Thursday, 18 April 2024

Estate planning: Private retirement plans and asset protection

One of the very best domestic asset protection opportunities available to California residents is their private retirement plan; not to be confused with individual retirement accounts (“IRAs”).

The reason is that California statutory law provides absolute protection against creditor claims to so-called “private retirement plans.” The same cannot be said of IRAs.

Now let’s examine “private retirement plans.”

A “private retirement plan” is a plan “designed and used” primarily for retirement purposes to benefit the retiree and his family.

It is established by the participant’s employer and must operate in accordance with its primary purpose of providing retirement benefits upon reaching retirement age. Thus, it cannot be accessed by the participant prior to retirement to make withdrawals, as if it were a bank account, nor can it be used to borrow money.

There are, however, limited exceptions such as illness, disability or financial hardship, which may justify an early distribution; but, the determination of such justification must be made by someone other than the plan participant.

The private retirement plan must hold assets that are suitable for retirement purposes. Thus, one cannot transfer one’s home and rental properties into a retirement plan in order to shield these assets from one’s creditors. Moreover, the accumulation of retirement funds inside of the retirement plan must be gradual and not spontaneous, aside from a rollover (discussed below).

Private retirement plans do not need to qualify under the federal ERISA standards for so-called “qualified retirement plans”, although many do qualify. ERISA qualified plans are doubly protected because ERISA provides near absolute federal law protection against creditor claims.

IRAs, by contrast, have only limited creditor protection. They are protected only insofar as necessary to meet the IRA participant’s basic retirement needs. What is necessary is determined after taking into consideration the participant’s other available resources and current and future earnings power. The foregoing itself involves a “debtor’s examination” by the creditors.

Fortunately, assets transferred from an IRA into a private retirement plan are fully protected as a “private retirement plan.”

The transfer will not be treated as a reversible fraudulent conveyance if properly done. Nor do private retirement plan assets transferred into an IRA from a private retirement plan lose their exempt status, provided that the existing assets can be traced back to the source private retirement plan. Thus, if one transfers one’s private retirement plan into an IRA consisting exclusively of funds received from such plan, then the IRA is protected like it were a retirement plan.

Lastly, upon reaching retirement age, any funds received by the private retirement plan participant are exempt. That is, any use by the retiree of plan distributions counts as a retirement use. This is true even if the retiree is still working while withdrawing funds.

Patience is definitely a virtue when it comes to realizing the benefits of private retirement plans.

Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 1st St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.

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