A properly designed Private Retirement Plan is not enough to capture the exemption protection of CCP § 704.115. The plan must also be principally or primarily used for retirement purposes. The statute itself does not provide any rules regarding plan administration that, if followed, would automatically ensure the validity of the exemption. Whether a plan is used for retirement purposes is a question of fact assessed by the courts based on the totality of the circumstances of each particular case.
Absent a comprehensive command of the intricate interworking of the case law, an act by a plan participant of taking a loan from the plan prior to retirement is like gambling with the statutory exemption. If the court considers the loan to be more like a withdrawal, the exemption protection is lost — and the funds are treated as used for a nonretirement purpose.
Rather than playing a game of chance, the way to protect the exemption is to understand the rules the courts actually apply — and to build those rules into the plan’s administration from the beginning.
1. In re Bloom: When Loans Do Not Destroy the Retirement Purpose
In In re Bloom (9th Cir. 1988) 839 F.2d 1376, 1379, the debtor’s interest in the plans was approximately $475,000. She took a number of loans from the plan totaling nearly $300,000, with accrued interest, in exchange for unsecured promissory notes. At the time she filed for bankruptcy, a significant portion of the plan’s assets consisted of those unsecured promissory notes.
Despite that, the court held that the plans were not so abused as to lose their retirement purpose. The court relied on four circumstances:
- Bloom followed the procedures set out in the Trust Agreement for obtaining loans;
- she was charged a reasonable rate of interest on the loans;
- she regularly made the interest payments due, over a period of several years; and
- there was no indication she used the plans to hide otherwise ineligible assets from bankruptcy administration.
The court did note that the unsecured loans may well have been imprudent investments — but it was explicit that an imprudent investment does not necessarily mean a plan is not designed and used for retirement purposes.
2. In re Daniel: When Loans Look Like Withdrawals
The Bloom court contrasted its ruling with the earlier decision in In re Daniel (9th Cir. 1985) 771 F.2d 1352, 1357–1358. In Daniel, the court held that the plan was not principally used for retirement purposes based on two transactions.
The first transaction involved an unsecured loan Daniel made to himself in the amount of $75,000 to purchase a house. The loan was substantially equal to his interest in the plan, was only secured by that interest, never had interest or principal payments made on it, and was rolled over when it came due.
The second transaction consisted of Daniel contributing all of the corporation’s available cash — $39,000 — to the plan two weeks before filing bankruptcy. Viewed together, the court noted that the plan essentially operated to meet the debtor’s short-term personal needs by lending money or shielding and hiding funds from creditors. That is the textbook description of a loan being treated as a withdrawal.
3. The Minimum Rules for PRT Loans That Preserve the Exemption
Reading Bloom and Daniel together produces a workable checklist. At a minimum, a plan participant who wants to borrow from the plan should:
- Follow plan procedures. Document the loan request and approval under the exact procedures set out in the Trust Agreement.
- Charge a reasonable rate of interest. The note must reflect a market-appropriate rate, not a token rate that signals self-dealing.
- Make timely, continuous payments. Interest payments — and principal payments where the loan terms require them — should be made on schedule over the life of the loan.
- Avoid any appearance of asset hiding. Loans taken in close proximity to liability events, or that absorb substantially the entire plan balance, draw scrutiny.
And to double down on the bet for exemption protection, the plan participant should never serve as the PRT Trustee. The odds always favor a participant who does not control the plan assets, because an independent trustee reinforces the conclusion that the plan is genuinely designed for retirement purposes — not for short-term personal use.
4. Even Valid Loans Are Not Exempt: The In re Friedman Rule
Even when a loan survives judicial scrutiny and does not negate the retirement purpose of the plan, plan participants need to understand a separate and equally important rule: funds loaned from the plan are not exempt. The statutory exemption only applies to funds held, controlled, or in the process of distribution for the payment of benefits.
In In re Friedman (B.A.P. 9th Cir. 1998) 220 B.R. 670, 672, the court explained that the payment to the debtor was not a payment of benefits. It was a loan from the plan. The funds loaned were not exempt under CCP § 704.115(d) because they were not CCP § 704.115(b) funds.
In practical terms: once funds leave the plan as a loan, they sit in the participant’s hands as ordinary, non-exempt assets — fully reachable by creditors — until they are paid back into the plan. The exemption protection lives inside the plan, not outside it.
5. Why the Loan-vs.-Withdrawal Distinction Matters So Much
A loan and a withdrawal can look similar on paper. Both involve money leaving the plan and going to the participant. The legal consequences, however, are very different:
- A properly documented loan does not, by itself, negate the retirement purpose of the plan. The plan remains exempt, even though the loaned funds in the participant’s hands do not.
- A withdrawal — or a loan that looks like a withdrawal — can support a finding that the plan is not principally used for retirement purposes. If the court reaches that conclusion, the entire plan can lose its exemption.
That asymmetry is exactly why courts apply such close scrutiny to loan documentation, interest rates, payment history, timing, and the proportion of the plan being borrowed against. Each of those factors is a tell that points the court toward either a legitimate loan or a disguised withdrawal.
How a Properly Designed PRT Protects Retirement Assets
California residents have been dealt the best hand to protect their retirement assets: exemption protection under CCP § 704.115(b). When the plan is properly designed and used for retirement purposes, that statutory exemption can ensure participants never walk away empty-handed — no matter how many times they find themselves staring at a losing hand in litigation. The key is administering the plan in a way that the case law actually rewards: with independent professionals, documented procedures, reasonable terms, consistent payment histories, and a clear factual record that the plan is for retirement, not for short-term personal needs.
Work With a Private Retirement Trust Attorney
A Private Retirement Plan and Private Retirement Trust are complex and comprehensive devices. The mechanics of taking a loan from the plan — or deciding whether to take one at all — are exactly the kind of decisions where a small misstep can negate years of exemption planning.
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, taking a loan from an existing plan, or want to evaluate whether your loan history could expose your exemption, 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 PRT Loans and Withdrawals
Can I Take a Loan From My Private Retirement Trust?
Yes, but only with caution. California courts treat loans from a PRT as a fact-based question and will look at the totality of the circumstances. Following the procedures in the Trust Agreement, charging a reasonable interest rate, making timely payments, and avoiding any appearance that the plan is being used to hide assets are the minimum requirements established in In re Bloom.
Will a Loan Cause My PRT to Lose Its Exemption?
Not automatically. A loan that follows the plan’s procedures, carries reasonable terms, and is repaid on schedule will not, by itself, destroy the retirement purpose of the plan. A loan that looks like a withdrawal — large relative to the plan balance, unpaid, undocumented, or timed to creditor events — can cause the entire plan to lose its exemption under cases like In re Daniel.
Are the Funds I Borrow From My PRT Still Protected From Creditors?
No. Under In re Friedman, the statutory exemption applies only to funds held in the plan for the payment of benefits. Once funds are loaned out of the plan to the participant, those funds are not exempt and are reachable by creditors until they are repaid into the plan.
What Made the Loans in In re Bloom Acceptable?
Four facts: Bloom followed the procedures set out in the Trust Agreement, she was charged a reasonable rate of interest, she regularly made the interest payments due over a period of several years, and there was no indication she used the plans to hide otherwise ineligible assets. Even though the unsecured nature of the loans was imprudent, the court held the plans had not lost their retirement purpose.
What Made the Loans in In re Daniel Unacceptable?
The loan to Daniel was substantially equal to his interest in the plan, secured only by that interest, carried no interest or principal payments, and was rolled over when it came due. Combined with a large last-minute contribution to the plan shortly before filing bankruptcy, the court found the plan was being used to meet short-term personal needs and to hide assets — not for retirement.
Does It Matter If I Am the Trustee of My PRT?
Yes. While the participant can technically serve as trustee, courts treat substantial control over contributions, management, administration, and use of funds as a strong signal of a nonretirement purpose. Using an independent trustee, trust protector, plan advisor, and plan administrator helps defeat the inference that the plan is being treated as a personal asset.
Is an Imprudent Investment the Same as a Nonretirement Use?
No. The Bloom court was explicit that a poorly — even imprudently — invested plan may still be designed and used for retirement purposes. Imprudent investment choices are different from using the plan for short-term personal needs or to hide assets.
What Is the Safest Way to Access Retirement Funds Held in a PRT?
The safest approach is to take retirement distributions in accordance with the plan’s terms after reaching the participant’s designed retirement age, as established in the Retirement Appraisal. Distributions taken according to the plan’s own terms and timeline are the clearest evidence that the plan is being used for its intended retirement purpose.
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.
About the Author: Dustin
