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Can A California Trust Shield Its Assets From Creditors?

Generally, trusts in California can help shield assets only from future creditors of third party beneficiaries for whose benefit the trusts are created. California limits a person’s ability to create a trust for his own benefit and shield those assets from creditors. However, if someone creates a trust for his children, he can include a clause known as the “spendthrift clause” that states that creditors will not be able to reach trust assets. That type of trust in California is permitted and can function fairly effectively to shield assets from the children’s creditors as long as those assets remain in the trust.

But someone cannot gain the same protection if they are the creator of the trust and the beneficiary of the trust. The idea is that if permitted, everybody would use such a trust to shield himself from liability for his own debts. As a matter of public policy, California does not permit that to happen. In order to do that, a person needs to go to another state such as Nevada where they have special legislation that allows such asset protection trusts to exist.

What Kind of a Trust is Needed to Prevent Assets from Being Taken by Creditors?

Primarily, it has to be an irrevocable trust with spendthrift clause language that is created for a person other than the creator of the trust, or trusts are set up in other states that have enabling legislation that allows such asset protection trusts.

What is a Special Needs Trust?

A “Special Needs Trust” protects the assets available only to persons with disabilities who are on SSI or Medical that are “means tested” programs, meaning programs that are only available to persons with limited assets and income. Assets that are placed into special needs trusts are not counted for purposes of eligibility but are available to pay the “special needs” of the disabled person.

Are There Any Assets That Are Unavailable to Creditors?

The primary assets that are wholly or partially exempt from creditor claims are pension plans and IRAs. A private pension plan is exempt from creditors as long as the value of the assets in the plan does not exceed the amount that is reasonably necessary to pay for an owner’s retirement. Most of the time that limit is fairly high so assets in most private pension plans and IRAs are not subject to creditor execution or levy. Public pension rights such as California Public Employees Retirement System plans or California Teachers Retirement plans are also exempt. Those assets are not subject to creditors in any event regardless of the amount because they are a “group” fund administered for the benefit of thousands of different individuals. California law also provides statutory protection from creditors for certain types of assets including equity in a home (subject to certain limits), tools of the trade and automobiles (subject to value limits) and so forth.

We must draw a distinction though between money that is held in a retirement plan and money distributed from the retirement plan. Once a distribution occurs, that money becomes subject to creditor levy just like any other asset that is owned by the beneficiary of the IRA directly. For instance, if someone takes an IRA distribution of $20,000 and puts it into a savings account in his own name, a creditor can levy on that savings account even though the original source of the funds was the IRA.

For more information on Asset Protection from Creditors, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (916) 635-0302 today.

California’s Estate Planning Essentials