Asset Protection in California

The layers of protection

A sound plan combines several tools, each covering a different risk:

• Liability insurance — homeowner’s, auto, professional and umbrella coverage is the first and often strongest layer.
• Business entities — LLCs and corporations separate business liabilities from personal assets when their formalities are followed.
• Statutory exemptions — California shields part of a home’s equity and most retirement savings from judgment creditors.
• Trusts for heirs — spendthrift and discretionary trusts protect inheritances from beneficiaries’ creditors and divorces.
• Titling and agreements — how spouses hold property, and written marital agreements, affect what a creditor can reach.

What a revocable living trust does not do

A revocable trust avoids probate and plans for incapacity, but while you are alive its property is fully available to your creditors (Probate Code §18200), and after death it remains subject to claims against your estate. Many people are surprised by this; it is the main reason asset protection is a separate conversation from estate planning.

Self-settled trusts and the California limit

California does not enforce a spendthrift provision in a trust in which the person who creates it is also a beneficiary: the creator’s creditors can reach the trust property (Probate Code §15304). Some states, including Nevada, allow self-settled asset protection trusts, but a California resident who uses one faces real uncertainty about whether a California court will respect it — particularly for California real estate.

The homestead exemption

California’s homestead exemption protects equity in a principal residence from most judgment creditors. Since 2021 the amount is the greater of $300,000 or the county’s median sale price for a single-family home in the prior year, capped at $600,000, with both figures adjusted annually for inflation beginning in 2023 (Code of Civil Procedure §704.730). It does not protect against mortgages, property tax liens or other debts secured by the home.

Retirement accounts

Private retirement plans such as 401(k)s are generally exempt from creditors under California law and federal ERISA rules, and IRAs are exempt to the extent necessary to support the debtor and dependents in retirement (Code of Civil Procedure §704.115). Inherited IRAs are treated differently: in Clark v. Rameker (2014), the U.S. Supreme Court held that inherited IRAs are not protected retirement funds in bankruptcy.

Business entities and charging orders

An LLC or corporation that is properly capitalized and maintained keeps the business’s debts inside the business. For a personal creditor of an LLC member, California generally limits the remedy to a charging order against the member’s distributions (Corporations Code §17705.03), although a court can order foreclosure of the interest in some cases. Separate entities for separate rental properties or business lines can keep one problem from reaching everything.

Protecting what your children inherit

The strongest lawful protection most families can provide is for the next generation. An inheritance held in a spendthrift trust (Probate Code §15300) or a discretionary trust is protected from a beneficiary’s creditors, and when kept separate it remains the beneficiary’s separate property in a divorce. A trust can also protect a beneficiary who struggles with money or addiction, or who receives public benefits.

Timing and voidable transfers

A transfer made with intent to hinder, delay or defraud a creditor — or made without receiving reasonably equivalent value while insolvent — can be set aside under the Uniform Voidable Transactions Act (Civil Code §3439.04–3439.05), generally within four years. Planning in the face of an existing lawsuit is limited and risky; planning during calm times is not.

Coordinating protection with your estate plan

Asset protection decisions affect taxes, control and family dynamics: retitling community property, giving property to children or creating entities can change the income tax basis heirs receive, property tax treatment and who controls the property. A coordinated review puts insurance, entities, exemptions and trusts into one plan.