What Assets Are Protected in a California Lawsuit

In California, your home equity up to $722,000, most retirement accounts, life insurance policies, and personal property are protected under state and federal exemptions from lawsuits.

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California is reputed to be among the most litigious states in the U.S. With high divorce rates and a penchant for lawsuits, protecting your assets is critical to anyone who resides in California. From entrepreneur to professional to anyday homeowner, knowing which assets are shielded from creditors will save you from bankruptcy.

How Much Home Equity Is Exempt?

In 2025, California homestead exemption shields between $361,000 and $722,000 of home equity, depending on the median home value of your county. That's a significant increase from the old $75,000 limit before 2021.

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The exact dollar amount depends on your county. In expensive counties like Orange County and Los Angeles, you have the maximum $722,000 protection. In cheaper counties, you have at least $361,000 protection.

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Two Homestead Protection Types

There are two homestead exemptions in California:

Automatic Homestead: You get automatic protection if you live in your home. It only applies when your property is being compelled to sell by creditors.

Declared Homestead: You file documents with the recorder in the county. That protects you even if you sell your home voluntarily. The amount that is secured stays secure for six months, and you can buy a new house.

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What the Homestead Exemption Protects

The homestead exemption protects your primary residence, like houses, mobile homes, condominiums, and even boats or other floating homes you live in.

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There are dramatic limitations on the homestead exemption, however. It does not protect you from:

• Mortgage foreclosures
• Property tax liens
• Mechanic's liens
• Child support or alimony claims
• Debts secured before recording the homestead declaration

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Retirement Account Protection

Retirement accounts are handled differently under California lawsuits. The protection will depend on the type of account you have.

Fully Protected Retirement Accounts

Federal law provides maximum protection to ERISA-qualified retirement plans like 401(k)s, 403(b)s, pension plans, and profit-sharing plans. Your plan administrator owns these funds, not you. These funds are inaccessible even if a creditor sues and prevails.

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The protection is so strong that even after you retire and start receiving distributions, the money remains secure if you deposit it into a special bank account.

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Limited Protection for IRAs

California statute protects IRAs and Roth IRAs only to the "extent necessary for the support of you and your dependents" in retirement. What that is, is that if a court thinks you have more in your IRA than you need for a good retirement, your creditors can seize the excess.

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This is much less protection than 401(k) protection. Judges take all your assets into account when deciding what is "necessary" for retirement. If you own other assets of value, your IRA is less safe.

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Special Protection for Rollover IRAs

Surprise for many: if you roll over a 401(k) to an IRA, the funds still enjoy their full ERISA protection. You need only certify that the money was earned in an employer plan.

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Assets love this news. Take complete records of any 401(k) rollovers to save this protection.

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Self-Directed IRAs and Alternative Investments

Self-Directed IRAs with real estate or other alternative assets may be in jeopardy since courts could decide such assets are not "necessary" for retirement income.

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When you invest in real estate through a Self-Directed IRA, be aware that this plan might reduce your asset protection versus other investments.

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Life Insurance and Annuities

California protects some life insurance policies and annuities to some extent from creditor claims. The protection varies with the type of policy and ownership.

Life Insurance Protection

Life insurance proceeds paid to beneficiaries are largely protected against the creditors of the decedent. However, if you have a policy on your own life, cash value could be vulnerable to your creditors.

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Annuity Protection

Annuities are provided with some protection under California law, but the laws are complex. The protection generally depends on when you purchased the annuity and how much you contributed to it.

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Personal Property Exemptions

California protects a range of personal property from creditors, but the amounts are typically modest.

• Protected Personal Property
• California covers these personal items:
• Home furnishings and household effects to $8,000
• Clothing and personal effects
• Tools of your trade to $8,000
• One vehicle up to $3,300 in equity
• Wedding bands and family treasures
• Medical aids and equipment

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Salary and Income Protection

California shields most salaries from garnishment, as well as public benefits such as Social Security, unemployment benefits, and workers' compensation.

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Creditors can garnish only 25% of your disposable earnings, and only if you earn over 40 times the minimum wage for a week.

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Business Asset Protection

Preserving business assets involves planning carefully and having the right business structures in place.

Limited Liability Companies (LLCs)

LLCs create legal separation between business and personal property, which restricts personal exposure for business liability and lawsuits.

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If someone sues your business, they typically can't go after your personal residence, car, or bank accounts. However, this protection isn't unlimited.

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Corporation Protection

S-corporations and C-corporations provide equivalent liability protection. They are distinct legal entities from the owners.

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Reverse Piercing Concerns

Here's something many business owners don't know: LLCs and corporations protect your personal property from lawsuits against the business, but they don't protect business assets from lawsuits against you personally.

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If you personally get sued for a car accident, creditors can attach your business interests to satisfy the judgment.

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Trust Protection Strategies

Trusts can be excellent asset protectors, but there are regulations in California regarding what works.

Asset Protection Trusts

California forbids self-settled asset protection trusts, i.e., you can't form a trust in your own name out of your own money and make the assets safe from creditors.

However, you can form trusts for the benefit of other family members and bestow asset protection upon them.

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Spendthrift Trusts

Spendthrift trusts may safeguard beneficiaries' property by limiting their ability to assign or transfer their trust interests. But again, you can't be both beneficiary and settlor of a California spendthrift trust.

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Discretionary Trusts

When trustees have complete discretion in the distribution, beneficiaries have no legal interest in the property in the trust. That makes it harder for creditors to reach trust money.

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Offshore Trusts

They use offshore asset protection trusts in jurisdictions like the Cook Islands or Nevis for additional protection. These are sophisticated methods with high-end legal services.

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Assets That Are NOT Protected

It is just as important to understand what creditors CAN take as it is to know what they can't.

Vulnerable Assets

These assets typically offer little or no protection from lawsuits:

• Typical bank accounts and savings
• Investment accounts (stocks, bonds, mutual funds)
• Rental properties (other than your primary residence)
• Luxury items like jewelry, artwork, or collectibles
• Cryptocurrency and digital assets
• Second homes and vacation homes

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Community Property Dangers

California is a community property state. That means property that was obtained during marriage is jointly owned by both spouses. If a spouse is sued, community property assets may be at risk even if the other spouse didn't do anything wrong.

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Joint Assets

Jointly owned assets tend to be susceptible to lawsuits against any owner. This includes bank accounts held jointly and jointly owned property.

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How to Make Assets Less Vulnerable

Besides relying on exemptions, there are proactive steps that can significantly increase your asset protection.

Professional Liability Insurance

Physicians, lawyers, and other professionals should carry malpractice insurance. This protects your practice and personal assets from professional liability claims.

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Strategic Asset Titling

Titling assets makes a big difference. Consider the following:

• Maintaining retirement funds in 401(k) plans, as opposed to IRAs
• Using business entities for investment realty
• Maintaining special accounts for protected funds

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Geographic Considerations

Some people relocate to states with more asset protection laws. Texas and Florida, for example, offer unlimited homestead exemptions.

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Common Mistakes to Avoid

These are errors which will destroy your asset protection plan.

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Transferring Assets After Being Sued

Asset protection plans only work if made many years in advance of issues. Moving assets after you've already been sued is fraudulent transfer and makes matters worse.

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Mixing Protected and Unprotected Funds

When you place protected retirement distributions into a regular bank account with other money, you can lose the protection. Separate protected funds.

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Ignoring Community Property Rules

Most married couples are not familiar with how community property laws affect asset protection. Assets purchased during marriage are generally community property whether titled in one spouse's name or both spouses' names.

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Over-Reliance on Business Entities

LLCs and corporations are wonderful tools, but they are not infallible. Creditors can sometimes "pierce the corporate veil" if you do not take formalities seriously.

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Waiting Too Long

The most significant mistake is procrastination. Asset protection planning is time consuming to implement. Plan ahead of time.

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Asset Protection Techniques by Profession

Certain professions carry their own unique lawsuit risks that require tailored asset protection techniques. Understanding your specific professional vulnerabilities enables you to build the right protection plan.

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Timing and Effectuation of Asset Protection Plans

Understanding when and how to effectuate asset protection plans can be the difference between effective protection and futile planning. Timing is not just important,  it's critical in asset protection.

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The Preeminence Role of Advance Planning

Asset protection plans only work when executed before the trouble begins. Courts regard transfers made after legal action has begun as fraudulent efforts to hide assets from creditors.

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Major Timing Rules:

• Use strategy in good times, not in bad times
• Provide sufficient "seasoning time" for transfers to take hold
• Employ the same protection strategies for years, not months
• Update and review protection plans on a yearly basis

All states have "look-back" periods in which recent transfers may be unwound. In California, creditors can object to transfers made within four years of the date of the lawsuit if they suspect the transfer was fraudulent.

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Frequently Asked Questions

Q: Can creditors sell my home?

A: Only if your equity exceeds the homestead exemption amount. If you have $500,000 equity and $722,000 protection, your home is safe.

Q: What happens to my 401(k) if I am being sued? A: ERISA-qualified 401(k)s are entirely protected from lawsuits and creditors, regardless of amount.

Q: Can I protect assets by distributing them to family members? A: Gift giving to relatives is open to being unraveled as fraudulent transfers if done to outsmart creditors. It normally bites you back.

Q: How long must I stay in California to qualify for homestead protection? A: You must be present for at least 1,215 days (about 3.3 years) to qualify for the maximum homestead exemption. Residency for less time may equate to reduced protection.

Q: Are investments in cryptocurrency safe from creditors? A: Typically no. Cryptocurrency is investment property and has no special protection from creditors.

Q: Can protected assets be seized by child support creditors? A: Yes. Child support and alimony obligations can attach to most protected assets, such as homestead equity and some retirement accounts.

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Final Thoughts

California asset protection law gives broad protections to some retirement accounts and homestead equity. Most assets remain vulnerable to creditors and lawsuit judgments.

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The key to asset protection is planning ahead. Implement adequate insurance, business organization, and strategic asset titling before the problem arises. Don't wait for a lawsuit to be filed against you to think about protection.

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Remember asset protection is not about hiding assets or avoiding legitimate responsibilities. It's about using legal methods to safeguard your financial well-being and shield your family's future.

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If you're worried about asset protection, meet with seasoned attorneys familiar with California law. The strategies that work elsewhere won't work here, and mistakes cost too much. 

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Asset protection planning is an investment in your own peace of mind. In our litigious culture, it's not a matter of if or when you'll be sued, but when. Be prepared.