Let's say you live in California. You've worked hard, saved well, and maybe even own a business, some investment properties, or a nice portfolio. Naturally, you want to protect your assets—especially from unexpected lawsuits, divorces, or creditor claims.

So, you hear about something called a Domestic Asset Protection Trust (DAPT) and how states like Nevada, South Dakota, and Delaware let you set one up to shield your wealth.

Sounds amazing, right? Set up a trust, transfer assets to it, stay the beneficiary, and voilà—creditors can't touch your money.

Not so fast.

If you're a California resident, there's a hard truth you need to know: California courts do not recognize these out-of-state asset protection trusts. And thanks to a new law—AB 2837—things just got even more serious.

Let's break it down in a clear, everyday way.

🔐 What Is a DAPT?

A Domestic Asset Protection Trust is a special kind of irrevocable trust allowed in some states like Nevada, Delaware, and South Dakota.

It's designed so you (the person who creates the trust) can:

• Put your assets in the trust
• Remain a beneficiary (still get money out)
• Appoint someone else as trustee (often a friend or professional)
• And most importantly, protect the trust assets from creditors

In states that allow DAPTs, this setup is legal and courts will honor the protection.

But there's a problem…

❌ California Doesn't Play That Game

California has never allowed self-settled asset protection trusts.

In plain English: If you create a trust and still benefit from it, you can't hide behind it to dodge creditors. California sees right through it.

And even if your trust is set up in Nevada or South Dakota, California courts say:

"We apply our law to California residents, not Nevada's."

In other words, just because something is legal in Nevada doesn't make it valid in California.

This is called a strong public policy exception to the Constitution's Full Faith and Credit Clause.

So when push comes to shove in a California courtroom? That DAPT is getting unraveled like a loose sweater.

⚠️ AB 2837 – The Law That Seals the Deal

In 2023, California passed AB 2837, which amended the Uniform Voidable Transactions Act (UVTA).

Before this, creditors could already challenge shady transfers into self-settled trusts. But now, with AB 2837:

• If you move assets into a trust where you still benefit, it's presumed to be a fraudulent transfer.
• There is a 10-year look-back period, meaning even transfers made up to a decade ago can be clawed back.
• The law explicitly rejects the idea that out-of-state law (like Nevada's DAPT laws) override California policy.

🔒 Real Example:

Let's say John, a Los Angeles dentist, sets up a Nevada DAPT and transfers $3 million in investment real estate into it. Two years later, he gets sued for malpractice.

Guess what?

• That transfer can be challenged in court.
• His trust won't protect him.
• And California courts will use AB 2837 to unwind the entire setup.

⚖️ What the Courts Have Said

California and other state courts have repeatedly refused to honor DAPTs created in other states by their own residents.

🔹 In re Huber (Bankr. W.D. Wash. 2013)

• A Washington resident set up an Alaska DAPT.
• The court said, "Nice try," and applied Washington law.
• Result? The trust was disregarded.

🔹 Klabacka v. Nelson, 133 Nev. 164 (2017)

• Nevada upheld its own DAPT law only for Nevada residents.
• No bearing on Californians.

🔹 In re Brooks-Hamilton (Bankr. N.D. Cal. 2008)

• A California bankruptcy court rejected a Nevada trust for asset protection.
• California law applied, not Nevada's.

Bottom line: California courts protect California creditors. Period.

❎ Why DAPTs Are Especially Risky in California

1. False Sense of Security – You think you're protected. You're not.
2. Fraudulent Transfer Risk – A court can claw back transferred assets for up to 10 years.
3. No Precedent on Your Side – Not a single California court has upheld a DAPT created by a California resident.
4. Expensive to Defend – If challenged, your out-of-state trustee is getting deposed and you're burning money on lawyers.

📉 Better Alternatives for Californians

✅ 1. California Private Retirement Plan (PRP)

• Covered under California Code of Civil Procedure §704.115
• Fully exempt from creditors if set up properly
• Can protect real estate, LLC interests, and investment accounts
• Backed by case law: In re Bloom, O'Brien v. AMBS Diagnostics

✅ 2. Irrevocable Trusts With Third-Party Beneficiaries

• Give the benefits to your spouse, kids, or other loved ones
• You don't retain direct benefit = stronger protection

✅ 3. Offshore Trusts (e.g., Cook Islands)

• Not under U.S. court jurisdiction
• Must be properly reported (IRS Form 3520 / 3520-A)
• For high-risk cases and high-net-worth individuals only

✅ 4. Exempt Asset Classes

• Homestead equity (limited)
• Retirement accounts (IRA/401(k))
• PRP assets held for retirement purposes

🤔 Still Not Convinced?

Let's try a simple analogy:

Imagine trying to escape California taxes by saying, “But I opened a bank account in Nevada.”

It doesn't work. California still taxes you.

Same goes with asset protection. California residency means California rules.

📖 Frequently Asked Questions (FAQ)

Q1: Can I use a Nevada or South Dakota DAPT to protect my assets if I live in California?
A1: No. California law does not recognize Domestic Asset Protection Trusts (DAPTs) established in other states. Under California Civil Code § 3439.04 and AB 2837, such trusts are presumed fraudulent if the settlor retains a beneficial interest.

Q2: What is AB 2837, and how does it affect asset protection?
A2: AB 2837 is a law that amended California's Uniform Voidable Transactions Act (UVTA), imposing a 10-year look-back period on transfers to self-settled trusts and creating a presumption of fraud for those transfers where the settlor retains benefits.

Q3: What alternatives do I have for asset protection in California?
A3: Viable alternatives include California Private Retirement Plans (PRPs), irrevocable third-party trusts (e.g., Spousal Lifetime Access Trusts), and compliant offshore asset protection trusts in jurisdictions like the Cook Islands or Nevis.

Q4: How does a Private Retirement Plan (PRP) work?
A4: Under CCP § 704.115, assets designated for retirement within a properly structured PRP are fully exempt from creditor claims. PRPs can hold real estate, business interests, and financial accounts if their primary purpose is retirement.

Q5: Is a PPLI policy a valid tool for asset protection in California?
A5: Yes. Private Placement Life Insurance (PPLI) offers tax-deferred investment growth and, when paired with proper trust planning, can provide additional asset protection and estate tax efficiency for high-net-worth individuals.

Q6: How can I maintain the strength of my estate plan over time?
A6: Enroll in an ongoing maintenance program like our Legacy Protection Program, which provides structured legal reviews, updates for law changes, and continuity planning.

Q7: Where can I get personalized advice on these strategies?
A7: Contact the Law Office of James Burns at (949) 305-8642 or visit www.jamesburnslaw.com to schedule a consultation.

 

🌍 Final Word

California's AB 2837 made one thing crystal clear: you can't outmaneuver California law just by forming a trust somewhere else. Especially not one that you still benefit from.

If you want real protection, you need a strategy that respects California's statutes, court precedents, and public policy. That means using tools like PRPs, offshore structures (carefully), and strategic irrevocable planning.

Want to explore what that looks like for your situation?

Reach out to the Law Office of James Burns.

We're here to help protect what you've built—the right way.

James G. Burns, Esq.
Law Offices of James Burns
(949) 305-8642

Disclaimer: This blog is for informational purposes only and is not legal advice. Consult with a qualified attorney before making any decisions related to asset protection or trust law.