California Asset Protection
Law Office of Robert J. Mintz – June, 2018
Fear of lawsuits and the risk of personal financial loss has always been a force shaping the asset protection needs of businesses in California. In several key respects California asset protection laws differ from those in other states.
For example, in California, most licensed professionals, including physicians and attorneys are not permitted to practice in an LLC and no entity will limit personal liability. Although physicians and lawyers can practice in a corporation, they will still be personally liable for malpractice.
For physicians and other business owners who have a risk of personal liability from whatever source, (Asset Protection for Physicians and High Risk Business Owners) the proper strategy for asset protection in California is to make sure that personal assets such as a residence, investment real estate, savings and retirement funds are properly insulated from potential claims.
California Asset Protection Strategies
Protecting Your Home from Judgments
Most states protect some or even all of the equity in your residence by legally exempting all or a portion of the equity in a residence from a judgment. This is known as the “Homestead Exemption. For example, in Florida, Texas and Kansas the amount of the Homestead Exemption is unlimited. Almost any amount can be protected in the equity of the home. Other states protect varying amounts from $20,000 to $500,000. California is on the low side with the protected amount ranging from $75,000 to $175,000 depending on age and who is living in the house. (CCP 704.710 and CCP 704.910) With home values in California far above the median, many find that the exemption does not fully protect the available equity.
The most popular strategy for protecting equity in a home is a Personal Residence Trust (PRT). This is a grantor-type trust, specifically permitted under the Internal Revenue Code. Protection against claims is afforded while the tax benefits of ownership are preserved. A strong degree of control and enjoyment over your home can be maintained, depending upon the terms of the PRT which you establish.
California Private Retirement Plans
California allows for the creation of a Private Retirement Plan, which is entirely exempt from judgments and bankruptcy (Code of Civil Procedure 704.115). California is unique in that full exemption is afforded these Plans regardless of IRS qualification.
According to the cases that have been decided, Private Retirement Plans can be highly flexible in design, need not cover other employees, and can include contributions of an unlimited amount. Although contributions are not deductible, the flexible contribution limits make the Plan an attractive savings and asset protection vehicle.
This exemption from judgment also applies to distributions from the Private Retirement Plan. The funds are protected while in the Plan and also when the proceeds are withdrawn. This is a significant advantage over many other planning techniques in which distributed funds are no longer protected from legal claims and bankruptcy.
- California residents are permitted by law to establish Private Retirement Plans which are exempt from creditor claims and judgments.
- All assets in the plan intended for retirement purposes are completely protected from lawsuits and judgments—even in bankruptcy.
- No maximum limit on contributions.
- No coverage requirements for other employees
- IRS plan qualification filings are not required
- A Private Retirement Plan can be used instead of or in addition to an existing qualified plan.
In addition to Personal Residence Trusts and Private Retirement Plans, entities such as Family Limited Partnerships, LLC’s, and Family Savings Trusts can be effective planning techniques in California. Consult with a California attorney to accomplish your asset protection and estate planning goals.