A Guide to Creating an Asset Protection Trust in California

Asset protection trusts are some of the most valuable and effective defensive vehicles for high-net-worth individuals. If you're a California resident, you might consider setting up a domestic asset protection trust at the earliest opportunity.

However, the process can be complex. More importantly, a domestic asset protection trust in California is not the ideal means to safeguard your hard-earned money and other assets. Let's take a closer look. 

Asset Protection Trusts in a Nutshell

An asset protection trust, put simply, is a fiduciary arrangement established for the purpose of safeguarding various personal assets, like money, real estate, stocks and bonds, and much more. Like other trusts, an asset protection trust has a few key actors:

• The grantor, who sets up the trust and places assets within this vehicle
• The trustee, who oversees and manages the trust, plus handles distributions
• The beneficiaries, who receive distributions from the trust

When you put assets in an asset protection trust, you give up ownership of those assets. At that point, the trustee (through the trust) technically owns and has control over the assets.

Asset protection trusts are defensible in legal contexts, like lawsuits and creditor claims, because even successful lawsuits or creditor claims can’t force you to pay debts or bills with things you don’t have. 

Say that you put $10 million into an asset protection trust. If you lose a civil lawsuit, the court can’t tell you to pay damages with that $10 million; you don’t own it!

Asset protection trusts are irrevocable, too – that means they can’t be changed or have their terms modified except under specific circumstances. 

In their totality, properly drafted asset protection trusts (in the right jurisdictions, at any rate) are effective legal fortresses that can safeguard your assets for decades to come. 

Can You Set Up an APT in California?

California does allow you to set up domestic asset protection trusts or DAPTs. However, California does not allow you to set up every type of asset protection trust you might have previously researched.

According to California law, you cannot set up an asset protection trust for your own benefit with your own assets. 

As an example, you can’t build your business to true success and scale it into a worldwide brand, then set up an asset protection trust to tuck $20 million away with the plan of receiving regular distributions from that money over the next few decades.

Given this limitation, California isn't the best place to set up an asset protection trust, particularly for high-net-worth individuals ranging from entrepreneurs to successful artists to surgeons and more. Why?

An asset protection trust in California is, by definition, subject to California (and therefore US) court rulings and case precedent. That means if there's a court judge or creditor motivated enough, they will certainly be able to penetrate your asset protection trust's barriers and get to the assets held within.

Allowed Asset Protection Trusts in California

California does allow three different types of asset protection trusts. The key factor binding these trust types together is that they must be used for the benefit of third parties, like children, spouses, or other loved ones/intended beneficiaries.

Spendthrift Trusts

California spendthrift trusts are trusts where beneficiaries receive regular, usually periodic, distributions of assets like money or real estate ownership. In California, these spendthrift trusts cannot have grantors who are also beneficiaries.

However, note that any income or principal given to a beneficiary from a spendthrift trust loses its protection. On top of that, California imposes several statutory exceptions to asset protection spendthrift trusts. 

As an example, spendthrift trusts don’t protect beneficiaries against any claims of spousal support or child support.

Support Trusts

Support trusts are trusts created for the education of a beneficiary. Fortunately, this kind of income support can't be taken or claimed by beneficiary creditors until the assets of the trust are distributed to the beneficiary. 

Support trusts can also be used to provide financial support for the education of the spouse or children of a beneficiary. These trusts can be highly effective when the settlor wishes to provide for the educational needs of a family member while ensuring that the funds are used solely for that purpose.

However, the level of asset protection might not be as robust as a discretionary trust, as the beneficiary could potentially access the assets upon reaching the age of majority or completing their education.

Discretionary Trusts

Discretionary trusts give trustees total discretion on whether or not to distribute income or other assets to a beneficiary. As an example, a trustee can give all of the assets in the trust to a beneficiary, none of the assets, or only some of the assets.

On the bright side, the creditor of the beneficiary can't enforce trust distributions with this kind of trust setup. In general, a discretionary trust is considered to be the most protective and effective asset protection trust you can set up in California.

Setting Up Your Ideal Asset Protection Trust in California

If you want to set up an asset protection trust in California, the process is fairly straightforward.

• First, you’ll meet with legal experts and choose the type of trust you want to set up. In California as in other states, a trust has to be set up with a licensed attorney. You can’t set up a trust yourself, no matter how much research you do
• Then, you’ll determine the terms of the trust. These include naming the trustee and beneficiaries. You’ll also determine things like distribution schedules, which beneficiaries will get what assets, and much more. This is an important part of setting up your trust since it will determine just how legally airtight it actually is
• You'll then need to have the trust documents drafted. Working with an experienced trust attorney or law firm is vital. Again, even a single misplaced comma or other inappropriately chosen language could cause your trust to be much less protective than you think. Think of bad legal wording as chinks in the armor of your trust
• After that, you’ll sign and notarize your trust documents. Naturally, this has to be done in the presence of a notary public, but that shouldn’t be a problem if you work with licensed attorneys
• All that's left is to fund your trust. You can transfer ownership of assets under your name to the trust. Depending on the assets you choose to transfer, this can take several weeks or even several months, once again highlighting the importance of setting up an asset protection trust sooner rather than later

In California, asset protection trusts must be irrevocable, meaning changes cannot be made once established. Common assets placed in these trusts include real estate, business interests, and financial investments. Establishing such a trust may offer significant protection against creditors and lawsuits, offering peace of mind for your financial future.

But There Are Better Ways to Protect Your Assets…

Truth be told, setting up a California asset protection trust shouldn't be the end-all-be-all of your asset protection strategy. There are far better ways to protect your assets, whether that’s liquid capital, real estate, or many other kinds of assets.

At Dominion, we highly recommend setting up an offshore asset protection trust. An offshore asset protection trust is one set up in a jurisdiction other than the US. Since it’s outside the US, US court rulings, case precedent, and claims don’t necessarily apply to the assets within such a trust.

This, of course, depends on the exact jurisdiction you choose and the bank you pick to work with. At Dominion, we can help you with all of those decisions and much more. In fact, when you work with Dominion, the process will look like this:

• We’ll have an initial consultation with you to figure out your goals, the assets you want to store, and any limitations that might apply to your case
• Then we’ll do extensive research into the different jurisdictions that might be appropriate for your asset protection purposes. With our decades of experience, we’re well-equipped to do this research and locate the ideal jurisdiction for your unique needs and the potential legal threats you think you’ll face in the future
• Next, we’ll connect you to the legal infrastructure and personnel needed to set up your trust promptly. We have trust administrators/trustees, lawyers, and any other experts you might need to get your trust documents drafted and reviewed ASAP. More importantly, you can count on us to draft trust documents that are as airtight as possible
• Then, we’ll guide you through the trust asset transfer process. With our help, you’ll get your trust assets transferred quickly, well ahead of any legal difficulties you might face later on

With a properly drafted asset protection trust in an offshore jurisdiction, your estate and wealth will be shielded against all possible hazards. Compared to a California asset protection trust, an offshore asset protection trust has a much better chance of safeguarding the wealth you’ve worked so hard to attain for years to come.

Contact Dominion Today

Overall, your best bet to protect your wealth as a business owner, doctor, or other high-net-worth individual is to contact Dominion and set up an offshore asset protection trust. California has a lot of excellent elements, but legal protections aren't included.

There are far better jurisdictions for durable asset protection trust setup, and Dominion knows them all. More importantly, we can provide you with sound, wise legal counsel and help you choose the right jurisdiction for your needs, plus set you up with a knowledgeable, experienced trustee to administer your trust for years to come.

Get in touch with one of our representatives today to learn more.