Non-public pension provision as an asset safety instrument that’s overheard within the occasion of bankruptcies Greenberg Glusker LLP

After years of hard work and planning, or perhaps entering a young market on time, your business will thrive. With day-to-day operations going smoothly, think about the best way to plan ahead to protect your newly accumulated capital in a landscape of constantly changing consumer tastes and great uncertainty. The number of asset protection measures may seem daunting, ranging from the confusion of the spendthrift trusts to the somewhat questionable practice of offshore accounts. An often overlooked option for protecting assets is having your company create a private retirement plan.

The California Code of Civil Procedure (“CCP”), Section 704.115, exempts “[a]Any amount held, controlled, or distributed by a private retirement plan. “CCP § 704.115 (b). Amounts held in “[p]Private Employer Pension Plans “established or maintained by private employers, including” closely related companies “, are entirely exempt from the tax. CCP § 704.115 (a) (1) & (b).

For a private retirement plan to qualify as exempt under CCP Section 704.115, the plan must “be designed and used primarily for retirement purposes”.[1] Even a private pension plan that is “partially used to protect assets is still excluded” if it meets this basic requirement. I would.

Determining whether a private retirement plan is primarily designed and used for retirement purposes is a fact-based investigation and the courts take into account the entirety of the circumstances.[2] All factors have to be taken into account and none is dispositive.[3] Relevant factors are:

  1. the subjective intent of the “debtor” in creating and using the plan or account.
  2. the “chronology” or the time at which the plan or account was created in relation to other events.
  3. The degree of control that the debtor maintains in the plan or account “over contributions, administration, administration and use of funds”.
  4. whether the debtor violated or complied with the rules of the Internal Revenue Service (IRS) or the rules of the plan to contribute to the plan.
  5. when the debtor withdraws funds from the plan or account, whether those funds were used for retirement or for some other non-retirement purpose instead.[4]

As long as a private retirement plan is designed and used primarily for retirement purposes and exists under the above factors, California law completely exempts the private retirement plan, even if the plan is created solely for the benefit of a company’s principal. As such, it is a powerful tool for those principals who want to protect their assets today for an uncertain tomorrow.

[1] In re Rucker, 570 F.3d 1155, 1160 (9th Cir. 2009) (focus on original); see also Yaesu Elecs. Corp. v. Tamura, 28 cal. App. 4th 8: 14 (1994).

[2] O’Brien v AMBS Diagnostics, LLC, 38 Cal.App.5th 553 (2019); Rucker, 570 F.3d at 1161.

[3] In re Bloom 839 F.2d, 1376, 1379-80 (9th Cir. 1988).

[4] O’Brien, 38 Cal.App.5th at 561 (List of factors and authorities that apply from each).

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