Asset Protection Strategies for Californians with a Larger Estate

You've worked hard. You've built something. And now, somewhere in the back of your mind, there's a nagging question: what happens to all of this if things go sideways?

A lawsuit. A creditor. A bad business deal. Life has a way of throwing curveballs, and California, as much as we love the weather, is one of the most litigious states in the country. If you and your spouse have built a meaningful estate, asset protection isn't paranoia. It's just smart planning.

Let's walk through the most effective asset protection strategies available to California married couples, using a real-world example to make it concrete.

Meet Our Example Couple

Let's say you and your spouse have the following:

That's a meaningful estate, and one that deserves a meaningful plan. A standard revocable living trust is essential here, but it alone won't protect your assets from creditors or reduce estate taxes. For that, you need more advanced strategies.

A quick note before we dive in: the federal estate tax exemption is currently $15 million per person, $30 million for a married couple, and increasing with inflation each year under the One Big Beautiful Bill. At $14M, you're under the individual threshold today, but as your estate grows (and your business and real estate appreciate), you could find yourselves in estate tax territory sooner than you think. More importantly, estate taxes aside, every one of these assets is exposed to creditors, lawsuits, and other risks right now, and that's reason enough to plan.

1. LLC for Rental Property 

This is the most straightforward strategy on the list, and it's often the first one we recommend for people with rental real estate.

How it works: You transfer your rental property, in our example, the $1M rental, into a Limited Liability Company (LLC). The LLC becomes the legal owner of the property, and you own the LLC. If a tenant slips and falls and sues, they're suing the LLC, not you personally.

The pros:

• Creates a legal firewall between your rental property and your personal assets. A judgment against the LLC generally cannot reach your home, brokerage account, or retirement funds.
  
  
• Provides a layer of privacy, since the LLC (not your name) appears on title.

The cons:

• California charges an $800 annual minimum franchise tax on LLCs, plus an additional fee if gross receipts exceed $250,000.
  
  
• Transferring the property into the LLC may trigger a due-on-sale clause in your mortgage, especially if it is a residential rental property. Historically, lenders don't like changing ownership to an LLC for a rental house, but they are more likely to allow it for a commercial rental. If you have a low-interest mortgage, this is a bigger risk. If you recently acquired the property and have a high-interest loan, the risk is less. 
  
  
• California's Proposition 19 (passed in 2020) significantly changed property tax rules. Transferring property to an LLC can trigger a reassessment, a potentially large and permanent increase in your property tax bill. This is a California-specific trap that catches people off guard, so work with an attorney before making any moves. However, if the ownership of the property is the same as the owners of the LLC (for example, husband and wife owned the rental and husband and wife own the LLC), then the proportionate interest exclusion kicks in and avoids a reassessment. 
  
  
• An LLC does not eliminate all exposure. California courts can sometimes "pierce the corporate veil" if the LLC isn't maintained properly. Separate bank accounts, proper records, and keeping your personal finances separate from the LLC's are all required.

Bottom line: For the $1M rental property, an LLC is usually worth it, but the due0on-sale clause in your mortgage and the California property tax reassessment issue requires careful analysis before you act.

2. Irrevocable Gift Trust (for Gifting to Children)

If you want to transfer wealth to your children and remove those assets from your taxable estate and from the reach of creditors, an irrevocable gift trust is a powerful tool.

How it works: You create an irrevocable trust, name your children (or other beneficiaries) as the beneficiaries, and gift assets into the trust. Once assets are in the trust, they belong to the trust, not to you: which means they're protected from your creditors and removed from your taxable estate.

As a married couple, you can each use your annual gift tax exclusion ($19,000 per person per recipient per year, or $38,000 combined per recipient) to fund the trust gradually over time. Or you can make a larger one-time gift using your lifetime exemption. For our example couple, gifting a portion of the $3M brokerage account into a trust for your children is a natural starting point. 

FYI. The lifetime gift exemption is the same amount as the estate tax exemption: $15 million per person. If you use any lifetime exemption, it will be subtracted from your estate tax exemption.

This means you are not limited to gifting $19,000 per person, per year. You can give bigger amounts without a gift tax. But the gift amount would eat into your estate tax exemption. For example, if you gifted $1 million to your daughter, there would be no gift tax, but now you would only have $29 million left in your estate tax exemption ($30M - $1M = $29M). If your estate value is way less than $30 million, who cares if you use up $1 million here or there for gifting to your children: it won't trigger an estate tax.

The pros:

• Assets transferred to the trust are removed from your estate, which can reduce or eliminate future estate taxes.
  
  
• Creditors generally cannot reach assets held in the trust.
  
  
• You can structure distributions to protect your children from their own creditors or from divorce proceedings - so the inheritance you work so hard to build doesn't end up in the wrong hands: a divorcing spouse or a plaintiff in a lawsuit.

The cons:

• Irrevocable means irrevocable. Once you gift assets into this trust, you have given them away. You lose control and access to those assets.
  
  
• Capital gains tax planning is tricky. Unlike assets that pass at death (which get a step-up in tax basis), gifted assets carry over your original tax basis. If you gift appreciated stock or real estate, your children may owe capital gains tax if they eventually sell.
  
  
• Using a large chunk of your lifetime exemption now reduces what's available for future planning. But, as explained above, unless your estate value is pushing up against $30 million, this won't be an issue. The One Big Beautiful Bill provides a lot of room to gift.

Bottom line: Irrevocable gift trusts are excellent for couples who have assets they're confident they won't need, and who want to give their children a meaningful head start while also reducing their liability exposure.

3. Spousal Lifetime Access Trust (SLAT)

A SLAT is one of the more elegant tools in estate planning for married couples: it threads the needle between giving assets away (for estate tax purposes) and keeping them accessible to your family.

How it works: One spouse (the "grantor spouse") creates an irrevocable trust and gifts assets into it, naming the other spouse as the primary beneficiary during their lifetime. The beneficiary spouse can access income and principal from the trust during their lifetime, which gives the couple continued (indirect) access to the assets, while those same assets are removed from the grantor spouse's taxable estate and protected from the grantor spouse's creditors.

For our example couple, the grantor spouse could gift a portion of the $3M brokerage account into a SLAT for the benefit of the other spouse and their children. That chunk is now outside their estate but still accessible to the family through distributions to the beneficiary spouse.

The pros:

• Removes assets from your estate while maintaining family access through the beneficiary spouse.
  
  
• Protects assets from the grantor spouse's creditors.
  
  
• Takes advantage of the current high gift and estate tax exemption.

The cons:

• If the beneficiary spouse dies first, the surviving (grantor) spouse loses access. The kids become the beneficiaries. That's a real risk worth thinking through carefully.
  
  
• Divorce makes things messy. If the marriage ends, the grantor spouse can lose both the assets and access to them.
  
  
• Both spouses cannot create reciprocal SLATs for each other, the IRS calls that the "reciprocal trust doctrine" and will essentially undo both trusts. If you both want to establish SLATs, they must be meaningfully different in structure and funding - but that can be done with thoughtful drafting.
  
  
• Requires an independent trustee or the beneficiary spouse. The grantor cannot serve as trustee of their own SLAT.

Bottom line: SLATs are an especially strong fit for committed married couples. The combination of estate tax reduction and continued family access to the wealth makes this one of the first strategies we discuss with couples at this asset level.

4. Domestic Asset Protection Trust (DAPT)

A DAPT is a trust where you are both the grantor and a permissible beneficiary, meaning you can still benefit from the assets, while those assets are protected from your future creditors. DAPTs are also known as self-settled trusts.

Here's the catch: California does not have a DAPT statute. To use one, a California resident must set up the trust in a state that does. Nevada is the most popular choice for Californians, given its geographic proximity and favorable trust laws. Nevada allows DAPTs with a two-year seasoning period before creditor protection fully kicks in.

How it works: You create a Nevada DAPT, fund it with assets (say, a portion of the brokerage account), name an independent Nevada trustee, and name yourself as a discretionary beneficiary. You give up direct control, but you can potentially receive distributions at the trustee's discretion.

The pros:

• You can potentially remain a beneficiary, unlike most other irrevocable trusts where you give assets away entirely.
  
  
• Strong creditor protection after the seasoning period.

The cons:

• Whether a California court will respect a Nevada DAPT is not fully settled law. California has strong public policy against self-settled spendthrift trusts, and California courts have sometimes reached through these structures to get to the assets.
  
  
• The trust must be administered in Nevada with a Nevada trustee. You can't just paper-file it and keep everything in California.
  
  
• Transfers must not be made to defraud existing creditors. If you fund a DAPT and then get sued by a creditor you had reason to believe would sue you, the transfer can be unwound as a fraudulent conveyance.
  
  
• More complex and expensive to set up and maintain than most other trusts.

Bottom line: DAPTs are a legitimate strategy, but in California they carry more legal uncertainty than in other states. They work best as one layer of a broader plan rather than a standalone solution. And they work best if your assets, and even you, are in Nevada.

5. Irrevocable Life Insurance Trust (ILIT)

Here's where our example couple has a significant planning opportunity.

You have $3M in life insurance. That's a meaningful death benefit, and it's probably meant to take care of your family if something happens to one of you. But here's the thing: if you own that policy personally, the $3M death benefit is included in your taxable estate. That takes your estate from $11M to $14M when the first spouse passes, which could push a meaningful portion into estate tax territory down the road.

An ILIT solves this.

How it works: Instead of owning the life insurance policy personally, you create an irrevocable trust that owns the policy. The trust pays the premiums (funded by annual gifts from you), and when you die, the $3M death benefit is paid to the trust, completely outside your taxable estate, and then distributed to your beneficiaries according to your instructions.

The pros:

• The $3M death benefit is excluded from your taxable estate. For a married couple with a growing estate, this can make a meaningful difference in long-term estate tax exposure.
  
  
• Proceeds are protected from creditors.
  
  
• Provides estate liquidity. Your heirs can use the proceeds to pay taxes, fund a buyout of your business interest, or simply provide a financial cushion without a forced sale of other assets.

The cons:

• ILITs work best with permanent, rather than term, policies, and permanent policies can be pricey depending on your age and health condition.
•  
• You must give up ownership of the policy. You cannot be the owner or direct beneficiary.
  
  
• Requires annual "Crummey" notices to beneficiaries to preserve the gift tax exclusion on premium payments. (This sounds more complicated than it is, but it does require annual attention.)
  
  
• If you transfer an existing policy to the ILIT and die within three years, the IRS pulls the death benefit back into your estate. If that's the situation, it's often better to have the ILIT purchase a new policy from the start rather than transferring the old one.

Bottom line: For a couple with $3M in life insurance, an ILIT is one of the highest-leverage, lowest-cost moves available. The policy is already there - it just needs to be owned by the right entity.

Click here for our recent article on ILITs.

6. Charitable Remainder Trust (CRT)

A CRT isn't purely an asset protection tool. It's more of a tax and income planning strategy with a charitable twist. But for the right couple, it can be one of the most powerful moves in the playbook, particularly when you're sitting on a highly appreciated asset and the idea of writing a massive check to the IRS makes you cringe.

How it works: You transfer a highly appreciated asset, say, appreciated securities from your brokerage account, into an irrevocable charitable trust. The trust sells the asset and avoids paying capital gains tax, reinvests the full proceeds, and then pays you and your spouse an income stream for both of your lifetimes (or a set number of years). When you both pass away, whatever remains in the trust goes to a charity of your choosing.

There are two main flavors:

• Charitable Remainder Annuity Trust (CRAT): Pays you a fixed dollar amount each year. Simpler, but less flexible.
  
  
• Charitable Remainder Unitrust (CRUT): Pays you a fixed percentage of the trust's value each year, recalculated annually. As the trust grows, your payments grow too — which makes a CRUT a better fit for most couples who want some inflation protection on their income stream.

For our example couple, imagine you funded a CRT with $1M of appreciated stock from the brokerage account that you originally purchased for $200,000. If you sold it personally, you'd owe federal capital gains tax plus California state income tax -potentially $270,000 or more gone immediately. Inside a CRT, the trust sells the stock tax-free, reinvests the full $1M, and generates a meaningfully larger joint income stream for both of you over your lifetimes.

On top of that, you receive a charitable income tax deduction in the year you fund the trust, based on the actuarial present value of the charity's remainder interest. That deduction can offset income in the current year or be carried forward for up to five years.

The pros:

• Eliminates the immediate capital gains tax on the sale of appreciated assets - the full value stays working for both of you.
  
  
• Provides a reliable income stream for both of your lifetimes.
  
  
• You receive an upfront charitable income tax deduction.
  
  
• Removes the asset from your taxable estate.
  
  
• Assets inside the CRT are protected from your creditors.
  
  
• Satisfies philanthropic goals: a meaningful gift goes to causes you both care about.

The cons:

• This is ultimately a gift to charity. The remainder goes to the charity when you both pass away - not to your children. If leaving a full inheritance to your heirs is the top priority, a CRT alone doesn't accomplish that.
  
  
• The trust is irrevocable. Once you fund it, you cannot take the assets back.
  
  
• The IRS requires that the charity's remainder interest be at least 10% of the initial value of assets transferred. If the math doesn't work out (usually because of very high payout rates), the trust won't qualify.

Bottom line: A CRT is compelling if you have a highly appreciated asset you're planning to sell anyway, you want reliable joint lifetime income, and you have some charitable inclination. For a married couple, the joint lifetime income feature makes it even more attractive. It's one of the rare planning tools where the government essentially helps you give more to both your family and charity than you could have done on your own.

Putting It All Together for Our $14M Couple

Here's a simple way to think about which strategy applies to which asset:

A few important reminders for married couples specifically:

Your retirement accounts (IRA, 401k) already have significant creditor protection under both federal and California law. You don't need to do anything special with these, but getting your beneficiary designations right is critical. A common mistake is naming your estate as beneficiary, which triggers probate and eliminates the stretch IRA benefit for your heirs, or forgetting to name a beneficiary, especially if your spouse dies, which also could trigger probate.

The unlimited marital deduction means assets can pass between spouses estate-tax-free at death. But this only defers the estate tax; it doesn't eliminate it. When the surviving spouse eventually passes, the full estate is taxable. Planning now, while both spouses are alive and the exemption is high, is far more effective than scrambling to plan after the first death.

Umbrella insurance is one of the most cost-effective asset protection tools available and is often overlooked. A $2–5M umbrella policy will provide broad liability coverage across your home, rental, and vehicles.

No single strategy protects everything. The goal is layering: creating multiple barriers between your assets and potential creditors, so that even if one layer is breached, others remain intact.

Ready to Protect What You've Both Built?

Asset protection planning at this level requires coordination between your estate planning attorney, your CPA, and your financial advisor. At Clark Allison LLP, we work with California families every day to build estate plans that protect their homes, their businesses, and the people they love, in a process that's straightforward and, dare we say, enjoyable. And we appreciate the opportunity to work as a team with our clients' CPA and financial advisor.

Give us a call or click Get Started below to reach out. We'd love to help you figure out the right combination of strategies for your situation. 

We serve families in person in our El Dorado Hills, Roseville, San Diego, and San Luis Obispo offices, and virtually from anywhere in California.

Get Started