What Is a Private Retirement Plan in California?

A major reason people want to do estate planning is to protect their hard-earned assets, whether for themselves or their loved ones. A frequent concern is the possibility that there will either be issues with creditors/legal judgments and settlements or a bankruptcy situation for both the estate holder or the heirs, or divorce for the heirs. Wanting to protect the estate from those types of claims is essential, and it’s a form of protection not offered with individual retirement accounts (IRAs). One way to do that is through a private retirement plan (PRP), a program held under California state creditor law. It’s a unique form of estate planning that
offers many safeguards other forms of estate planning do not. Here’s what you need to know.

What Does a PRP Protect?

It protects the named assets by exempting them from liens and seizures, whether due to bankruptcy or lawsuit settlements. It can also safeguard heirs by keeping the inheritance out of community property in marriage. Then, if the couple divorces, the spouse will not be entitled to the inheritance, which they could be otherwise.

The assets in the trust, including any earnings, gains, and future values, are safe while accumulating. Depending on the size of the estate and the assets within, the PRP may be able to take advantage of several tax benefits as well, which could conceivably offset the cost of setting it up. This is especially true for business owners.

When Should I Begin Developing a PRP?

There are situations when people face an unexpected financial problem, such as a lawsuit with a large settlement, and they want to put their assets in a PRP at that point to protect them. For example, a surgeon could face a malpractice lawsuit that could far exceed what his insurance covers. However, one criteria for the PRP to be legal and successful is that it’s done primarily for retirement benefits, not to evade creditors and judgments. That’s why a PRP should be set up as early as possible while there’s no pending financial problem on the horizon. By the time the surgeon faces the lawsuit, it’s too late.

Note that if the estate holder passes away before creating a PRP and the estate goes to a married inheritor, it may be too late for the inheritor to define it as a PRP.

Also, understand that this is a long-term planning tool. While it has many shorter-term benefits, it is structured specifically for retirement. If you have cash reserves you think you need before retirement, you may want to think about keeping those out of the PRP. Our team of attorneys is happy to discuss the specifics of your situation to come up with the best plan for you.

How Is a PRP Constructed?

This is a complex plan that requires having a knowledgeable professional to ensure it’s drawn up correctly. A big part of the PRP is setting up a private retirement trust. Assets are brought into that trust and retitled to indicate they’re assets specifically to be used for retirement.

Not every asset can be contained in a private retirement trust, but many can be, whether cash or property. The key is that the trust should hold things that will be used during retirement. Things like rental properties must be excluded. But funds from existing IRAs can. Unlike other retirement plans, PRPs can be funded with private business stock and LLC member interests.

That PRP is constructed so that you can continue adding to it, just as you’d add to any other retirement program. One of the additional benefits of the PRP is that contributions to it aren’t tax deductible, so there’s no maximum limit on contributions. However, the PRP plan needs to detail the need for retirement savings, so if much more significant contributions are made than what’s required, that could raise questions. That’s why it’s critical to have an experienced estate planning professional involved in developing the PRP, especially the plan.

What’s Required to Have a PRP?

As noted above, one thing that will be examined is whether or not the estate holder is trying to avoid creditors somehow. If that’s the case, the trust may not be able to be created; a prime example of why setting this up while there are no conflicts at hand is strongly recommended.

The PRP needs to have a detailed plan that outlines the assets and how they’ll be used in retirement. Courts will look closely at this plan to ensure it’s not a precursor to hiding funds from upcoming litigation but instead appears to be a diligently considered plan for when retirement may take place and what will likely be needed. A plan needs to be presented from every person named in the trust.

Beyond that, the trust must have an independent trustee and an independent plan administrator. There are many professionals in California who can fulfill those roles.

Finally, a PRP is only valid in California. If you plan to move out of state before or during retirement, the PRP will no longer hold legally.

What Should I Do if I Need a PRP?

Call us at 916-685-1225 for a free consultation. Our team of experienced, knowledgeable attorneys can walk you through the rules and requirements to ensure your estate is protected from creditors and lawsuits for you and your heirs. Because of the complexity of PRPs and the need to have them in place before any crisis arises, getting started as soon as possible is highly recommended. It’s a good idea to plan for the worst, even if you hope it never happens.