“It’s time.” You obtained an independent appraisal of your company, listed with Venture Point, and now you are in escrow to sell the company in a leveraged buyout. As you are acutely aware, leveraged buyouts carry the risk that the buyer will operate the company with less skilled than you have employed over the years, and will find himself unable to service the acquisition debt. Human nature and life experience tells us that his thoughts will then turn to how to recover the losses from you. The general subject of asset protection planning is beyond the scope of this article, but here is some encouragement with respect to the pension, profit sharing, or 401k plan terminated as part of the sale transaction.
When you retire, you may roll over your qualified deferred compensation account to your personal individual retirement account. While those funds are in the corporate plan, they are protected from all claims except those of the tax man and former spouses. Your personal IRA, on the other hand, is protected under state law only to the extent you do not need it for a dignified retirement. Being a subjective call, you are at the mercy of a judge who may have been a million-a-year partner at a big firm (who will think you poor and let you keep the IRA), or who may have been a $30,000-a-year lawyer for a poverty agency (who will think you rich and turn over all or most of your IRA to your creditors).
The Fourth District Court of Appeal introduced a fresh view of this creditor-friendly circumstance. In McMullen vs Haycock (2007) 147 CA4th 753, 54 CR3d 660, the court ruled that private retirement plan assets that are transferred to an IRA continue to be completely exempt from the claims of judgment creditors.
This requires the account holder to be able to trace the funds, since the federal exemption applies only to the former plan assets and accretions thereof. The more restricted exemption for IRA funds continues to apply to the remainder.
Also keep in mind that the state law exemption for IRA’s is pre-empted by federal law (unlimited exemption) in bankruptcy cases.
As mentioned, the McMullen case arose in the Fourth Appellate District (Orange County and environs). That makes it controlling law within the district. Since other California district courts of appeal have the right to reach their own conclusions, the McMullen case is persuasive law, not controlling. Statewide effect as controlling law takes place only upon a ruling by the California Supreme Court, usually when two or more lower courts reach differing conclusions on similar facts.
Author Bentley Mooney Jr.; His practice in North Hollywood, rated “av” by Martindale-Hubbell since 1976, author of nine books and many law journal articles, hold a LLM(Tax) degree, certified by the State Bar of California as a specialist in estate planning, trust, and probate law, and have maintained a concentration in asset protection planning since 1983.
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