How to Create an Asset Protection Strategy in California
Wealth preservation trust strategies for both you and your heirs: How to protect your assets from creditors and lawsuits using a California Private Retirement Plan (PRP) to guard assets for your retirement, and a California Asset Protection Trust to protect the inheritance you leave behind.
You’ve worked hard to build a nest egg: cash, investments, properties, and more. But all these assets could be lost in an instant through a lawsuit—even when the lawsuit isn’t your fault.
After you’re gone, similar threats could devastate the assets you leave to your loved ones—often through no fault of their own. For example, many people, after inheriting and turning (“transmuting”) their separate property inheritance to community property, find that they lose half when the other spouse decides to divorce the person inheriting.
Let’s look at some key legal strategies you can implement now, before the threat arrives. Indeed, in general these strategies only work if put in place well in advance of trouble.
Asset Protection While You’re Alive: Private Retirement Plans
We’ll start with protecting your assets while you’re still alive.
California offers its citizens plenty of legal challenges, but we are blessed by a law which allows us to create something called a Private Retirement Plan. A California PRP is much more than a mere financial plan. It includes the creation of a Private Retirement Trust, careful retitling of assets, and a written actuarial plan—all of which must be created by professionals.
At the risk of oversimplification, using a PRP, you carefully identify certain assets as “retirement assets,” after which you are allowed to build a sturdy legal wall around them, greatly improving protection from creditors and predators of many kinds. Indeed, the purpose of the law is to protect identified assets so they can be used in retirement. You can’t quite protect all of your assets, but a savvy lawyer, working with a specialized trust administrator, can help you safeguard your key investments, properties, and more against things like lawsuits and creditors—while leaving you in control of those assets, and benefitting from them over time.
Private Retirement Plan Court-Tested, Proposition 13 Protections, Tax Advantages
PRPs have been well-tested in Federal Court: if properly structured, they have proven solid indeed. And importantly, a PRP can usually be designed to preserve Proposition 13 rights. With savvy planning, a PRP can also include a tax mitigation strategy which can enormously benefit particularly a business owner or investor.
CunninghamLegal works closely with its longtime partner, TRUST-CFO® to create highly effective Private Retirement Plans in California. We do the legal work, TRUST-CFO handles the administration, assists in tax planning, and more. We invite you to visit the TRUST-CFO site and use their Diagnostic Calculator to see exactly how a PRP might benefit you. Please contact us to learn more.
Asset Protection for Loved Ones After You’re Gone
Here’s a disaster we see all too often in our practice: An inheritance which required a lifetime to accumulate is taken by a predator, creditor, or divorce after it transfers to a loved one.
You or your loved ones may not even see the threat coming. Lawsuits are at an all-time high. Divorce hits at least half of marriages. And (thanks to Covid-19), bankruptcies have become quite literally pandemic.
Any inheritance, but especially a significant inheritance, can become a target. Unless you take important legal steps to protect your loved ones and your legacy before you pass away, your legacy may well be lost, and lost quickly. Here in California, inheritance asset protection may be especially vital.
Inheritance Asset Protection strategies go well beyond creating a Living Trust or designating beneficiaries on a bank form. Protection strategies add only a little extra work to the estate planning process, but they can prove highly effective. Many who create a PRP (see above) during their lifetime can pass to their loved ones similar asset protection when they pass away.
Imagine the following tragic asset protection scenarios:
Just 1% at Fault, but Taking 100% of the Hit
Upon your death you leave your house ($650,000), a bank account ($25,000), and your remaining IRA funds ($325,000) to your daughter, let’s call her Eileen. Indeed, all these wonderful assets transfer directly into Eileen’s name.
Eileen is smart and diligent, and by the time of your death she’s attained a high level of financial responsibility. A few months after your death, she’s driving in Los Angeles, California when a teenage drunk-driver runs into her car, pushing her car forward and causing her car to hit a pedestrian. Eileen is ok, but the pedestrian is badly injured and brings a lawsuit against both the drunk driver and Eileen. The judge affirms the pedestrian’s damages are $1 million, and a jury determines that the drunk driver is 99% at fault and Eileen is just 1% at fault for the accident.
So far this sounds like justice. But what happens if that drunk driver cannot pay his 99% of the damages? In California, this scenario can stick Eileen with 100% liability for the $1 million damages, because she can pay; even though it was determined she was just 1% at fault. No kidding.
Creating asset protection for retirement accounts has become more important than ever.
And now, guess what? The pedestrian gains access to the house you left behind, along with the bank account and IRA you lovingly left Eileen –because she is now the legal owner of those assets. Disaster has truly struck.
And perhaps you are beginning to see that when it comes to asset protection, California can be a special kind of minefield.
Bankruptcy Trustee Goes After the Goods
Here’s another possible scenario. You die with a $1 million estate which you successfully leave to your responsible son, Trevor. Trevor is a respected local business owner with a popular restaurant held in his name. He held the business as a sole proprietor, but he didn’t keep much in the bank, and if his business were to fail, he could have effectively walked away.
Suddenly, after years of success, a viral pandemic sweeps through the country, prohibiting townsfolk from socializing publicly, and decimating the dining industry.
Trevor’s restaurant survives for a bit, but after months of lost income, he is forced to file for bankruptcy. Only now you’ve provided him with money in the bank. A Bankruptcy Trustee is appointed and requires Trevor to use your $1 million legacy to satisfy the restaurant’s creditors.
Son-in-Law Cuts Out and Takes Half
Your daughter Tamma and her husband Mike are happily married and living in California when you pass away. Tamma inherits your estate, and she uses half of your generous inheritance to pay off the mortgage on the house she and Mike own together. The other half is transferred to their joint bank account. So far, so good.
Except that five months later, Mike is unfaithful, and the marriage falls apart. Indeed, it’s Mike who files for divorce—maybe because he sees that he can now cash in. When he files, he argues that as part of the Marital Settlement Agreement, he is now entitled to one-half of the assets acquired with Tamma’s inheritance, because Tamma commingled her inherited assets with him over the last five months, and as a result, the assets became community property. Mike prevails in California Family Court and walks away with one-half of the inheritance you worked so hard to provide your daughter.
How Can I Protect an Inheritance Against an Heir’s Irresponsible Spouse?
What’s a high-maintenance spouse? It’s a husband or wife who really, really likes to spend money, especially your heir’s inherited money. Such a spouse can be found on any rung of the socio-economic ladder—rich, poor, middle-class, it doesn’t seem to matter.
What’s a high-maintenance spouse? It’s a husband or wife who really, really likes to spend money, especially your heir’s inherited money.
Let’s assume, for example, that you plan to leave some money to your daughter, let’s call her Jane. But you know that Jane’s husband, Ted, is a total spendthrift. He’s always spending all the family money on new cars and motorcycles and stuff, and he really, really wants to buy a boat so he can take his friends out bass fishing. A bass boat can cost $300,000.
A good lawyer could set up a trust with Jane as the beneficiary, but Jane herself could not remove any of the money, because someone else would be named the trustee for her funds. If the million were properly invested, Jane could take out 4.8 percent, or $48,000 a year. The language of the trust could permit Jane to receive $4,000 a month—plenty for Jane to live on in retirement, within her lifestyle.
And since she herself was blocked from accessing the money, her husband could never pressure her for another big purchase.
Some lawyers call a trust like this a “general needs trust,” or sometimes a “dole-it-out trust.” You dole a little bit of money out every month to Jane for the rest of her life. Result: she is protected from a predator.
Can I Protect My Inheritance with a Trust? Redefining Ownership
Each of the asset protection examples—and disasters—above are based on true stories, and each is especially poignant because the children did not commit any wrongdoing. They didn’t even act irresponsibly. Rather, the threats were outside their control, and sometimes the California asset protection laws (or lack thereof) happened to work against their interests.
Just as tragically, in each case good planning by the parents could have prevented the loss.
How? It all lies in the definition of “ownership.”
The secret to effective asset protection lies in structuring an estate so that your heirs will get full control of your assets, but not actually own them. As John D. Rockefeller once advised, it’s best to “Own nothing, but control everything.” That’s because, by law, what you don’t own can’t be taken from you, even it if it is completely under your control.
Control without ownership can be created using an Inheritance Protection Trust, or for retirement assets, an IRA Legacy Trust. Both of these asset protection strategies can allow your loved ones to completely control, access, and manage their inheritances while simultaneously enjoying protection from potential creditors, bankruptcy, lawsuits, and divorce.
How Can I Control, But Not Own Assets?
A good asset protection attorney in California can structure an inheritance in a manner where instead of leaving wealth to your loved one directly in their name, the wealth is left in a California trust for asset protection that continues to exist after your death. You decide who may control the wealth within the trust (the Trustee) and who will benefit from that wealth (the Beneficiary.) Whether you appoint your loved one or an independent third party to control the assets within an Inheritance Protection Trust, if properly constructed, all the funds may benefit your loved ones while remaining safe from creditors, bankruptcy, lawsuits, and divorce.
One additional benefit of an Inheritance Protection Trust is that the language used to create it can be drafted right in your Revocable Living Trust. Most people, in particular Californians, already seek to establish a Revocable Living Trust to avoid probate, direct their assets to the proper beneficiaries, and plan for potential taxes upon death. They can add the feature of asset protection by including an Inheritance Protection Trust.
If you already have a trust and are considering an Inheritance Protection Trust, good news! Many of our clients with existing trusts don’t need to start from scratch. In many instances you may need only to formally update your existing trust by creating a Restatement. A Restatement has the added benefit of bringing all the language of the trust up-to-date—and typically legal fees are lower than starting from scratch.
How Can I Protect My Retirement Account from a Divorce or Predator?
It has become common for a family’s most valuable asset to be a retirement account like an IRA, 401(k), 403(b), or tax-deferred annuity. It used to be that inherited retirement accounts offered some protection from predators. But in 2014, the United States Supreme Court unanimously ruled that inherited retirement accounts are no longer considered “retirement accounts” subject to protection from the creditors of a beneficiary. The case was called Clark v. Rameker, 573 U.S. 122 (2014), and it has had a devastating impact.
All in all, creating asset protection for retirement accounts has become more important than ever.
For reasons too lengthy to discuss here, an Inheritance Protection Trust is typically only appropriate for non-retirement assets such as a house, cash or stocks – not retirement accounts.
Here at CunninghamLegal we offer special expertise in creating a highly specific kind of trust to deal with the complex laws around retirement accounts, called an IRA Legacy Trust. An IRA Legacy Trust uses several of the strategic concepts found within an Inheritance Protection Trust, but it’s equipped with a sophisticated tax plan to account for the income tax obligations that exist with most inherited retirement accounts.
Importantly, it can also be sited in a state without state income taxes, such as Nevada, even though your beneficiaries may reside in a high-tax state like California. Combined with the asset protections of “controlling, not owning,” such a trust can allow you to leave a powerful and safe legacy to your loved ones.
Should I Really Try to Protect My Assets After I Pass Away?
It’s impossible to go through all the possible examples or asset types here. You need to ask your attorney questions like, “Are annuities protected from creditors in California?”, and “Is a domestic California asset protection trust right for me?” Only a specialized attorney can explain how to protect your assets in California.
Any inheritance, especially a significant inheritance, can become a target. Unless you take important legal steps to protect your legacy before you pass away, it may well be lost, and lost quickly.
If you are the kind of person who says, “What do I care? By the time any of this matters, I’ll be gone anyway,” these planning strategies may not be for you.
But if, like most of our clients, you’re looking for a truly savvy solution, and you see the value of providing protection for your loved ones even after you are gone, we encourage you to schedule a consultation with a competent estate planning attorney. Together you can determine whether an Inheritance Protection Trust or IRA Legacy Trust may be appropriate for you and those you love.
What Do We Do?
The lawyers and staff at CunninghamLegal help people plan for some of the most difficult times in their lives; then we guide them when those times come.
Make an appointment to meet with CunninghamLegal for California Estate Planning and Trust Administration. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.
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We look forward to working with you!
James Cunningham Jr., Esq.