The Best Little Asset Protection Vehicle No One Has Ever Heard Of — Securing Retirement

Dear Clients, Colleagues, and Friends,

Life is full of little surprises. Wondering if you have enough money for retirement should not be one of them.

Imagine this…

You’ve worked your entire life to build a successful business, investing every spare penny back into your company. Your long-term plan? To sell the company when you turn 60 so you can live a life of leisure on the proceeds. Then, disaster strikes. You and your company get sued, and after a devastating multi-million dollar judgment, there aren’t enough assets to pay off the debt. Next step… bankruptcy. It’s going to wipe you and your company out, and because you never saved for retirement, you don’t have enough protectable assets, such as a healthy IRA, with which to start over. And that “sell the company” retirement plan you worked so hard for? Gone without a net.

Luckily, there is something you can do to avoid this fate.

In California and other states with similar exemption laws, you can create a Private Retirement Trust (PRT) to secure your retirement. Private Retirement Trusts are retirement savings and asset protection vehicles entirely exempt from judgments and bankruptcy. Sound too good to be true? There is a catch. To qualify as a PRT, the plan must be operated strictly for retirement purposes, and misuse of the plan will disqualify it as a PRT under California Law.

Here’s how it works: A business owner or professional establishes a PRT funding it with company assets. Because a PRT is not a qualified retirement trust and does not enjoy any special tax treatment, contributions to and earnings inside the PRT are taxable. Your company can fund a PRT with valuable assets like accounts receivables, real estate holdings, and retained earnings, with the goal of funding your retirement at a certain age with an established yearly benefit. However, if the company currently lacks enough funds to reach your retirement goal you can secure its promise to fund your PRT by obtaining a security interest (lien) in the company’s current assets and future income stream until the trust has been fully funded. Thus, your prior lien for the PRT would take priority over any of the company’s future judgment creditors. This protects your company’s current and future assets.

But how do PRTs secure your retirement? Simple. The real beauty of PRTs is that the trust’s assets are protected when you and your company are making contributions and also when you are withdrawing funds during retirement. The result is that as long as the withdrawn money is tied back to the funds coming from the plan, it can be invested in a wide variety of options and still be protected from judgments. Hello peace of mind, goodbye creditors! This is a handy net indeed.

While PRTs must be carefully drafted and maintained, they have several advantages over other types of retirement plans. First, there is no maximum yearly limit on contributions. This allows late starters to play “catch up,” providing large, yearly retirement benefits that would be otherwise unavailable with more traditional, contribution-limited plans. Second, there is no requirement that the trust cover other employees; therefore, it can be set up for one individual person, if necessary. Third, annual IRS filings are not required in PRTs so you can maintain plan funds at whatever financial institution you choose and manage your trust’s investments however you see fit. Because PRTs have such elasticity, they are an excellent vehicle for retirement and asset protection.

If you’re interested in learning if your state allows for Private Retirement Trusts or if we can help secure your retirement with the PRT, contact our firm for a complimentary phone consultation about this or any other related subject.

Posted in Client Alert, Trust Advisement.