LAW OFFICE OF
ROBERT J. MINTZ
Exclusive Legal Representation For Your
Asset Protection Planning Needs
Asset Protection
Estate Planning
International Tax
Business Planning
LAW OFFICE OF
ROBERT J. MINTZ
Exclusive Legal Representation For Your
Asset Protection Plannings Needs
Asset Protection
Estate Planning
International Tax
Business Planning
California Asset Protection
Law Office of Robert J. Mintz
Asset protection planning under California law presents unique challenges as well as exceptional opportunities for developing a successful asset protection plan. This article summarizes some of the significant asset protection strategies we consider when designing a plan for clients residing or owning property in California.
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, ( See 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.
Asset Protection for California Real Estate
Asset protection for a residence, or a rental property usually involves a change in the manner of holding title to a property. The property may be transferred into a specially designed trust or other entity such as a Limited Liability Company, a Family Limited Partnership or a corporation. Under some circumstances contracts impacting certain rights over the property, such as a lease or mortgage or other security interest may be created as a part of the overall plan or in connection with the client’s business. In each of these and similar instances, asset protection planning requires the consideration of the unique impact of California law under Proposition 13.
Impact of Prop 13
A key issue unique to California asset protection is the potential impact of Proposition 13 on transfers of real property. In general Prop 13 limits annual property taxes to approximately 1% of the assessed value of a property. Broadly speaking, the assessed value is the value at the time the property was purchased-not it’s current value. For example, an individual who purchased a property in California in 1980 for $100,000 has annual property taxes of about $1,000 ( plus certain allowable increases).Even though the value of the property increased over the years, a reassessment based on the then current value is specifically prohibited by Prop 13. That’s what the law was intended to accomplish. If the property is sold in 2018 for $1 million the annual taxes are permitted to increase based on the market value and for this buyer would increase to about $10,000.
Just as a sale of property is considered to be a change of ownership, permitting a reassessment of the property value to market value, the law considers some transfers of property- other than sales- to be a change of ownership subject to reassessment. Transfers of property to entities such as LLC’s, Family Limited Partnerships and trusts are considered changes in ownership unless one of the exemptions to the law applies. Any transfer of property must be carefully structured by a California asset protection attorney or other real estate advisor to avoid a reassessment of transferred property resulting in significant property tax increases. See Asset Protection For California Real Estate
California Asset Protection Strategies
Personal Residence Trust
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. The PRT is structured so that it is exempt from reassessment under Prop 13.
California Private Retirement Plans
California allows for the creation of a Private Retirement Plan, which is entirely exempt from judgments and bankruptcy. 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.
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- 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
California Family Limited Partnership and LLC’s- Foreclosure
In addition to Personal Residence Trusts and Private Retirement Plans, entities such as Family Limited Partnerships, and LLC’s, can be important elements of an asset protection strategy in California. However, in addition to the normal charging order remedy, California law allows a creditor to foreclose on a limited partnership interest and a membership interest in a Limited Liability Company. See our detailed discussion of foreclosures of FLP and LLC interests. Asset protection planning to protect ownership interests from charging order or foreclosure often involves structuring these interests within one or more Family Savings Trusts. Also, the FLP Agreement or the LLC Operating Agreement should be drafted to specifically restrict charging order or foreclosure of an interest. Consult with a California attorney to accomplish your asset protection and estate planning goals.