ASSET PROTECTION

California law recognizes that certain types and amounts of property should always be exempt from lawsuits and creditors, and these are referred to as statutory exemptions. The process of “claiming” or “using” these exemptions is known as exemption planning. For instance, by paying down the mortgage on your California primary residence, you may be able to protect up to $600,000 in equity, depending on the county, and indexed upward for inflation. California courts and creditors often have a much more difficult time arguing that such planning constituted a voidable transfer or was otherwise undertaken to hinder, delay, or defraud creditors, as California law authorizes such planning. Contributing to a 401(k) plan and/or an IRA is another potential form of exemption planning, with important differences between the two (i.e., the potential of almost absolute protection that ERISA can afford 401(k) plans). Camarillo asset protection attorney Ryan J. Casson can guide you in thinking through whether exemption planning is appropriate for you.

In addition to exemption planning, utilizing an irrevocable trust to give up complete ownership and control over an asset may be an appropriate way to continue to minimize your assets’ exposure to lawsuit judgment creditors and bankruptcy. Such trusts may or may not be a domestic asset protection trust, may or may not utilize other asset protection strategies mentioned on this website (i.e., powers of appointment) and you may or may not remain a beneficiary (or potential beneficiary). However, integrating into your estate plan irrevocable trust planning cannot be done with the intent to hinder, delay, or defraud creditors (even if unknown and unanticipated), and a bankruptcy court can “look back” at transfers completed a full 10 years before the bankruptcy filing and “claw back” any voidable transfers (courts consider multiple factors, i.e., whether you were insolvent). While irrevocable trusts may afford potent protection, the risks are real. Such planning should not be undertaken without a careful California asset protection attorney on your team.

As explained in this blog article, a discretionary spendthrift trust with an independent trustee (the beneficiary is prohibited from serving as trustee) may be a simple way to create the potential of heightening the protection afforded to the trust assets. While California judgment creditors can still try to avail themselves of special procedures to petition a California court to force or siphon distributions, requiring that the trustee of a child’s spendthrift trust always be an independent trustee tends to strengthen the shield (subject to the carve out for support creditors). If you do not wish to utilize irrevocable trust planning or other asset protection strategies, you will still need to decide whether you’re willing to allow the beneficiaries of your trust (which will become irrevocable at your death) to serve as trustee of any trust that is created for their benefit upon your passing.

Think of a California Private Retirement Plan (PRP) as an irrevocable retirement trust, as if you’re creating your own 401(k) plan. A PRP integrates California exemption planning, retirement planning, and irrevocable trust planning; it has the potential to afford the trust assets near absolute protection from creditors, lawsuits, liens, seizure, and bankruptcy. But the devil is in the details: California law requires, among other things, that the PRP be designed, used, and operated for retirement purposes and not be used as the trustmaker’s/employee’s “personal bank account” (in general, a PRP cannot protect a personal residence or rental properties as, in general, these types of assets do not have a retirement purpose). There must be a plan (i.e., gradual, consistent contributions of earnings or rollovers from existing qualified accounts, based on a planned actuarial basis purposed for funding retirement) whose clear, primary purpose is funding retirement (and the irrevocable trust must have clear tax objectives), and it must be respected. Integrating California exemption planning, retirement planning, and irrevocable trust planning may be a critical component of your comprehensive California estate plan.

A power of appointment is the power to designate the beneficial owner of particular property. A power of appointment is either general or limited. Powers of appointment are common in various types of trusts (a trustmaker can give beneficiary a power of appointment) and a trustmaker may decide that providing to a beneficiary a power of appointment will help them achieve a particular estate planning objective (i.e., tax, flexibility, or protecting against a beneficiary’s creditors). In California, a limited power of appointment (LPOA) is exempt from the power holder’s creditors, while a general power of appointment (GPOA) is not. Utilizing in an estate plan various forms of powers of appointment has the potential to strengthen your personalized asset protection shield.

Strategic bankruptcy planning involves determining which of California’s two bankruptcy exemption “systems” to use in filing for bankruptcy, which in large part depends on whether home equity is to be exempted. However, the bankruptcy trustee and/or creditors may attempt to challenge and claw back transfers made on the eve of bankruptcy (or even transfers made up to 10 years before the filing of the bankruptcy petition). Strategic bankruptcy planning requires careful timing and analysis to try to avoid any claim that a transfer was made with the intent to hinder, delay, or defraud creditors, violates California’s Uniform Voidable Transactions Act, or that property claimed as exempt from the bankruptcy estate is part of the bankruptcy estate or is otherwise not dischargeable.

Forming a business entity can help minimize exposure to California judgment creditors, other creditors, and legal claims. However, judgment creditors can petition a court for a California charging order to “lien” your interest, and may be able to “foreclose” on the interest. As with everything, there are no guarantees. There are tax issues to think about, as well as the concept of “outside in” and “inside out” liability with California Sole Member LLCs versus California Multi Member LLCs. Via phone calls, Zoom meetings, or meetings at his Camarillo office, attorney Ryan J. Casson can assist you in thinking about the potential pros and cons (based on your particular objectives) in utilizing and implementing an LLC or a partnership for California asset protection. The Law Office of Ryan J. Casson can advise you on the distinguishing tax features between various California business entities, draft and analyze your California LLC and partnership agreements, and more.