California does not have domestic asset protection trust legislation. More significantly, California has a strong public policy against self-settled trusts, and courts consistently apply California law even when residents establish trusts in other states. This creates a challenging environment for California residents seeking creditor protection through trust structures.
Understanding California’s position on domestic asset protection trusts is essential before pursuing any asset protection strategy. The rules here differ meaningfully from states like Nevada, Wyoming, or South Dakota, and what works in those jurisdictions may not protect California residents.
California’s Prohibition on Self-Settled Trusts
California Probate Code Section 15304 directly addresses self-settled trusts. If you create a trust for your own benefit and include spendthrift provisions designed to prevent creditors from reaching trust assets, those provisions are invalid under California law. Creditors can reach the maximum amount the trustee could pay to or for your benefit.
This is not a technicality. California courts have consistently held that individuals cannot place property beyond the reach of creditors while still enjoying its benefits. The Ninth Circuit summarized this principle clearly: it is against public policy to permit someone to tie up property in such a way that they can enjoy it but prevent creditors from reaching it.
Revocable living trusts, which are common estate planning tools in California, provide no creditor protection at all. Because you retain the power to revoke the trust, courts treat the assets as still belonging to you for creditor purposes.
Can California Residents Use Out-of-State DAPTs?
Seventeen states now allow domestic asset protection trusts, including Nevada, Wyoming, Delaware, and South Dakota. California residents can technically establish trusts in those states. Some practitioners suggest this provides meaningful protection.
The reality is more complicated. California courts do not automatically recognize out-of-state DAPTs for California residents. When California has jurisdiction over a dispute, courts typically apply California law rather than the law of the state where the trust was formed. This is called the strong public policy exception to the Constitution’s Full Faith and Credit Clause.
The case of In re Huber illustrates the risk. A Washington resident established an Alaska DAPT in 2008 as the real estate market collapsed. He placed cash into the trust while most of his other assets remained in Washington. When he filed bankruptcy in 2011, the court applied Washington law, which does not recognize DAPTs, rather than Alaska law. The trust failed to protect assets because the settlor, beneficiaries, and most assets were located in Washington.
The pattern is clear: courts look at where the settlor resides, where assets are located, and where beneficiaries live. If those connections are primarily to a non-DAPT state, that state’s law likely applies regardless of where the trust was formed.
California’s Hostile Legal Environment
California has adopted the Uniform Voidable Transactions Act, which governs fraudulent transfers. Transfers to self-settled trusts can be challenged if made with intent to hinder creditors, and California courts have interpreted these provisions broadly.
Federal bankruptcy law adds another layer of risk. Under 11 U.S.C. Section 548(e), a bankruptcy trustee can challenge transfers to self-settled trusts made within ten years before the bankruptcy filing. This federal rule applies regardless of state DAPT protections. If you file bankruptcy within ten years of creating a self-settled trust with intent to hinder creditors, the transfer can be unwound.
The combination of California’s strong public policy and federal bankruptcy provisions creates significant risk for California residents relying on out-of-state DAPTs.
What Options Work for California Residents?
California does provide meaningful protection for qualified retirement plans. Under California Code of Civil Procedure Section 704.115, private retirement plans are exempt from creditors. This applies to both IRS-qualified plans and properly structured non-qualified plans.
Third-party irrevocable trusts offer another option. Trusts created for the benefit of others, not yourself, can include effective spendthrift provisions. Spousal Lifetime Access Trusts allow married couples to benefit indirectly while providing creditor protection for the beneficiary spouse.
LLCs and business entities provide inside liability protection. Multi-member LLCs receive charging order protection in California, though these protections are weaker than in Wyoming or Nevada.
Offshore asset protection trusts in jurisdictions like the Cook Islands or Nevis are not subject to U.S. court jurisdiction and may provide stronger protection than domestic alternatives. However, they involve higher costs and strict IRS reporting requirements.
The Wyoming Alternative for California Residents
Despite the challenges, Wyoming structures may still be worth considering. Wyoming’s private family trust company structure allows operational control not available in states requiring institutional trustees. Wyoming has no state income tax and strong statutory protections.
To strengthen a Wyoming DAPT for a California resident, several steps are critical. Use a Wyoming-based trustee rather than a California trustee. Hold assets that can be located in Wyoming, not California real estate. Ensure trust administration occurs in Wyoming. Fund the trust well before any creditor issues arise.
Expectations must be realistic. A Wyoming DAPT is not bulletproof for California residents, and choice of law risk remains. However, the structure is better than California-based planning and may provide negotiating leverage. Creditors facing a properly structured out-of-state trust must weigh the cost and uncertainty of litigation against settlement.
Planning Considerations
Timing is critical. You cannot transfer assets after a creditor threat arises without risking fraudulent transfer claims. Federal bankruptcy has a ten-year look-back for self-settled trusts. The best time to establish asset protection is when you do not need it.
Asset location matters significantly. California real estate remains vulnerable regardless of trust structure. Liquid assets can be held outside California more defensibly, and business interests can be structured through out-of-state entities.
For guidance on how Wyoming structures might fit into a California resident’s asset protection plan, consider consulting experienced counsel like Mark Pierce and Matt Meuli at Wyoming Asset Protection Attorney.