How to Protect Your Assets from a Lawsuit or Creditors (California Edition)

No matter how financially responsible you are, life can throw unexpected curveballs—lawsuits, medical bills, business disputes, or creditor claims. In California, one of the most litigious states in the U.S., protecting your personal assets isn’t just smart—it’s essential.

Whether you’re a homeowner, business owner, professional, or investor, here’s how to protect your assets from lawsuits and creditors before problems arise.

🛡️ Why Asset Protection Matters

Lawsuits can stem from nearly anything: car accidents, professional liability, personal injury claims, or business disputes. If you lose, creditors can potentially go after your:

• Bank accounts

• Real estate

• Investment accounts

• Business interests

• Personal property

Fortunately, with smart estate and financial planning, there are legal ways to protect your assets.

🔐 1. Use a Revocable Living Trust (But Know Its Limits)

A revocable living trust is one of the most common estate planning tools in California. While it helps:

• Avoid probate

• Maintain privacy

• Manage incapacity

…it does not protect assets from creditors or lawsuits. Since the trust is revocable, courts consider the assets still under your control and available to creditors.

👉 Best Use: A revocable trust is great for estate planning—but not for asset protection. For that, you’ll need to consider other strategies.

🧱 2. Set Up an Irrevocable Trust

Unlike a revocable trust, an irrevocable trust can offer real protection from creditors—because once you transfer assets into the trust, you no longer legally own them.

Key options include:

• Domestic Asset Protection Trusts (DAPTs) – While not recognized in California, residents may use out-of-state DAPTs (e.g., Nevada or Delaware).

• Irrevocable Life Insurance Trusts (ILITs) – Removes life insurance proceeds from your taxable estate and protects them from creditors.

📌 Caution: Transferring assets after a lawsuit has been filed could be seen as a fraudulent transfer. These strategies must be proactive.

🧮 3. Use Proper Business Entities

If you run a business or own rental property in California, personal liability can be a major concern. The solution? Segregate risk using legal entities like:

• Limited Liability Companies (LLCs)

• Corporations (S-Corp or C-Corp)

• Limited Partnerships (LPs)

These structures limit your personal exposure. For example, if someone sues your business, your personal assets (home, savings, etc.) are typically protected—if the entity is properly formed and maintained.

📌 Tip: Keep business and personal finances completely separate to maintain liability protection.

🧾 4. Use Homestead Exemptions for Your Primary Residence

California law offers a homestead exemption that protects a certain amount of equity in your primary residence from creditors. As of 2021, the exemption ranges from $300,000 to $600,000, depending on your county’s median home price.

This means even if a creditor wins a lawsuit, they may not be able to force the sale of your home, depending on how much equity you have.

💳 5. Retirement Accounts Offer Built-In Protection

Most retirement accounts—including IRAs, 401(k)s, and pensions—are protected from creditors under both federal and California law.

However, there are exceptions:

• Inherited IRAs may not have the same protections

• Excess contributions may be vulnerable

📌 Tip: Maximize contributions to these protected accounts as part of your long-term strategy.

👨‍⚕️ 6. Consider Umbrella Insurance and Liability Coverage

Legal structures are great, but insurance is your first line of defense. Consider:

• Umbrella liability insurance to supplement your homeowners or auto insurance

• Professional malpractice insurance (doctors, lawyers, accountants)

• Landlord insurance for rental properties

Insurance is often the most cost-effective and immediate protection against claims.

🚫 7. Avoid Fraudulent Transfers

Once you’re sued—or even if you suspect a lawsuit is coming—it’s usually too late to start moving assets around. Courts can reverse transfers that appear to be done to defraud creditors under California’s Uniform Voidable Transactions Act.

Lesson: Asset protection must be done before trouble appears, not after.

Final Thoughts

Asset protection in California is a proactive—not reactive—strategy. Whether you’re safeguarding your family home, your business, or your estate, the key is to:

• Use legal tools strategically

• Separate personal and business assets

• Keep good records

• Work with professionals to build a plan tailored to your risks

An effective asset protection plan combines trusts, business structures, exemptions, and insurance—all coordinated with your estate plan.

Ready to Protect What You’ve Worked Hard For?

We help California individuals and families build asset protection plans that shield wealth, reduce liability, and prepare for the unexpected. Schedule a consultation to start safeguarding your future today.

Contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney today to schedule a telephonic consultation. Have questions, call (626) 460-1763 or email LV@MoravecsLaw.com.

Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.