The exemption protection afforded to California residents for private retirement plans under CCP § 704.115(b) is astounding. “The very purpose of the exemption is to permit a judgment debtor to place funds beyond the reach of creditors,” and the statute is to “be construed, so far as practicable, to the benefit of the judgment debtor.” (Schwartzman v. Wilshinsky (1996) 50 Cal.App.4th 619, 628 & 630.)
So where is the catch? If this exemption protection is so great, then why don’t all estate planning attorneys in California incorporate private retirement plans into their client’s advanced planning strategies? The answer lies in the simplicity of the statute itself.
What CCP § 704.115(b) Actually Says
CCP § 704.115(b) provides that:
“[a]ll amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan are exempt.”
The exemption protection provided by the statute appears to be in black and white. However, the validity of such plans is not stated in absolute terms and is instead governed by case law that tackles—and sometimes fumbles—issues that materialize in contrasting shades of grey.
It is this simplicity, in corresponding ambiguity, that requires advanced study of the case law interpreting the statute and providing guidance as to properly structuring a plan to capture its benefits. Most noteworthy is the fact that the statute fails to define a “private retirement plan” and fails to set forth a list of required elements or even factors that should be considered when establishing a plan.
The Problem with the Statute’s Definition
In addressing what constitutes a “private retirement plan,” the court in In re Phillips (206 B.R. 196) stated that “[t]he critical question for the court to decide is whether the Retirement Plan constitutes a ‘private retirement plan’ as provided in [CCP § 704.115(a)(1)], which section curiously and unhelpfully defines ‘private retirement plan’ as a ‘Private retirement plan.'”
If the practitioner is able to overcome the hurdle of deciding whether a private retirement plan qualifies as a private retirement plan under the statute, the next question becomes whether the plan is designed and used for retirement purposes. Determining the answer to this question requires extensive knowledge of case law and a practitioner capable of navigating through the holdings of various courts that fall along a spectrum of grey, since such holdings and judicial guidance tend to be based on particular fact-based scenarios that differ from case to case.
The Role of the Private Retirement Trust
In order to effectuate the purpose of a private retirement plan, there must be a vehicle to hold the retirement assets. This vehicle is sometimes referred to as a Private Retirement Trust (PRT). Like all trusts, the PRT requires a settlor, a trustee, and a beneficiary, but unlike most trusts, PRTs are not required to be valid spendthrift trusts in order to prevent creditors from reaching the assets.
Rather, courts have made clear that “whether or not the debtor exercises control over the plan is irrelevant to the exemption” (In re Vigghiano, 74 B.R. 61 (Bankr.S.D.Cal.1987).) Thus, a wholly owned corporation that establishes a retirement plan with a single shareholder, director, plan trustees, and beneficiary, qualifies for the full exemption under CCP § 704.115(a)(1) or (a)(2). (In re Chang, 943 F.2d 1114, 1116 (9th Cir.1991).)
Why Trustee Control Is Still a Grey Area
In practice, however, the grey area therein lies because “[i]n assessing whether a plan or account was principally or primarily designed and used for retirement purposes, courts are to look at the totality of the circumstances.” One such circumstance is the degree of control the debtor maintains “over contributions, management, administration, and use of funds” in the plan or account. (O’Brien v. AMBS Diagnostics, LLC (2019) 38 Cal.App.5th 553, 561.)
Thus, although case law provides that the plan beneficiary can be the trustee, structuring a plan as such is detrimental to the survival of the plan. If the trustee/beneficiary exercises a high degree of control over the plan—for instance, making a withdrawal rather than a loan—the legitimacy of the plan will be litigated, and the scales of justice may weigh in favor of creditors’ objections to the declared exemption.
Not only will such litigation be costly, but an interception by the creditors will negate the very purpose of the plan, which is to place retirement funds beyond the reach of creditors.
How a Properly Designed PRT Scores the Exemption
To score a legal touchdown with a PRT, careful thought must be placed on every phase of the exemption playbook: design, creation, implementation, use, and maintenance of the structure. When each element is handled with precision, the PRT beneficiary wins the exemption game and protects their needed retirement assets.
A properly structured PRT, overseen by an independent trustee and supported by a customized Retirement Appraisal and annual administration, is the foundation of a legally defensible private retirement plan under California law.
Work With a Private Retirement Trust Attorney
Navigating the grey areas of CCP § 704.115(b) requires deep familiarity with California case law and the ability to structure a plan that will withstand creditor challenge. Dustin Nichols, creator of the Private Retirement Trust®, has spent over 30 years designing integrated exemption strategies for California clients.
If you are considering a PRT or want to evaluate whether your existing plan meets the required legal standards, schedule a free consultation or call the Irvine, California office: (949) 240-1101.
Frequently Asked Questions About the CCP § 704.115(b) Exemption
What Makes the CCP § 704.115(b) Exemption So Powerful?
The statute exempts all amounts held, controlled, or in process of distribution by a private retirement plan for the payment of benefits. Courts have construed the statute broadly, in favor of the judgment debtor, to permit placement of funds beyond the reach of creditors.
Why Don’t More Attorneys Use Private Retirement Plans in Their Planning?
The statute’s simplicity is deceptive. It does not define what a “private retirement plan” is, nor does it list required elements. The validity of any given plan is instead governed by a complex and evolving body of case law, requiring specialized knowledge to structure a plan that will actually hold up in court.
Can a Beneficiary Also Serve as the PRT Trustee?
Case law technically allows it, and there are arrangements with a single shareholder, director, trustee, and beneficiary that have qualified under In re Chang. However, in practice, a high degree of trustee/beneficiary control over plan funds—such as taking withdrawals instead of loans—invites creditor challenges and potential loss of the exemption. An independent trustee is strongly recommended.
What Does “Totality of the Circumstances” Mean for a PRT?
When courts assess whether a plan was principally designed and used for retirement purposes, they examine all the facts, including how much control the debtor exercised over contributions, management, administration, and use of funds. No single factor is determinative; the overall picture of how the plan was designed and operated is what matters.
What Is the Risk if a Creditor Challenges My PRT?
If a creditor successfully challenges the plan, the exemption is lost, and retirement assets become available to satisfy the creditor’s judgment. Litigation is also expensive. A properly designed, administered, and documented PRT significantly reduces this risk.
How Is a Private Retirement Trust Different from a Regular Trust?
Like all trusts, a PRT requires a settlor, trustee, and beneficiary. Unlike most trusts, however, a PRT does not need to be a valid spendthrift trust to be protected from creditors. Its protection derives from the plan being principally designed and used for retirement purposes under CCP § 704.115, not from spendthrift provisions.
LEGAL DISCLAIMER
This article is for informational purposes only and does not constitute legal advice. The information provided is general in nature and may not apply to your specific circumstances. No attorney-client relationship is formed by reading this content. For advice tailored to your situation, please consult with a qualified attorney. The Law Office of Dustin I. Nichols, APC serves clients throughout California.
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