Private Retirement Trust
A Private Retirement TrustSM is an irrevocable non-gifting grantor trust created to support assets funded to a private retirement plan in which all funds are exempt from creditors under California statute Code of Civil Procedure CCP 704.115. Also referred to as a PRTSM the trust has the following key characteristics:
1. All PRTSM funds, distributions and death benefits are fully exempt from creditors, both lawsuit and bankruptcy.
2. All PRTSM funding is sourced from a Plan Participant’s private balance sheet, not from a plan-sponsoring Employer.
3. A PRTSM must have an independent arms-length Trustee and Plan Administrator to effectively maintain exemption status and resulting creditor protection.
4. A PRTSM is a taxable grantor trust. There is no tax deduction for PRTSM contributions, and earnings (income & gains) are taxed as earned to the plan participant as if they owned the assets directly. The reason is that the assets typically funded to a PRTSM already have inherent tax benefits which should not be disrupted, as well as avoid negative tax triggers, such as property or tax reassessments.
5. Plan participants retain beneficial interest in the assets during lifetime because they are not gifting assets, but rather contributing assets using their state retirement exemption rights. As such, assets are included in the participant’s taxable estate.
6. All scheduled PRTSM benefits should continue to be exempt from creditor lien, seizure and attachment, even after distribution from the trust, if properly administered. Likewise, all benefits paid out at death should retain full creditor exemption to beneficiaries.
As with most all other retirement plans, a PRTSM trust is simply the delivery vehicle in which to help ensure benefits are being properly received based on the “plan”.
A private retirement plan is a term most often used to refer to a specific exemption statute under California state law. Originally instituted in 1970 under CCP 609.18, the private retirement plan exemption was reaffirmed in 1982 under CCP 704.115 and remains unchanged since.
As used in section 704.115 today, “private retirement plan” means:
“(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986, as amended, including individual retirement accounts qualified under Section 408 or 408A of that code, to the extent the amounts held in the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code.”
A key subsection to note includes:
(b) All 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.
In summary, private retirement plans fall generally under exemption law, however depending on the type of plan, the exemption might be elected under federal or state law. Therefore, special attention should be paid to the plan design and whether it seeks to be “qualified” and receive certain tax exemptions, and would therefore fall under Special Rules under ERISA and federal bankruptcy law, or elect “non-qualified” status and avoid such regulation and reporting requirements, but be tax-neutral.
Some of the characteristics of a “non-qualified” private retirement plan:
1. No annual IRS filings
2. No maximum limit on plan contributions
3. No restriction on investments or prohibitive transactions
4. No tax deduction for contributions, but no tax on plan distributions. Income and gains are taxed as earned.
5. No requirements to cover or include other employees
6. No age restrictions: no pre-59 ½ (10%) or post-70 ½ (50%) distribution penalties.
Case law has suggested that exemption protection is awarded to the benefit of a debtor, if the debtor can:
1. Prove the need for retirement
2. Show a legitimate “plan” is in place, and
3. Has proper administration and reporting of all plan funds, benefits, distributions.
Failure to meet these requirements may forfeit exemption rights and allow creditors to seize plan assets or benefits.
B. Legislative History behind section
1. All PRTSM funds, distributions and death benefits are fully exempt from creditors, both lawsuit and bankruptcy.
2. All PRTSM funding is sourced from a Plan Participant’s private balance sheet, not from a plan-sponsoring Employer.
3. A PRTSM must have an independent arms-length Trustee and Plan Administrator to effectively maintain exemption status and resulting creditor protection.
4. A PRTSM is a taxable grantor trust. There is no tax deduction for PRTSM contributions, and earnings (income & gains) are taxed as earned to the plan participant as if they owned the assets directly. The reason is that the assets typically funded to a PRTSM already have inherent tax benefits which should not be disrupted, as well as avoid negative tax triggers, such as property or tax reassessments.
5. Plan participants retain beneficial interest in the assets during lifetime because they are not gifting assets, but rather contributing assets using their state retirement exemption rights. As such, assets are included in the participant’s taxable estate.
6. All scheduled PRTSM benefits should continue to be exempt from creditor lien, seizure and attachment, even after distribution from the trust, if properly administered. Likewise, all benefits paid out at death should retain full creditor exemption to beneficiaries.
As with most all other retirement plans, a PRTSM trust is simply the delivery vehicle in which to help ensure benefits are being properly received based on the “plan”.
A private retirement plan is a term most often used to refer to a specific exemption statute under California state law. Originally instituted in 1970 under CCP 609.18, the private retirement plan exemption was reaffirmed in 1982 under CCP 704.115 and remains unchanged since.
As used in section 704.115 today, “private retirement plan” means:
“(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986, as amended, including individual retirement accounts qualified under Section 408 or 408A of that code, to the extent the amounts held in the plans, annuities, or accounts do not exceed the maximum amounts exempt from federal income taxation under that code.”
A key subsection to note includes:
(b) All 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.
In summary, private retirement plans fall generally under exemption law, however depending on the type of plan, the exemption might be elected under federal or state law. Therefore, special attention should be paid to the plan design and whether it seeks to be “qualified” and receive certain tax exemptions, and would therefore fall under Special Rules under ERISA and federal bankruptcy law, or elect “non-qualified” status and avoid such regulation and reporting requirements, but be tax-neutral.
Some of the characteristics of a “non-qualified” private retirement plan:
1. No annual IRS filings
2. No maximum limit on plan contributions
3. No restriction on investments or prohibitive transactions
4. No tax deduction for contributions, but no tax on plan distributions. Income and gains are taxed as earned.
5. No requirements to cover or include other employees
6. No age restrictions: no pre-59 ½ (10%) or post-70 ½ (50%) distribution penalties.
Case law has suggested that exemption protection is awarded to the benefit of a debtor, if the debtor can:
1. Prove the need for retirement
2. Show a legitimate “plan” is in place, and
3. Has proper administration and reporting of all plan funds, benefits, distributions.
Failure to meet these requirements may forfeit exemption rights and allow creditors to seize plan assets or benefits.
B. Legislative History behind section
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