Understanding the Basics of Asset Protection in California

What is Asset Protection?

Asset protection is a plan developed by an estate attorney to limit future liabilities. Those liabilities can include things such as divorce, lawsuits, creditors, and long-term care expenses. Asset protection is strongest when integrated with a larger estate plan. A comprehensive plan is a solid legacy defense. Asset protection is most effective when a plan is in place before a problem arises.

California Asset Protection Plans

Owning a business is a great legacy, however, business ownership comes with great risk to personal assets. Generally speaking, there are three types of business structuring that can protect an individual’s personal assets, and in some cases separate tax liabilities, from their business: a Limited Partnership, a Limited Liability Company (LLC), or a Corporation. In terms of asset management, a Limited Partnership allows the partners to limit their personal liability percentage to their percent investment in the business. An LLC limits personal liability, protecting an individual member’s assets. A Corporation is a separate legal entity from the person(s) creating it with separate liability. Each type of business entity is subject to different tax implications.

Asset protection planning is not limited to business owners.Individuals have a number of methods that can be used alone or combined as part of a comprehensive asset protection plan. The method of asset protection that people might be most familiar with is the prenuptial and post-nuptial agreements. These are legally binding agreements that a couple signs before or after marriage that allow the couple to dictate the division of property and debt outside of the statutory norm. This can include how vehicles, homes, bank accounts, and personal property will be divided, to name a few.

Trusts are another common form or asset protection for Californians. Two types of trusts often used are the Revocable Living Trust and Irrevocable Trust. A revocable living trust functions similarly to a will, but avoids the probate process. The revocable living trust can be modified or revoked at any time, and remains in control of the individual. This kind of trust can be subject to federal tax.

Irrevocable Trusts require more planning than a revocable living trust. The reason for this is that once created, an irrevocable trust cannot be modified or revoked without consent from the beneficiary or a court order. An irrevocable trust is managed by a Trustee, whose duties include compliance with state and federal tax laws. It is important to note that for tax purposes an irrevocable trust is taxed separately from the trustor’s estate. The trustor is the person who had the trust created.

A home is often a person’s largest asset. That makes protecting that asset incredibly important. In California, a homeowner is automatically entitled to the protection of a portion of their home’s equity. This is called the California Homestead Exemption (CHE). While the CHE can’t prevent the sale of a home to pay off debts, it does provide that the homeowner is entitled to a portion of the home’s equity before creditors are paid. There is also an option to record a declaration of ownership and extend CHE protection to the voluntary sale of a home.

The California Private Retirement Plan is another option for Californians looking to protect their assets. All assets contributed to the trust are exempt from creditor judgment and bankruptcy. Unlike an irrevocable trust, the individual is not giving assets to others but rather contributing to a trust that is intended to provide for the individual’s retirement. This kind of trust requires a business settlor.

Obstacles to Asset Protection

Asset protection is no simple matter. Asset protection advisers are often cross referencing overlapping laws and weighing the pros and cons of various solutions to devise a plan that provides the best possible result for the client. When considering the options some of the most common obstacles include communal property laws, timing of asset protection, and location of asset protection. Under California law, assets acquired during the marriage are community property. Without a prenuptial or post-nuptial agreement, for example, under communal property laws creditors can target communal property to settle the debts of one spouse.The time at which asset protection is sought can make a big difference in whether or not an asset can be protected. Proactive strategies are less likely to trigger judicial scrutiny than last-minute strategies taken when the fear of imminent asset loss arises. The location of an asset protection strategy can also make a difference. A domestic trust is easier to form, less expensive, and subject to lower scrutiny, however an offshore trust usually has stricter confidentiality laws and is harder for creditors to access.

The Next Steps: Beginning Your Asset Protection Journey

Planning for the future can be complex, and it’s crucial to have a knowledgeable estate law attorney to help individuals and business owners protect their assets. Based in Escondido, and helping the people of San Diego County, White and Bright provides dedicated counsel and reliable representation to clients for a wide variety of estate related issues, including those asset protection. Remember, the best asset protection is proactive asset protection. To learn more about our legal services and how we can assist you, call (760) 747-3200 or contact us for a new client consultation.