To qualify for the exemption protection of California Code of Civil Procedure § 704.115(b), a Private Retirement Plan must be principally or primarily designed and used for retirement purposes. Subjective intent alone is not enough. A person cannot simply designate certain assets as retirement assets and expect the statutory exemption to hold up when creditors come knocking.
Creating a Plan that satisfies both the design and use requirements takes a working command of the statute and the related case law. Without that, the process feels like riding a roller coaster in the dark — holding onto your retirement assets without knowing whether the next drop will leave you empty-handed.
An experienced exemption planning attorney can build a customized retirement track for the individual participant, with built-in protections designed to prevent the Plan from veering into non-retirement purposes. Done correctly, the Plan and the Private Retirement Trust (“PRT”) that holds the Plan assets are tailored to the participant’s circumstances rather than borrowed from a template.
1. What California Courts Treat as a Non-Retirement Purpose
Courts have found a non-retirement purpose in several recurring fact patterns. Any one of these can negate the retirement purpose on its own, and in other cases, courts have reached the same conclusion based on a combination of factors:
- a Plan partly designed and used to shield assets from creditors;
- the creation of a Plan that coincides with judgments or bankruptcy;
- a Plan Participant who maintains a high degree of control over the Plan or the retirement assets;
- failure to comply with IRS rules (where applicable) or the Plan’s own rules; and
- use of Plan funds for a non-retirement purpose.
Avoiding the inference of a non-retirement purpose is what customized drafting is for. The Plan agreement and the PRT have to be built in a way that makes the retirement purpose visible at every level — from the initial design to the ongoing administration.
2. The Totality of the Circumstances Test
In assessing whether a Plan is valid, courts look at the totality of the circumstances. As the court explained in O’Brien v. AMBS Diagnostics, LLC (2019) 38 Cal.App.5th 553, 561, no single factor is dispositive. All of the relevant facts are evaluated together against the fundamental question: was the Plan designed and used for a retirement purpose?
That standard creates both risk and opportunity. The risk is that an isolated, sloppy provision — or a single course of conduct — can become a thread the court pulls on. The opportunity is that a thoughtfully drafted Plan, paired with administration that mirrors the design, gives the court a coherent record showing retirement purpose at every step.
3. The Degree-of-Control Problem
The degree of control over the Plan and PRT by a Plan Participant is one of the most heavily litigated issues in this area. As the court put it in Schwartzman v. Wilshinsky (1996) 50 Cal.App.4th 619, 629, the kind of control that would show a non-retirement purpose would be substantially all control over contributions, management, administration, and use of funds.
The Plan agreement and the PRT have to be drafted to limit the control held by a Plan Participant. That gets tricky when the sponsor company of the Plan is wholly owned by the participant, because ownership of the sponsor inevitably means some indirect control. The way to manage this is structural: distribute authority across independent roles, and write the Plan in a way that constrains what the participant can and cannot do.
4. Why the Plan Participant Should Not Serve as PRT Trustee
When the sponsor company is wholly owned by the participant, having the participant also serve as PRT Trustee compounds the control issue dramatically. Removing the participant from the trustee role is one of the single most effective steps for reducing the degree of control the participant exercises over Plan assets.
That single change is not, by itself, enough. The Plan agreement still has to restrict the powers the participant can exercise as an owner of the sponsor by explicitly detailing what the participant can and cannot do — rather than granting open-ended powers that a creditor’s attorney can later argue amount to substantial control.
5. Custom Distribution Provisions That Protect the Retirement Purpose
Distributions are one of the highest-risk areas in a PRT, because a wrongful distribution looks indistinguishable from treating the Plan as a personal account. The Plan agreement should explicitly state:
- the projected retirement age of the Plan Participant;
- that distributions can only be taken after the projected retirement age, or upon an unforeseen emergency, disability, or death; and
- the amount of distributions allowed under each circumstance.
Detailing these terms in advance prevents the participant from unintentionally destroying the retirement purpose of the Plan by taking distributions that were never authorized by the design. It also gives the court a clear, written record to compare against actual conduct.
6. Custom Loan Provisions That Protect the Retirement Purpose
Loans from the PRT to the Plan Participant are equally sensitive. To prevent loans from being recharacterized as withdrawals — with all of the exemption consequences that follow — the Plan agreement should specify:
- the maximum loan amount that can be taken in relation to the total amount of retirement assets;
- that adequate interest is required;
- the terms of repayment;
- that the loan must benefit the Plan’s retirement purpose by preserving and enhancing the retirement assets; and
- that the terms of the loan are substantially similar to commercially available loans.
Drafting at this level of detail allows the participant to access funds when truly necessary, while keeping the conduct visibly inside the boundary of legitimate retirement plan administration.
7. The Custom Provisions That Make a Plan Defensible
The provisions and requirements of the Plan and PRT can differ significantly from one individual to the next, because they are customized to financial status, retirement goals, and family circumstances. Each Plan agreement and PRT typically requires drafting of customized provisions covering:
- participation requirements;
- contributions and funding guidelines;
- recharacterizations of assets;
- investments;
- beneficiary designations; and
- Plan administration.
A template document cannot do this. The customization is the entire point: the Plan has to reflect the participant’s actual retirement story, which is the same story the supporting Retirement Appraisal has to prove up.
How a Properly Designed PRT Protects Retirement Assets
Riding the retirement exemption roller coaster on an unfinished track is exactly what creditors want — every unanticipated twist or turn becomes a place where the exemption can fail. A Plan and PRT that are designed for the individual participant, drafted with explicit limits on participant control, supported by appropriate independent professionals, and administered consistently with their own terms put the participant on a complete track from beginning to end. When the Plan is built that way, the statutory exemption protection of CCP § 704.115(b) is in its strongest position to do its job.
Work With a Private Retirement Trust Attorney
A Private Retirement Plan and Private Retirement Trust are complex and comprehensive devices. The difference between a Plan that holds up and a Plan that fails under creditor scrutiny usually comes down to how carefully it was customized at the beginning — and how consistently it has been administered ever since.
Dustin I. Nichols, creator of the Private Retirement Trust®, has spent over 30 years designing integrated exemption strategies for California clients. Don’t ride the retirement exemption roller coaster on an unfinished track. Take action now to preserve and protect your retirement assets using the statutory exemption protection of CCP § 704.115(b). Schedule a free consultation, contact the Law Office of Dustin I. Nichols, APC in Newport Beach, California or call (949) 240-1101. You can also reach us through our contact page.
Frequently Asked Questions About Customizing a Private Retirement Plan
Why Does a Private Retirement Plan Have to Be Customized?
California courts evaluate whether a Plan is principally or primarily designed and used for retirement purposes by looking at the totality of the circumstances. A generic, template-based Plan rarely produces the kind of evidentiary record courts find persuasive. Customizing the Plan to the participant’s actual financial circumstances, retirement goals, and family situation is what supports the retirement purpose on the design side.
What Counts as a Non-Retirement Purpose?
Courts have identified a Plan partly designed to shield assets from creditors, Plan creation that coincides with judgments or bankruptcy, a participant’s high degree of control over the Plan or its assets, non-compliance with IRS or Plan rules, and use of Plan funds for non-retirement purposes. Any of these can negate the retirement purpose, alone or in combination.
Can I Be the Trustee of My Own PRT?
Technically yes, but it is strongly discouraged. Serving as the PRT Trustee while also owning the sponsor company concentrates control in the participant and gives creditors a powerful argument under Schwartzman v. Wilshinsky that the participant exercises substantially all control over contributions, management, administration, and use of funds. Using an independent trustee is one of the most effective defenses.
What Should the Plan Say About Distributions?
The Plan should explicitly state the projected retirement age of the participant, that distributions can only be taken after that age or upon unforeseen emergency, disability, or death, and the amount allowed in each case. Without these limits, a routine distribution can look indistinguishable from treating the Plan as a personal account.
What Should the Plan Say About Loans?
The Plan should specify the maximum loan amount as a proportion of total retirement assets, require adequate interest, state the repayment terms, require that the loan benefit the Plan’s retirement purpose by preserving and enhancing the assets, and require that the terms be substantially similar to commercially available loans.
What Provisions Are Typically Customized in a Plan and PRT?
Beyond distribution and loan provisions, customized Plans typically address participation requirements, contributions and funding guidelines, recharacterizations of assets, investments, beneficiary designations, and Plan administration. The customization reflects the participant’s actual retirement story — which is also the story the Retirement Appraisal has to prove up.
Does the Totality of the Circumstances Test Mean That No Single Factor Destroys the Exemption?
It means that no single factor is dispositive in isolation — courts weigh all of the relevant facts together against the fundamental question of whether the Plan was designed and used for a retirement purpose. That is why both the drafting and the ongoing administration matter.
Can I Customize a Plan After It Has Already Been Funded?
Existing Plans can sometimes be amended, and existing PRTs can sometimes be restructured, but the analysis is more delicate after funding has occurred. The best practice is to design the Plan and PRT carefully at the outset. If an existing Plan needs to be brought up to standard, an exemption planning attorney should evaluate the specific facts before any changes are made.
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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