Private Retirement Trust

On September 24, 2024, California Governor Gavin Newsom signed into law AB 2837, dramatically reducing the creditor exemption for qualified retirement accounts in California. The new law will take effect on January 1, 2025. In the wake of these changes, the California Private Retirement Trust (“PRT”), a “non-qualified” 401k-like retirement plan, is unaffected by the new law and has now emerges as a far superior option for those seeking robust asset protection for their “can’t lose” retirement assets. While traditionally, qualified plans like 401(k)s and Defined Benefit Plans protected under California State exemption and federal “ERISA” laws, have been relied upon for both retirement savings and creditor protection (commonly referred to as “The OJ Plan” among bankruptcy attorneys). However, the new law under AB 2837 has made these plans vulnerable to creditors, especially in non-bankruptcy cases. This article explores the key benefits of the California PRT from a creditor exemption/asset protection standpoint and why it is essential to consult legal counsel now more than ever to consider this strategy.

A critical shift occurred when California lawmakers drastically reduced the creditor exemption protections historically afforded to qualified retirement accounts. According to a recent article, these changes have made it much easier for creditors to access funds held in qualified plans, limiting the protection these plans once offered. In many cases, this opens the door for creditors to claim assets that were previously shielded under exemption rules.

Given these new risks, the California Private Retirement Trust has become an attractive alternative. Unlike now exposed qualified retirement plans, a PRT is a non-qualified plan specifically designed and used for retirement purposes that results in the exemption protection of the retirement assets held therein from predators and creditors. Here are some of the reasons why a PRT offers superior protection:

1. Complete Creditor Protection for Retirement Assets:The most significant advantage of the California PRT is its comprehensive creditor exemption protection. While qualified plans now have reduced exemption protections under state law, a PRT shields assets from creditors in their entirety. Specifically, pursuant to California Code of Civil Procedure Section 704.155(b), all assets contributed, distributions at retirement age and death benefit associated therewith are “exempt” from creditors. This protection applies even if the individual is facing lawsuits (State Court) or bankruptcy (Federal Court), making it a critical protection tool.
2. Non-ERISA Governance:Qualified retirement accounts are governed by ERISA (Employee Retirement Income Security Act), which subjects them to specific limitations and vulnerabilities. However, a PRT, being a non-qualified plan, is not governed by ERISA. This now allows for more flexibility and broader creditor exemption protection under California law.
3. Customizable and Flexible:Unlike traditional Tax Qualified retirement accounts that have strict contribution limits, early withdrawal penalties, and distribution rules, a PRT is highly customizable. Contributions can be tailored to the individual’s “retirement lifestyle” needs, and there are no early withdrawal penalties or mandatory distribution requirements. This makes it not only a better tool for retirement asset protection but also a more flexible financial planning instrument.
4. Tax Benefits:While PRTs do not offer the same immediate tax benefits as qualified retirement plans, they provide some tax savings opportunities and significant long-term advantages. Since assets in a PRT are not subject to mandatory withdrawal rules, they can grow and remain protected for future generations, free from the reach of creditors. This makes it a powerful tool for multi-generational wealth preservation. From tax planning standpoint, since the PRT is a “Grantor Trust” for tax purposes, PRT tax mitigation strategies such as Solar Investments, Cost Segregation Studies and R&D credits can help to provide the PRT Participant with some personal tax benefits.

Given the recent legislative changes in California and the complexities of asset protection, specifically, “Retirement Exemption Planning,” it is more important than ever to consult with legal counsel when considering a California Private Retirement Trust. The laws governing asset protection, creditor exemptions, and trusts are nuanced and continually evolving. A skilled attorney can help you navigate these changes, ensuring that your assets are fully protected under the most current legal framework.

Moreover, setting up a PRT requires careful legal drafting to ensure it complies with California law and maximizes creditor exemption protection. This is not a one-size-fits-all solution; each PRT must be customized to the individual’s financial situation, goals, and risk factors.

The recent reduction in creditor exemptions for Tax Qualified retirement accounts in California has significantly weakened their utility as a retirement asset protection vehicle. As a result, the California Private Retirement Trust offers a much more robust solution for those seeking to protect their retirement assets from future unknown creditors. With its flexible structure, full creditor exemption protection, and long-term financial benefits, the PRT is now the preferred choice for retirement asset protection in California. However, given the legal complexities involved, it is crucial to consult with legal counsel to determine whether a PRT is the right strategy for you.

By proactively planning and utilizing tools like the California Private Retirement Trust, individuals can ensure their retirement assets remain safe from creditors and preserved for their retirement need, making this an essential consideration for anyone concerned about protecting their retirement today.