Many Californians assume that placing assets into a trust automatically shields them from creditors. Unfortunately, this belief is only sometimes true. In reality, whether a trust provides creditor protection depends on the type of trust, how it’s structured, and the role the trust creator plays. If you’re serious about asset protection, it’s essential to understand what actually works under California law—and what doesn’t.
Who Are Your Creditors?
Creditors aren’t just bill collectors. They can include lawsuit plaintiffs, divorcing spouses, former business partners, bankruptcy trustees, and government agencies. These threats often arise unexpectedly, so asset protection must be proactive rather than reactive.
What Doesn’t Work: Revocable Trusts
Revocable living trusts are among the most common estate planning tools—but they offer zero creditor protection for the trust creator (also called the settlor). Under California law, creditors can reach the assets of a revocable trust to the same extent as if those assets were still held in the settlor’s name.
Why? Because the settlor retains complete control: the power to revoke, amend, or direct distributions. Under Probate Code section 18200, during the settlor’s lifetime, the trust assets are subject to claims of the settlor’s creditors to the extent of the settlor’s power to revoke the trust.
This means that a revocable trust helps avoid probate and manage incapacity—but does not shield assets from lawsuits or liabilities.
What Sometimes Works: Irrevocable Trusts with Limits
Irrevocable trusts can offer protection—if appropriately structured. Once the settlor irrevocably transfers assets and gives up control, those assets may be shielded from future creditors. However, not all irrevocable trusts are created equal.
Spendthrift Trusts
Spendthrift clauses restrict a beneficiary’s ability to transfer their interest in the trust, limiting creditor access. However, under Probate Code section 15306.5, California law allows certain creditors (e.g., for support or public services) to reach up to 25% of a beneficiary’s interest in a spendthrift trust.
Discretionary Trusts
A trustee has discretion over when—and whether—to make distributions. This gives strong protection, especially if the beneficiary cannot compel distributions. Creditors generally can’t reach assets that the beneficiary has no enforceable right to demand.
Support Trusts
These trusts provide distributions for specific needs (like health, education, support, or maintenance [sometimes called the HEMS standard]). Because the beneficiary has a right to receive distributions to satisfy those needs, creditors can sometimes step into the beneficiary’s shoes and compel payment.
What Works Best: Third-Party Irrevocable Trusts
The most effective trust-based creditor protection in California comes from third-party discretionary trusts. These are irrevocable trusts funded by someone other than the beneficiary—for example, a parent funding a trust for a child. If the trust contains both a valid spendthrift clause and discretionary provisions, and the beneficiary lacks control, creditors will find it challenging to reach those assets—if not impossible.
This makes third-party irrevocable trusts a powerful tool in protecting inheritances and intergenerational wealth.
What to Avoid: Self-Settled Trusts and Fraudulent Transfers
California prohibits self-settled asset protection trusts. You cannot set up an irrevocable trust for your own benefit and expect your creditors to be barred from accessing it.
Even if you use another state’s law (e.g., Nevada or Alaska), California courts are unlikely to honor those protections if you live and are sued in California. Public policy and California’s Uniform Voidable Transactions Act (UVTA) strongly discourage such arrangements.
Fraudulent transfer rules also apply. If you transfer assets to a trust intending to hinder, delay, or defraud creditors—even if the transfer is to a third-party trust—the court can undo it. Timing, motive, and ongoing solvency are key factors in determining whether a transfer is valid.
Other Tools to Consider
Trusts are one part of the picture. Depending on your needs, additional protections might include:
- Homestead exemptions (limited in California),
- Retirement accounts (which often have strong protection under federal law),
- Life insurance policies and annuities, and
- Limited liability entities, like LLCs, for business assets.
An integrated approach tailored to your specific situation is always the most effective.
Conclusion
While many trusts offer probate avoidance and tax benefits, only specific types of irrevocable trusts can protect your assets from creditors, even under narrow conditions. California residents should avoid self-settled asset protection trusts and instead focus on third-party discretionary trusts complemented by broader planning tools.
Review Your Estate Plan with an Attorney
Asset protection is complex and highly fact-dependent. Mistakes can be costly, like retaining too much control or using the wrong kind of trust. Every California resident should review their estate plan periodically, especially when their personal or financial situation changes.
If you’re in Kern County, schedule a consultation with Jared R. Clemence, an experienced estate planning attorney who can help you build a plan that balances asset protection with your broader goals. Book now. Use the button below.