Will a Trust Protect my Assets from a Lawsuit in California?

If you own a business or property, you may be wondering how best to protect your assets from government seizure or creditors.  Lawsuits can happen to any person and any business, but forming a trust will reduce and can even eliminate the risk to your hard-earned empire.

What is a Trust?

A trust is a fiduciary arrangement that allows a trustee to hold assets on behalf of a beneficiary. Trusts separate legal ownership of assets from the individual (the settlor), and places that legal ownership into a separate entity (the trust).

The settlor, or the person who puts the assets into the trust and writes up rules for their distribution in a Deed of Trust, hands over control of the assets to the trustee.  The trustee’s job is to protect, invest, and distribute assets in accordance with the terms outlined in the Deed of Trust. The beneficiaries are the people or organizations designated in the trust to receive benefits such as assets or cash distributions.

There are many different types of trusts and they all have their own advantages and disadvantages. For example, a revocable trust allows the settlor to make changes to the beneficiaries, the assets, and their distribution.  The trust can be canceled at any time, and the assets can be accessed throughout the settlor’s lifetime before transferring to the beneficiaries upon the settlor’s passing.

On the other hand, an irrevocable trust cannot be changed once it is finalized.  The settlor will no longer have any control over the assets placed in the trust and the trustee will manage the trust according to the instructions originally set in place by the settlor.  By eliminating the settlor’s ownership of the assets, creditors generally cannot come after those assets in a legal battle.  This type of trust provides great protection for your assets against the threat of future lawsuits.

How Can a Trust Be Used to Protect my Assets?

When you or your company are defendants in a lawsuit, a creditor can make claims against the assets you hold.  This means that they can go after your house, car, bank accounts, and other belongings to cover the debts that they think you owe.

If your assets are placed in a trust where you have limited control over those assets, creditors will have a more difficult time making claims to the assets held by the trust.  While you can still obtain benefits from the trust, you do not control the distribution of the assets; therefore, creditors cannot force you to hand over said assets as payment.  The less control a beneficiary or settlor has, the harder it is for a creditor to seize the assets located inside of a trust.

In 17 U.S. states, you can have a self-settled spendthrift trust.  California is not one of those states.  A self-settled asset protection trust is one in which the settlor, or the person who creates the trust, also retains rights as a beneficiary of the trust, but their assets are still protected from creditors.  In California, this is not possible.

Due to California Probate Code Section 18200, if the settlor has the ability to revoke a trust or regain use of trust property as a beneficiary, they are considered to have full beneficial ownership and are therefore subject to creditor requests to turn over their assets.  If you want to protect your assets from seizure in California, you have to be very specific in your trust choice to ensure that your ownership over the assets you’re protecting is legally severed.

To avoid your assets being seized in lawsuits, you must have an irrevocable trust in which you are not named as a beneficiary.  If you set up an offshore trust, you’ll be protecting yourself even more.  This is because creditors who want to go after your assets will have to litigate in the jurisdiction of your offshore trust.  Picking the right offshore location is key because many countries’ legal systems are set up to protect the assets of the defendant rather than comply with creditors’ interests, offering you even further protection.

Hiring an asset protection lawyer can help you determine the best asset protection strategy for your goals.  It’s not ‘if’ your business gets sued, it’s ‘when.’  You can prepare yourself ahead of time by ensuring your property is protected, both by choosing the right business entity and by implementing asset protection strategies such as an offshore trust.  Contact us at Bagla Law Firm to learn more about your options.