The Gluck Case: How a Private Retirement Trust Lost Its Exemption Under California Law

Not all Private Retirement Trusts (“PRTs”) are created equal. To illustrate this point — and the importance of checking off every box when creating a PRT — it is worth examining a recent case in which a Private Retirement Trust failed to survive judicial scrutiny, and why.

In Gluck v. Sarkissian, a Los Angeles County Trial Court denied the defendant’s claim that his private retirement plans were exempt under CCP § 704.115, and the Court of Appeal affirmed that ruling. Although the Court of Appeal’s opinion is unpublished and noncitable, it is worth discussing because it appears to be the most recent case in which a California court has evaluated the totality of the circumstances to determine whether a private retirement plan was principally or primarily designed and used for retirement purposes — and therefore entitled to the exemption protection of CCP § 704.115.

In determining whether a plan is exempt, the critical inquiry is whether the plan is principally or primarily designed and used for retirement purposes. Unfortunately, CCP § 704.115 itself provides no guidance on what factors a court will consider in evaluating whether a plan qualifies under the statute. An examination of case law is necessary to provide that context.

The Five-Factor Test from O’Brien v. AMBS Diagnostics, LLC

The case of O’Brien v. AMBS Diagnostics, LLC (2019) 38 Cal.App.5th 553, 561, provides that in 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. All factors are relevant, but no single factor is dispositive. All of them must be considered in light of the fundamental inquiry: whether the plan was designed and used for a retirement purpose.

The O’Brien case set forth a nonexclusive list of five factors a court may consider when evaluating the totality of the circumstances:

• Subjective intent. The debtor’s subjective intent in designing and using the plan. In In re Simpson (9th Cir. 2009) 557 F.3d 1010, 1018, the court noted that while a debtor’s subjective intent cannot create an exemption, it may take one away.
• Chronology. The timing of the creation of the plan in relation to other events. In Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 15, the court found that the chronology suggested the debtor intended to conceal money from a creditor and did not consider the plan assets a source of retirement income.
• Degree of control. The degree of control the debtor maintains over contributions, management, administration, and use of funds in the plan or account. In Schwartzman v. Wilshinsky (1996) 50 Cal.App.4th 619, 629, the court stated that the kind of control which would show a nonretirement purpose would be substantially all control over contributions, management, administration, and use of funds.
• IRS and plan rule compliance. Whether the debtor violated or complied with IRS rules or the plan’s rules in contributing to the plan. In In re Rucker (9th Cir. 2009) 570 F.3d 1155, 1162, the court held that the debtor’s unlawful and deceptive behavior in funding his plans indicated, considering all the circumstances, that the plans were not designed and used primarily for retirement.
• Use of withdrawn funds. If the debtor withdraws money from the plan or account, whether those funds were used for retirement or a nonretirement purpose. The court in In re Jacoway (B.A.P. 9th Cir. 2000) 255 B.R. 234, 239–240, looked at whether the withdrawals or loans benefited the plan’s retirement purpose by preserving and enhancing the plan’s capital, and whether any withdrawals diminished the plan’s assets to an extent inconsistent with the majority of those assets being used for long-term retirement purposes.

What the Trial Court Found in Gluck v. Sarkissian

In Gluck, the issue before the Trial Court was whether the plan participant had designed and used the plans for retirement purposes. The participant claimed the plans were exempt under CCP § 704.115. The plaintiffs contested the exemption on the grounds that the plans were a sham and a bad-faith attempt to shield assets from creditors.

The Trial Court ruled against the plan participant, finding that given the timing of the plans’ creation, the fact that the plan participant was a part owner of the company that provided the plans, the absence of any averment that the plans complied with IRS rules, and the totality of the circumstances, the plans were not designed and used primarily for retirement purposes.

The Trial Court found that:

• the plans were created only two months after the plan participant was exposed to personal liability from lawsuits;
• the plan participant was age 67 or 68 — already past retirement age — when the plans were created; and
• the plan participant’s company that sponsored the plans had existed for seventeen years and never established any retirement plans until that point.

Degree of Control

The Court referenced the plan participant’s declaration that he had no direct control over the plans, and that the plans were controlled by an independent trustee, trust protector, and plan advisor. However, the Court focused on the fact that the plan participant did not discount his indirect control over the plans’ continued existence or termination as part owner and CFO of the sponsoring company.

IRS and Plan Rule Compliance

The Court stated that the plan participant had to show he did not violate IRS rules or the plans’ rules in contributing to the plans, and found that he did not address the IRS rules and only asserted that he had complied with the plans’ rules without any explanation.

Use of Withdrawn Funds

The Court acknowledged that the plan participant did not withdraw funds from the plans. However, it referenced its determination in O’Brien that a plan participant’s decision not to withdraw funds from the retirement plan does not conclusively establish a primary retirement purpose for the plan.

How Gluck Conflicts With Established Precedent

Under Gluck, the retirement plan exemption may be negated if the plan participant is a part owner of the sponsoring company, based on the participant’s indirect control over the plans’ continued existence or termination. The Court made this statement even though the plans had an independent trustee, independent trust protector, independent plan advisor, and independent plan administrator — thereby eliminating the participant’s direct control over the plan. This additional consideration of indirect control conflicts with well-established case law.

In re Vigghiany (1987)

The court was presented with the issue of whether CCP § 704.115 applies to an IRA when the debtor has the unlimited right to withdraw from the account. In concluding that the exemption does apply, the court stated that, under CCP § 704.115, whether or not the debtor has control over the account is irrelevant to the exemption.

In re Cheng (1991)

The Ninth Circuit addressed whether a corporate retirement plan in which one person controls the corporation and the plan qualifies for the private retirement plan exemption under CCP § 704.115(a)(1) or whether it must be treated as a self-employed retirement plan under subsection (a)(3). The court held that a plan sponsored by a wholly owned corporation qualifies for the full exemption under CCP § 704.115(a)(1). If the California legislature had intended to treat closely held corporations differently than large corporations, it could have done so explicitly.

In re Witwer (1992)

The debtor was the sole stockholder, president, and employee of the sponsoring corporation, and the only beneficiary of the profit-sharing plan. The debtor therefore maintained indirect control over the plan’s continued existence or termination as owner of the sponsoring company. The court held that the plan qualified for the private retirement plan exemption, and the bankruptcy trustee objected on the grounds that the plan was designed and used for present use rather than retirement purposes. Without even considering the debtor’s indirect control of the plan’s continued existence or termination, the court held that the trustee had failed to meet its burden of establishing that the plan was not designed or used for retirement purposes.

In re Bloom (1988)

The debtor was one of two owners of a medical corporation that created a private retirement plan and a profit-sharing plan, in which the two owners served as trustees. The debtor made a number of loans from the plans to herself in exchange for unsecured promissory notes and made only interest payments, meaning a significant portion of the plans’ assets were unsecured promissory notes. Without even considering the debtor’s indirect control as a fifty percent owner of the sponsoring company, the court held that the plans were not so abused as to lose their retirement purpose.

In Cheng, Witwer, Crosby, and Bloom, the plan participant’s indirect control of the plan’s continued existence or termination as owner (or part owner) of the sponsoring company is either acknowledged and disregarded or not even considered. If this type of indirect control becomes a factor that courts can consider when evaluating the totality of the circumstances, then every plan sponsored by a wholly or partly owned corporation may not qualify for the exemption — a result that would effectively obliterate the long line of cases permitting these plans to qualify.

Where Gluck Departs From the Schwartzman Standard

The Gluck case also disregarded the standard for assessing the degree-of-control factor set forth in the 1996 case of Schwartzman v. Wilshinsky. Under Schwartzman, the dispositive inquiry under CCP § 704.115 is whether the plan was designed and used for retirement purposes. The kind of control that would show a nonretirement purpose would be substantially all control over contributions, management, administration, and use of funds. The exemption statutes should be construed, so far as practicable, to the benefit of the judgment debtor.

Had the Gluck court applied the Schwartzman standard, the degree-of-control factor would not have negated the exemption. With an independent trustee, independent trust protector, independent plan advisor, and independent plan administrator, the plan participant did not have substantially all control over contributions, management, administration, and use of funds. That has been the longstanding position of the courts. Gluck takes this analysis a step further and focuses on the indirect control of the plan participant — a step that puts the exemption framework in tension with decades of established precedent.

The key takeaways from Gluck for any PRT participant or designer are:

• timing matters — a plan created in proximity to a creditor event faces serious scrutiny;
• failing to affirmatively address IRS rule compliance can sink a plan;
• using independent professionals for trustee, trust protector, plan advisor, and plan administrator roles remains the strongest defense against the degree-of-control factor; and
• the longstanding rule from Schwartzman — that only substantially all control negates retirement purpose — remains the proper standard, notwithstanding the indirect-control language in Gluck.

How a Properly Designed PRT Protects Retirement Assets

The Gluck case underscores how unforgiving California courts can be when a PRT shows signs of having been designed primarily to shield assets rather than to fund retirement. The cases that survive judicial scrutiny share a common pattern: they are created well before any liability event, they are supported by a robust retirement appraisal and proper analytics, they rely on independent professionals in every fiduciary and administrative role, and they document strict compliance with IRS rules and the plan’s own terms. When those ingredients are in place, the exemption protection of CCP § 704.115(b) does what it is designed to do — recharacterize retirement assets as exempt from creditor claims.

Work With a Private Retirement Trust Attorney

A Private Retirement Plan and Private Retirement Trust are complex and comprehensive devices. When properly designed and implemented, they protect a participant’s retirement assets by recharacterizing those assets as exempt under CCP § 704.115(b). When they are designed poorly, or for the wrong reasons, Gluck shows what happens.

Dustin I. 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 is structured to survive the kind of scrutiny applied in Gluck, schedule a free consultation, contact the Law Office of Dustin I. Nichols, APC in Newport Beach, California or call (949) 240-1101.

Frequently Asked Questions About the Gluck Case

What Was the Gluck v. Sarkissian Case About?

Gluck v. Sarkissian is a California case in which the plan participant claimed his private retirement plans were exempt under CCP § 704.115. The Los Angeles County Trial Court denied the exemption, and the Court of Appeal affirmed. The courts found that the totality of the circumstances showed the plans were designed to shield assets from creditors rather than to fund retirement.

Is the Gluck Opinion Citable?

No. The Court of Appeal’s opinion in Gluck v. Sarkissian is unpublished and noncitable. It is still useful to understand because it shows how a California court applied the totality-of-the-circumstances test and the five-factor framework from O’Brien v. AMBS Diagnostics, LLC.

What Are the Five O’Brien Factors?

Under O’Brien v. AMBS Diagnostics, LLC, courts evaluating a PRT exemption claim may consider the debtor’s subjective intent, the chronology of plan creation, the degree of control the debtor maintains over the plan, whether the debtor complied with IRS rules and the plan’s own rules, and how any withdrawn funds were used. No single factor is dispositive.

Why Did the Court Deny the Exemption in Gluck?

The Court relied on multiple findings: the participant’s own declaration revealed an intent to protect assets from pending lawsuits; the plans were created only two months after he was exposed to personal liability; he was already past retirement age when the plans were created; the sponsoring company had existed for seventeen years without ever creating a retirement plan; he failed to address IRS rule compliance; and he was a part owner and CFO of the sponsoring company.

Does Indirect Control of a Sponsoring Company Disqualify a PRT?

Long-standing precedent in In re Vigghiany, In re Cheng, In re Witwer, In re Crosby, and In re Bloom holds that ownership of the sponsoring company — and the indirect control that comes with it — does not disqualify a plan from the CCP § 704.115 exemption. Gluck’s consideration of indirect control conflicts with this established precedent.

What Standard Does Schwartzman v. Wilshinsky Set for the Control Factor?

Schwartzman v. Wilshinsky provides that the kind of control which would show a nonretirement purpose is substantially all control over contributions, management, administration, and use of funds. A plan with an independent trustee, trust protector, plan advisor, and plan administrator should not lose the exemption on the degree-of-control factor alone.

How Can a PRT Be Structured to Avoid the Issues in Gluck?

A defensible PRT is created well before any liability event, supported by a retirement appraisal documenting genuine retirement purpose, administered by independent professionals in every fiduciary and administrative role, and operated in documented compliance with IRS rules and the plan’s own terms. Working with an experienced exemption planning attorney from the outset is the most reliable way to ensure the structure can withstand creditor challenges.

Does Not Withdrawing Funds Prove a Retirement Purpose?

No. The Gluck court referenced O’Brien for the proposition that a plan participant’s decision not to withdraw funds from the retirement plan does not conclusively establish a primary retirement purpose. The retirement purpose has to be demonstrated through the design and use of the plan as a whole, not by the absence of withdrawals alone.

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.