also have costs and fees.
Who should consider this unique protection? All residents of California who may be in a car accident someday. Also, California business owners, professionals in high-risk fields, wealthy individuals, or anyone else who may be a target of lawsuits. Best to take advantage of the state’s statutory protection and not need it than to need it and not have it. And you can’t wait until the need arises to avail yourself of the planning. By then, it’s too late.
For our clients and colleagues, we encourage you to listen to the podcast we recently recorded with attorney Dustin Nichols on this topic, and to contact us if you have any questions: https://soundcloud.com/thewfypodcast/wfy-tax-talk-private-retirement-planning-and-trusts-with-dustin-nichols
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Wright Ford Young & Co. is headquartered in Irvine, CA and is the largest single office CPA firm in Orange County. WFY is a full service corporate accounting firm offering audit, tax, estate and trust, and business consulting services to closely held company and family business owners. More information about our Firm can be found at www.cpa-wfy.com.