The CA Section 704 Plan™: Executive Summary
Think of the CA Section 704 Plan™ as a brick wall keeping creditors, taxes, health risks, and potential divorce problems away from your assets. Only in California is this plan available. It is a low-effort method to accomplish major asset protection. The CA Section 704 Plan™ is a combination of proven strategies to shield assets. The combination is flexible and customized for each Plan participant. For example, if lowering taxes is not a goal, the "bricks" that provide for lowering taxes do not have to be implemented. The same regarding potential divorce and health risks. Creditor protection is the foundational element and it is always part of a Plan.
The construction consists of:
- California statute 704.115. While the wording is simple, it is open to interpretation. Fortunately the law has been around for 45 years and has been court-tested over 150 times. This testing has provided ample precedent to guide plan design to create structures that work to protect retirement assets. This creation involves plan sponsorship, participant agreements, independent beneficial trusts, actuarial calculations, and plan administration. This list may seem oppressive, but Plan professionals have streamlined the implementation and administration. The Plan acts much like a qualified retirement plan but is not a tax-exempt structure. Tax planning is optional and discussed below.
- First-liens on personal assets. The protected retirement can include a lien on personal assets that puts the participant's Plan first in line as a creditor. This is accomplished by calculating total retirement assets needed at retirement and claiming that as long as the plan is under-funded, the participant owes the plan money and thus a lien is placed to secure the future contributions.
- Tax-efficient investing. The Plan can invest in many assets. Some assets are more tax-efficient than others. The Plan provides an opportunity for tax-free growth based on investment market returns coupled with tax-free income during retirement. Using specialized life insurance contracts that have low fees but high flexibility in investments, this tax friendly structure is an optional way to accumulate and distribute retirement assets. If a participant is an accredited investor or a qualified purchaser according the securities regulations, the life insurance cash values can be invested in hedge funds and other alternative investments. For large enough deposits, personalized separately managed accounts are a possibility.
- Risk transfer contracts. Participant health issues can erode retirement assets. The Plan can own custom designed death benefit contracts, disability income policies, and extended care insurance. These contracts transfer the risk of erosion from the Plan to the insurance companies. In this way, if the health event arises, the Plan is kept whole or even self-completed, unlike qualified retirement plans. These optional protection elements are designed for the participant's specific needs.
- Situs. It may be desirable to have parts of the Plan to be created in South Dakota to take advantage of trust and LLC protections. The California participant is protected by California laws, but the additional layer of South Dakota law can be an advantage for some parts of the Plan for privacy and protection.
- Trust language. The Plan can be written to protect against future divorce. This type of planning is complex, but the Plan documents can be crafted privately, and the Plan managed correctly to protect some or all of the Plan assets from a future ex-spouse.
What does all of this cost? A Plan can generally be set up for less than $10,000 and maintained for about $5,000 per year. Plan contributions by the participant are set by the original Plan design and are flexible to a point. Insurance contracts premiums are paid separately from Plan contributions. Specialized language and management for divorce protection are an additional cost and should be an additional $5,000 set-up and $1,000 annual administration cost.