Private pension plans as a tool to protect assets caught in bankruptcy | Greenberg Glusker LLP

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After years of hard work and planning, or perhaps thanks to the timely entry into an emerging market, your business is booming. With day-to-day operations running smoothly, you begin to think about how best to plan ahead to protect your newly accumulated capital in a landscape of ever-changing consumer tastes and high uncertainties. The sheer number of asset protection measures can seem daunting, ranging from the perplexity of spending trusts to the somewhat questionable practice of offshore accounts. An often overlooked asset protection option is setting up a private pension plan through your business.

Section 704.115 of the California Code of Civil Procedure (“CCP”) exempts “[a]All amounts held, controlled or in the process of being distributed by a private pension plan ”. CCP § 704.115 (b). Amounts held in “[p]rival pension plans “” established or operated by private employers, “including” private companies, “are fully tax exempt. CCP § 704.115 (a) (1) and (b).

For a private pension plan to be considered exempt under section 704.115 of the CPP, the plan must be “primarily designed and used for retirement purposes. “[1] Even a private pension plan “used in part to protect assets is still exempt” if it meets this basic requirement. Identifier.

Determining whether a private pension plan is designed and used primarily for retirement purposes is a factual inquiry and the courts consider all of the circumstances.[2] All factors must be taken into account and none are determinative.[3] The relevant factors are as follows:

  1. The “subjective intention of the debtor” in the design and use of the plan or account.
  2. the “timeline” or timing of the creation of the plan or account vis-à-vis other events.
  3. the degree of control that the debtor exercises “over the contributions, management, administration and use of funds” in the plan or account.
  4. whether the debtor has violated or complied with Internal Revenue Service (IRS) rules or plan rules by contributing to the plan.
  5. if the debtor withdraws money from the plan or account, whether those funds were used for retirement or for some other purpose unrelated to retirement.[4]

As long as a private pension plan is designed and used primarily for retirement purposes and goes through the above factors, the private pension plan will be fully exempt under California law, even if the plan is established only in the profit of the principal of the enterprise. As such, it is an effective tool for executives who wish to protect their assets today for an uncertain future.

[1] In re Rucker, 570 F.3d 1155, 1160 (9th Cir. 2009) (emphasis in original); see also Yaesu Elecs. Corp. against Tamura, 28 Cal. App. 4th 8, 14 (1994).

[2] O’Brien v AMBS Diagnostics, LLC, 38 California, 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 (listing factors and authorities applying each).

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