Can I Use a Trust to Protect My Assets from Creditors in California?

If you're thinking about setting up a trust to protect your own assets from potential creditors, it's important to understand how California law works.

California does not allow what's called a "self-settled asset protection trust." That means if you create a trust and you are also a beneficiary of that trust (i.e., you still benefit from the money or property), California law will not protect those assets from your creditors. Even if the trust says the assets can't be touched, the law allows creditors to access them.

Some states like Nevada or Alaska allow these types of trusts (called Domestic Asset Protection Trusts or DAPTs), but California residents usually cannot rely on them. If you live in California and try to set up one of these out-of-state trusts, a California court can still apply California law and allow creditors to reach the trust assets — especially if it looks like the trust was created to avoid paying debts.

What about offshore trusts? Trusts set up in places like the Cook Islands can offer stronger protections, because those countries don’t recognize U.S. court judgments. But they come with major downsides: they are expensive, require strict compliance with international and IRS rules, and if a U.S. court thinks you’re trying to avoid your creditors, it can order you to bring the money back — and even hold you in contempt if you don’t.

What does work for asset protection?

If asset protection is a goal, here are safer, more effective options for California residents:

Irrevocable Trusts for Others: If you set up a trust for someone else (like your spouse or kids), and you are not a beneficiary, that trust can offer strong protection.
Business Entities (like LLCs) and liability insurance: These can help limit exposure to lawsuits, especially for business owners or rental property owners.

What about a SLAT?

SLATs (Spousal Lifetime Access Trusts) allow couples to create irrevocable trusts for each other, with careful planning to avoid IRS and legal pitfalls. However, using a SLAT for your home can backfire: it effectively transfers ownership to your children upon your spouse’s death, carries ongoing costs, and eliminates the step-up in capital gains at death. For that reason, SLATs are not a good tool for your personal residence or for assets you want to control after your spouse passes.

LLCs and Asset Protection: Great for Rentals, Not for Your Own Home

If you own real estate in California, you’ve probably heard that placing property into an LLC (Limited Liability Company) can protect your assets. That’s partly true — but it’s important to understand what LLCs actually protect, and when they’re the wrong tool for the job.

🏢 LLCs Are Great for Rental Properties

If you own a rental property, using an LLC can be an excellent asset protection strategy. Here's why:

Lawsuit Protection: If a tenant or visitor is injured on your rental property and sues, they’re suing the LLC, not you personally. Your personal savings, home, and retirement accounts are generally off-limits.
Separation of Risk: If you own multiple properties, putting each one in a separate LLC can prevent a lawsuit on one property from affecting the others.
Clean Bookkeeping: LLCs create a clear legal and financial separation between your rental business and your personal assets.

In short, an LLC helps protect you from what happens on the property.

🏠 LLCs Are Not Recommended for Your Personal Residence

Putting your primary home in an LLC is almost never a good idea — and here’s why:

🚫 Loss of Homeowner Protections

You may lose your homeowner’s property tax exemption (known as the Homeowners' Exemption in California).
You won’t qualify for the $500,000 capital gains exclusion when you sell your home (if you’re married filing jointly) — because the LLC, not you, owns the house.
You’ll lose homestead protection, which shields some equity in your personal residence from creditors and bankruptcy.

🚫 No Asset Protection Benefit

LLCs protect you from the property (like tenant lawsuits), but they do not protect the property from your personal liabilities. So if you get sued for something unrelated — like a car accident — and you own the LLC, creditors may still be able to get to the equity in the home through a court order or charging lien.

🚫 Financing and Insurance Complications

Many lenders won’t issue a mortgage for a home in an LLC — or will charge higher rates.

You may have to replace your homeowner’s insurance with a more expensive commercial policy.

🧠 Better Protection Tools for Your Home

If your goal is to protect your personal residence, we usually recommend:

A properly drafted revocable trust (for probate avoidance and family control),
Umbrella insurance to cover large liability risks, and
California’s homestead exemption, which protects a portion of your home equity from creditors.

These tools work better — and cost much less — than trying to use an LLC for a personal home.

✅ Bottom Line

Property Type : Rental Property

LLC Recommended? ✔️ Yes

Why? Helps protect you from lawsuits related to the property

Property Type : Primary Residence

LLC Recommended? ❌ No

Why? You lose tax benefits and gain no real protection

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