You Shouldn't Do a Private Retirement Plan if... | TRUST-CFO®

You Shouldn’t Do a Private Retirement Plan if…

Wen is a PRT Not Appropriate

When is a PRP NOT Appropriate?

As with any strategic planning where you try to keep your money from outside interests, planning can become overly aggressive, whether driven by an advisor or a client that takes good advice and bastardizes it on their own. These abuses are arsenal for attackers who can then claim that the planning was done for ulterior motives, and not for the true intent of the planning for which it was established.

A “plan” usually succeeds when it was found to honor the primary purpose of planning (“good case law”). The failure of a “plan” is usually determined by a fact pattern in which a plan was used as a shelter to hide funds from the grasp of unwanted creditors, but was not able to otherwise prove a true need, i.e. “bad case law or not appropriate”.  However, one should note that there is a gray area.  Even where it may be that a debtor had good intent, their plan may fail because they could not prove legitimacy due to lack of documentation or administration support. This error leaves the final decision to a judge and will likely end with you as the loser.

The protocol of “intent” is particularly acute with the implementation of a Private Retirement Plan because it’s tertiary wealth preservation benefits are so potent. Many times attackers will try to use lack of intent as a reason to unwind a plan and stake their claim.  However, unlike most planning that requires a debtor to prove intent, a PRP falls under exemption law, which dictates it’s up to a creditor to prove “lack of intent.”  So a PRP participant at least has a leg up if they can truly legitimize their retirement planning purpose.

The Primary Planning Purpose of a PRP is for Retirement

True and primary intent of a Private Retirement Plan is to make up an existing retirement savings shortfall by funding private assets to a private plan. In order to legitimately resolve an income gap and reduced lifestyle at retirement a PRP can be used to fill that retirement gap.

Retirement Must Be Primary, but not Exclusive

First, a Private Retirement Plan is supported under California statute CCP (Code of Civil Procedure) 704.115. An attacking creditor’s attorney won’t be able to challenge the legitimacy of the law.  Instead they will be left with trying to attack its planning intent.  Second, it has been determined under both federal and state case law that “retirement must be the primary, but not exclusive, purpose of the plan”.  So as long as retirement is the overriding purpose for the “Plan”, the receipt of other benefits is acknowledged as contingent and purposeful.

When is it NOT Appropriate to set up a PRP?

Basically, the answer is if the primary purpose is NOT for retirement, and usually includes one of these two scenarios:

  • Creditor Evasion: when someone calls in and says “I want a PRP”.  Our response is “what happened?”  The bottom line is if you are intending to use a PRP as a defensive strategy against existing creditors without any consideration for retirement, the plan will fail.  We won’t do it.
  • No True Retirement Need: in the case where there are clients that have done a great job accumulating wealth and can meet their retirement objectives, the excess funds should not be funded to a PRP and excess funds would not be protected.   Note that rarely do we see clients that can meet their retirement on an inflationary basis and therefore most cases prove up the shortfall and need for additional funding.

So what tools are used to validate the legitimacy of a PRP?

After review of all good and bad case law we have determined a path of success to both honor the true intent of a PRP and avoid the trappings of failed plans.  Here are the required components to ensure proper Plan design and assure maximum Plan defense:

  • PRP Diagnostic – inventory all estate assets, apply any current exemptions, and identify assets legitimate for retirement;
  • PRP Analyzer – calculates the income gap at retirement based on quarantined assets, and then calculates the savings shortfall that determines the amount of needed retirement funding.
  • PRP Accelerator – applies the legitimate assets against the shortfall and then calculates the future funding needed to make up the remainder shortfall, if any.
  • PRP Assessment Report – compares retirement planning improvements created from recommended PRP Plan funding, and summarizes all other Plan benefits based on the validated funding amounts.
  • PRP Benchmark Tracker – tracks actual returns and asset values as compared to the Plan, and accounts for excesses and shortfalls against the PRP “cone of uncertainty” to improve actuarial likelihood of plan success.

Each one of these steps is critical to the validation process and finely tuned into a patent-pending system to ensure maximum performance and avoid any abuses.  Any modification of these steps will leave a PRP Plan weaker if and when tested.

Asset Protection is a by-product of Private Retirement, not the primary objective

Unfortunately, most attorneys are geared toward legal defense (asset protection) strategies and do not understand the intricacies of retirement or exemption planning. They have a tendency to put the cart before the horse and play the “asset protection” card first.  We have worked diligently to help educate our PRP Attorney Subscribers to understand that a Diagnostic exemption planning review will help start the conversation with private retirement as the goal, and asset protection is simply one of the many benefits and results of a legitimate Private Retirement Plan.

Diagnostic Calculator