As society becomes increasingly litigious, the topic of asset protection becomes ever more important. This is especially true in California, which is known to be one of the most creditor-friendly states in the country. Without a strategy in place, those who lose a lawsuit in CA can find almost everything they own at risk.
Unfortunately, due to laws favoring creditors over debtors, there’s no such thing as a California asset protection trust (APT), so Golden State residents need to turn to other methods to keep their wealth out of a creditor’s hands.
In this article, we’ll cover the types of asset protection trusts in California that you can use to safeguard your wealth:
- California Asset Protection Trust Laws
- California Asset Protection Trust Options
- California Asset Protection Trust FAQ
Disclaimer
This article is for general informational purposes only and does not constitute legal advice. For legal advice regarding trusts in California, consult a licensed California attorney.
California Asset Protection Trust Laws
California’s asset protection trust laws prevent the creation of a true APT. Specifically, California does not allow the person creating the trust to serve as a beneficiary, which is necessary to create an APT. There are other types of trusts that California allows, but they are primarily useful for estate planning and other concerns, and won’t keep your wealth safe from a creditor.
California Asset Protection Trust Options
Even though there are no asset protection trusts in California, state residents can still use APTs that are offered by other jurisdictions. Specifically, Californians have the option to use either domestic asset protection trusts (DAPTs) or offshore asset protection trusts (OAPTs).
Domestic Asset Protection Trusts (DAPTs)
As mentioned previously, true asset protection trusts are not permitted in California. As a result, many California residents choose to establish trusts in domestic jurisdictions where this practice is allowed. As of this writing, there are currently 17 states in the United States that permit domestic asset protection trusts or DAPTs—the most notable of which are Nevada and South Dakota.
In order for a trust to be considered a domestic asset protection trust, it must be irrevocable and self-settled. Irrevocable means that it cannot be changed at the whim of the settlor, and self-settled means that the settlor can serve as the beneficiary. DAPTs must also have a trustee who is a resident of the state where the trust is established. Additionally, some administration of the trust must take place in the jurisdiction where the trust is settled. The settlor of a domestic asset protection trust may not act as the trustee.
Though their track records are shaky compared to offshore alternatives, domestic asset protection trusts are preferable to the various asset protection options in California. DAPTs in states like Nevada and South Dakota allow settlors to serve as the beneficiary and are irrevocable. If a creditor wins a judgment against you in either of these states, there is good reason to believe that your assets will remain safe while inside a DAPT.
However, DAPTs do have a few notable flaws. The primary one is that they are subject to the judgments of U.S. courts. This includes judgments regarding the California Fraudulent Transfer Act, which nullifies the protection afforded by most domestic trusts. California judges also enforce California’s asset protection laws and disregard the laws of other states, even if you have a trust established there.
Offshore Asset Protection Trusts (OAPTs)
Offshore trusts provide the most exhaustive protection available to California residents seeking to protect their assets. Like domestic asset protection trusts, self-settled offshore trusts are available in many jurisdictions. They also contain spendthrift clauses that give trustees the power to make distributions in order to protect any inherited assets from poor financial decisions made by a beneficiary.
The advantage of an offshore trust is that, in many jurisdictions, foreign judgments are not recognized by local courts. As a result, creditors who want to lay claim to the assets held in an offshore trust must travel to the foreign jurisdiction. They must then spend the time and money necessary to have their case re-adjudicated through the local court system. Oftentimes, this proves to be more trouble than it is worth, and creditors will drop their claims. Additionally, offshore jurisdictions often have much shorter statutes of limitations on claims of fraudulent transfer (usually just one to two years). Once the clock runs out on the statute of limitations, assets held in an offshore trust are virtually untouchable. Finally, offshore jurisdictions usually do not identify any parties as exemption creditors. As a result, offshore trusts can prove particularly advantageous in protecting assets in the event of divorce.
Ultimately, those seeking a California asset protection trust should instead create an OAPT to get the security they desire. These trusts are best equipped to deal with the threat of lawsuits, and can be crafted in a way that allows the settlor to retain control over their assets without putting anything at risk.
Call Asset Protection Planners for Help with Guarding Your Wealth
Now that you know there’s no such thing as “California asset protection trusts” in the modern sense of the phrase, you can start exploring other ways of keeping your wealth secure. The helpful team at Asset Protection Planners can assist you in your search. We know exactly which offshore jurisdictions offer the strongest protection available and have reputable trustees in each who can help oversee your trust.
Don’t wait for a lawsuit in California to strip you of everything you’ve earned. Contact us today for a free consultation.
California Asset Protection Trust FAQ
How can I set up an asset protection trust in California?
To set up an effective asset protection trust in California, you’ll need to explore options outside of the state. California itself does not offer an effective version of an asset protection trust, as the state has too many restrictions on how it can be formed, which assets it protects, and who can breach the protections a trust offers.
The lack of options in California will require you to look for either a domestic or offshore asset protection trust. Of the two, an OAPT is generally going to be the superior option, as it offers stronger protection against creditors and lawsuits.
Once you’ve selected which type of trust you’re going to create, reach out to an asset protection planner. These experienced professionals can help you determine where to establish your trust, and often have connections with trustees in several offshore jurisdictions. An asset protection planner will even set up offshore accounts and other financial structures that further reinforce your wealth defense strategy.
After contacting a planner, you’ll select where to establish your trust, fund it, and keep records of any transactions related to the trust. At the same time, your asset protection planner will continue to monitor the laws of your trust’s jurisdiction to ensure you stay compliant with changing laws.
Here’s a step-by-step guide detailing how to set up an asset protection trust in California:
- Explore asset protection trust options outside of California.
- Contact an asset protection planner to help you set up a trust.
- Discuss various asset protection options with your planner.
- Determine whether you need an offshore asset protection trust or a domestic one. Offshore trusts are the better choice for most people.
- Based on which type of trust you wish to create, ask your planner which state or offshore jurisdiction is the best option for your asset protection needs.
- Have your planner start setting up a trust in your chosen jurisdiction.
- Get a list of reputable trustees from your asset protection planner, and select one who appears to be a good fit.
- Fund your trust based on the instructions that your planner provides.
- Have your planner set up an LLC under your asset protection trust, which will allow you to control your assets without putting them at risk.
- If you are sued, transfer control of your LLC to the trustee.
- Once the lawsuit ends, regain control of your LLC.
- Have your planner continually maintain the trust by keeping it compliant with any legal changes in your chosen jurisdiction.
