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Understanding Asset Protection Strategies in California - Werner Law

Understanding Asset Protection Strategies in California

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Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: June 16, 2023

Whether it’s the divorce rate, aggressive creditors, or a predatory lawsuit, it makes sense to think about insuring your most valuable assets – especially from the threat of an unfortunate legal judgment. California is one of the most litigious states in the country. California is also one of the wealthiest states in the country, and […]

Whether it’s the divorce rate, aggressive creditors, or a predatory lawsuit, it makes sense to think about insuring your most valuable assets – especially from the threat of an unfortunate legal judgment. California is one of the most litigious states in the country.

California is also one of the wealthiest states in the country, and wealth in itself can be expensive to pass on. Asset protection strategies allow you to separate certain assets from your own personal liabilities, empower your loved ones to make the most of the family fortune, as well as protect your most important financial instruments from unforeseen events or consequences. 

Trusts, partnerships, restructuring, asset segregation, special insurance policies; which asset protection strategies are right for you? Altogether, the topic of asset protection can be dizzying, so let us take a step back and examine our options individually. 

Understanding Asset Protection

Asset protection strategies generally aim to do one thing: keep assets out of reach of creditors with completely legal means. 

When done correctly, an asset protection strategy allows you to preserve certain assets (usually for a beneficiary) even when faced with bankruptcy. 

But as with any important decision, there is a little bit of give and a little bit of take. There is a limit to how much cake you can have while eating it too – asset protection strategies may limit your access to the target asset(s), or may be incredibly complicated to set up, manage, and finance. Choosing the right kind of vehicle to protect your assets is important, as some strategies might be overkill, while others might be limited or inapplicable to your needs and circumstances. 

California-Specific Asset Protection Considerations

Asset protection strategies are valid and legal all over the country, but each state has its own laws and considerations. In California, for example, every homeowner has the right to shield up to $600,000 of the equity in their home from most creditors. Texas, on the other hand, allows homeowners to shield the entirety of the value of their primary residence or homestead from creditors. Some states have no homestead exemption, while others have exemptions as low as $5,000. 

Retirement accounts are also inherently protected to a certain degree from legal judgments, bankruptcy proceedings, and most creditors. These protections are also state-specific – in California, the exemption amount on qualified retirement accounts (employer-sponsored 401(k)s, traditional IRAs, Roth IRAs, SEP-IRAs, and Keogh plans) is based on the debtors “reasonable and necessary needs”, based on their age, marital status, and other financial considerations. 

Because California is a community property state, asset protection strategies are complicated by the fact that most assets acquired during marriage become jointly owned by both spouses. As such, an asset protection strategy involving community property will require the cooperation of both spouses to function – otherwise, creditors could get to the assets of one spouse through the other spouse. 

California Asset Protection Strategies

There are multiple ways of protecting assets from creditors outside of the aforementioned exemptions. Your options for enacting asset protection will differ from state to state – but generally speaking, your best bet will be to transfer the asset into an independent, irrevocable trust in a state that is favorable to asset protectionUnfortunately, having an irrevocable trust in California in and of itself does not provide asset protection.  

Trusts are legal entities that exist separately from their creators. While revocable trusts maintain some form of connection to their living grantor, with the additional benefit of being revocable and editable, an irrevocable trust cannot be reversed, and often limits the grantor’s access to the assets funded into the trust. 

Trusts do not always follow a rigid template. While there are trust archetypes, it is better to think of a trust as a flexible platform to enable a variety of different asset management strategies. 

California does not authorize the creation of a Domestic Asset Protection Trust (DAPT), which is a common vehicle for asset protection. Most people interested in asset protection in California end up looking towards Nevada or Colorado which have more favorable asset protection laws. Spendthrift trusts are another asset protection method, but such provisions protect beneficiaries of a trust. 

Business entities are another way to safely separate your personal liability from the assets of your choice. Corporations, Family Limited Partnerships (FLPs), and Limited Liability Companies (LLCs) are the most popular business structures for safeguarding assets from the business owner’s personal liability. 

When running an LLC, you have a financial interest in the business, but do not share the business’ liabilities. This goes both ways – if you go bankrupt, the LLC could continue to stand on its own two legs. FLPs work the same way, utilizing a formal partnership agreement to pool family assets, pool the management and decision-making for the investment of these assets, and keep the assets out of reach from creditors. 

Under extreme circumstances, you may want to consider other asset protection strategies by moving your assets out of state, and working with an estate planning professional who specializes in offshore or out-of-state asset management. 

Taking such measures can carry an enormous amount of risk – assets that are moved across state or national borders are inspected with much greater scrutiny, and there are many other costs to consider. Do not consider this option without thoroughly discussing it in person with an estate planning professional and a financial advisor. 

Estate planning and state-specific asset protection are delicate topics. You will want to make the most of your existing privileges and leverage tools such as spendthrift trusts and personal residence trusts to minimize the overall cost and upkeep of your asset protection plans, while ensuring that you are taking advantage of the maximum levels of potential creditor protection that are available to you. 

Trusts can be expensive to manage, and irrevocable trusts require the continued management of an experienced trustee. Furthermore, depending on how they’re structured, irrevocable trusts may not be immune to alimony claims or child support claims. And once an irrevocable trust is set up, it can be extraordinarily difficult to dissolve.  

Before you start thinking about implementing your own asset protection strategies, always consult with a legal professional. Note that The Werner Law Firm does not handle asset protection matters, but it is important to be aware of these options. 

Understanding Asset Protection Strategies in California - Werner Law

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