California is #1: And That’s Not a Good Thing…

Dear Clients, Colleagues, and Friends,

Harold spent the better part of his life building a profitable business, but one bad day led to a lawsuit that wouldn’t quit, and suddenly his years of hard work evaporated with the loss of his business…and his retirement.

To Harold, it’s no surprise that the National Federation of Independent Businesses (NFIB) declared California the #1 judicial hellhole in the United States for the 3rd year running.

That’s Bad News for California Businesses

Common strategies to counter litigation risk are available but, like increased casualty insurance which often incentivizes greedy plaintiffs, many have a double-edged sword. For example, estate planning techniques that irrevocably transfer or gift away assets via trusts mean losing control of hard-earned assets. And offshore trusts, which work extraordinarily well as lawsuit shields, come with their own set of problems in the face of the Foreign Account Tax Compliance Act (FATCA). Many offshore banks and brokerage firms refuse to accept these types of deposits from U.S. beneficiaries, making their use impractical for only the most sophisticated client. So other than moving to another state, what is a business owner to do?


The highest form of creditor protection offered by a state is their exemption laws.¹ A specific California exemption statute² offers CA residents the ability to place effective litigation protection around private assets for full exemption from creditors – both in lawsuit and bankruptcy – via a Private Retirement TrustSM (PRT).

How Private Retirement Trusts Work 

This form of business asset protection works differently from certain qualified retirement plans (non-ERISA qualified Plans and IRAs) which have more prohibitive transaction rules. A properly structured PRT can hold private business stock and assets including retained earnings, accounts receivables and other contract agreements, and also allows for the funding of private investment assets on an owner’s personal balance sheet, including private equity, real estate, and even promissory notes or loans. Unlike irrevocable trusts that transfer asset interests to others, the PRT’s owner-participant is its beneficiary and receives full beneficial interest from plan proceeds. Because the PRT is non-qualified, there are no funding limitations or penalties, and there is no requirement to include other participants if not desired.

A PRT must be administrated by an independent 3rd party trustee. With proper administration, distributions at retirement retain full asset protection even when paid out. Although potential fraudulent conveyance claims can be a concern with any trust, the key is to respect current commitments. Moreover, because the PRT is created under an exemption statute, late term planning is tolerated provided the primary objective of the PRT is retirement. Reviewing CCRs (conditions, covenants & restrictions) in your banking agreements, including the assignment, funding or title of assets, and honoring your carrier’s bonding & surety covenants, will help turn your bank or carrier into your biggest advocate as they gain friendly lien positions.

As Harold discovered, using California’s state exemption strategically can lead to wavy legal oceans, so using a professional with knowledge and expertise in the area of exemption asset protection planning is a must. A skilled attorney and trusted administrator are a powerful advisory combination to help assure that plan design offers maximum defense and empowers clients to meet their ongoing capital, cash flow, and business planning needs.

For more information about how a PRT can benefit you, contact Jeffrey M. Verdon, Esq. at, or call 949-333-8152 to schedule a free telephone consultation to see if you are a candidate for the PRT.

¹ Exemption laws are enacted by legislatures to give debtors a fresh start.

² CCP 704.115

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