How to Protect Your Assets From a Lawsuit in California

Methods for protecting assets from lawsuits in California include shifting ownership into legal entities such as trusts, taking advantage of legal protections for homesteads and retirement accounts, and maintaining appropriate insurance coverage. Business owners can protect business assets with the help of a legal business structure, such as a Limited Liability Company (LLC). Often, multiple techniques are used to create an umbrella of protection from lawsuits seeking damages.

A financial advisor can help you identify the assets you want to protect and work with other professionals, such as attorneys, to set up ways to shield those assets.

California Asset Protection Basics

Asset protection strategies in California are shaped by a multitude of laws, regulations and court rulings that aim to balance the interests of creditors and debtors. The same is true of other states, and many of the ways people protect assets from lawsuits in California resemble methods used across the country. At the same time, there are some unique wrinkles to California asset protection.

When it comes to protecting assets from lawsuits in California, the techniques employed include using insurance appropriately and taking advantage of protections for retirement savings accounts and homesteads. California business owners, like those in other states, can structure their enterprises as separate legal entities. This helps to erect a wall that can protect personal assets from business losses.

California-specific laws also provide for some asset protection strategies not available in other states. A prime example is the provision for Private Retirement Plans. When used with appropriate trusts and incorporating legally required features, these can shield assets designated to provide someone with a financially secure retirement from lawsuits and other claims.

Protecting California Assets

Asset protection in California involves strategic planning to safeguard your wealth from potential creditors, lawsuits, and other financial risks. California residents face unique challenges due to the state’s creditor-friendly laws and high litigation rates. Creating a comprehensive asset protection plan requires understanding which assets are already protected under state law and which need additional safeguards. Here are some of the tools and techniques most commonly used to protect assets from lawsuits in California:

Homestead exemption: As in many states, California law protects the equity in someone’s home from some types of creditors. The protection is restricted to the homeowner’s primary residence. Equity is also only protected up to a current maximum amount of $600,000, an amount that adjusts annually for inflation. A homestead is not protected against claims resulting from lender foreclosure, mechanics’ liens, and court-ordered child and spousal support.
Insurance: Insurance is a first line of defense against many sorts of claims on a Californian’s assets. The protection depends on the type of policy, the type of assets covered, and the amount of coverage. Sometimes, an insurance policy may not provide sufficient protection against all types of potential claims and losses.
LLCs: These business entities can effectively protect business owners’ personal assets from claims directed against the business. They provide less protection from losses due to personal liabilities, however.
Trusts: Transferring ownership of assets to one of these legal entities involves losing some control of the assets. However, real estate, investments, cash and other assets can be placed in a trust and overseen by a trustee for the benefit of named beneficiaries while remaining safe from claims. There are many different types of trusts, including revocable trusts, irrevocable trusts and charitable trusts, which offer different levels of protection.
Private Retirement Plans: These are asset protection tools unique to California. They require identifying some assets as retirement assets, retitling them so they belong to a specially created Private Retirement Trust, and creating a written actuarial plan for funding. While primarily for retirement funding, they can also protect assets from creditors.

Effectively shielding assets from a lawsuit in California, as in most states, calls for a multi-pronged approach employing insurance, separate legal entities and home equity protections to fend off claims from lawsuits and other sources. While each approach offers benefits, they also carry limitations and costs of their own.

What to do if You Get Sued in California

Being served with a lawsuit in California can be overwhelming. The first step is to carefully read all documents you’ve received, particularly the summons and complaint. These papers outline who is suing you, why they’re suing, and what they’re demanding. Note the deadline to respond, typically 30 days in California courts, as missing this deadline could result in a default judgment against you.

Seeking legal counsel should be your immediate priority when facing a lawsuit in California. An experienced attorney can evaluate your case, explain your options, and help develop a defense strategy. Many lawyers offer free initial consultations, and if cost is a concern, look into legal aid societies or pro bono services available throughout the state.

Responding to the lawsuit within the specified timeframe is critical. In California, this typically means filing an “Answer” with the court that addresses each allegation in the complaint. Your response must follow specific formatting requirements and be properly served to the plaintiff or their attorney, making professional legal guidance particularly valuable during this stage.

California courts often encourage alternatives to trial, such as mediation or arbitration. These methods can be less expensive and time-consuming than litigation. Your attorney can help determine if settlement negotiations or formal alternative dispute resolution might resolve your case more efficiently while still protecting your interests.

If your case proceeds to court, preparation is essential. Work closely with your attorney to understand what to expect during hearings and trials. California’s court procedures can be complex, so familiarize yourself with proper courtroom etiquette and be prepared to answer questions truthfully under oath if called to testify.

Bottom Line

A couple reviewing how to protect assets from a lawsuit in California.

Protecting your assets from lawsuits in California employs many of the techniques that are effective in other states. They include making the best use of homestead exemptions, ensuring you have adequate insurance coverage, utilizing trusts as appropriate to shield assets while retaining benefits, and organizing businesses so that the owners’ assets are protected from business debts. California’s Private Retirement Plans allow retirement savers to shield assets from claims, but require expert assistance to set up.

Tips for Living in California

A financial advisor is an important partner in the process of protecting your assets in California. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you live and work in California, you are subject to the country’s highest marginal income tax rate. SmartAsset’s California Paycheck Calculator tells you what your take-home pay will be after accounting for federal and state income taxes.