The “Bulletproof” Trust Problem

I’ve reviewed a number of irrevocable trust documents over the years that came to me with some variation of the same title: “Bulletproof,” “Asset Protection,” or “Ironclad.” Sometimes clients bring them in because they signed one somewhere else and want a second opinion. Sometimes they come through discovery in a probate matter. Or, someone sends me a template they found online and asks whether it’s worth using.

The short answer is almost never.

That’s not because irrevocable trusts are bad planning tools. They’re not. Used correctly, an irrevocable trust can be one of the most effective structures in an estate plan. But the documents I’m describing aren’t correctly designed irrevocable trusts. They’re templates dressed up with confident-sounding names, and the gap between the name and the substance is usually significant.

Here’s what I see, repeatedly, when I actually read them.

California Doesn’t Have an Asset Protection Trust Statute

The most fundamental problem with “bulletproof” trusts marketed for California residents is that California doesn’t recognize what lawyers call a domestic asset protection trust, or DAPT. About 20 states do. Nevada is the most commonly cited. South Dakota and Delaware are others. In those states, you can set up an irrevocable trust for your own benefit and, if it’s structured correctly and the timing rules are followed, your future creditors generally can’t reach it.

California has no such statute. California Probate Code section 15304 says that if you’re both the person who created the trust and a beneficiary of it, your creditors can reach the assets to the extent you could receive distributions. The spendthrift clause that every one of these templates includes doesn’t change that. California courts routinely pierce spendthrift protections in self-settled trusts because the statute tells them to.

So when a template describes itself as a California asset protection trust and lists the grantor as a potential beneficiary, it’s promising something California law doesn’t deliver. The trust can have the most carefully worded spendthrift clause in the world and it won’t matter if the client is sitting in Los Angeles, the trustee is in Ventura County, and the assets are California real estate.

A legitimate asset protection strategy in California requires either (a) a structure where the grantor is genuinely not a beneficiary, or (b) actually moving the trust situs to a DAPT state, appointing a qualifying trustee in that state, administering the trust there, and following the specific requirements of that state’s statute. A blank field in a form document that says “[State]” with a note that the laws “most favorable to enforceability” will apply doesn’t accomplish either.

The Tax Contradiction

The next problem I see most often is a direct conflict between two provisions in the same document.

One provision declares that the trust is a non-grantor trust for income tax purposes. The other gives the grantor a special power of appointment, which is the right to redirect trust assets among a defined class of beneficiaries, usually lineal descendants.

Those two things can’t coexist. Federal law, specifically IRC section 674, treats a trust as a “grantor trust” when the person who created it retains the power to determine who benefits from the principal or income. A special power of appointment exercisable by the grantor is exactly that kind of power. The non-grantor declaration in section 9 of a template doesn’t override the Internal Revenue Code. The trust ends up being a grantor trust regardless of what it says, which means the grantor pays income taxes on all trust earnings, which is the opposite of what the non-grantor structure is supposed to accomplish.

This isn’t a borderline case. It’s a straightforward application of a rule that’s been on the books for decades. When I see it in a template, it tells me the document was assembled without a clear picture of what it was trying to achieve.

There are legitimate reasons to want a grantor trust. There are legitimate reasons to want a non-grantor trust. There is no legitimate reason to try to be both at the same time, because it doesn’t work.

Phantom Statutory Protection

Some of these templates include recitals or purpose statements citing specific federal statutes as the basis for the trust’s asset protection. I’ve seen citations to bankruptcy code provisions that actually protect 529 college savings plans, offered as supposed authority for protecting a general trust from creditors. The citation is technically accurate — the statute exists — but it applies to an entirely different type of account and provides zero protection for what’s being described. A client reading that recital would reasonably believe the trust is backed by a specific federal exemption. It isn’t.

This matters because clients make decisions based on what documents say. If someone transfers a significant portion of their wealth into a trust partly because the trust’s own text told them it qualifies for a bankruptcy exemption, and then they later face a bankruptcy filing and discover the exemption claim was wrong, the consequences are real.

The Governing Law Problem

Most of these templates include a choice-of-law provision with a blank state field and a fallback clause saying something like the trust will be governed by “the laws most favorable to the enforceability of the Trust’s provisions.” This sounds comprehensive. It provides nothing.

Courts determining which state’s law governs a trust look at where the trustee is located, where the trust is administered, and where the assets are situated. A blank state field and a floating “most favorable” clause don’t move those needles. What you get is California law applied by a California court, regardless of what the template aspired to. If the trust was supposed to be a Nevada-law trust, someone needed to actually appoint a Nevada trustee, actually administer the trust in Nevada, and actually title assets appropriately. A clause in a Word document doesn’t do that work.

Missing Provisions That Aren’t Trivial

Beyond the structural problems, these templates routinely omit provisions that are standard in any competently drafted irrevocable trust.

There’s usually no incapacity planning. If the trustee becomes incapacitated, many of these documents provide no mechanism to determine that, qualify a successor, or maintain administration during the gap. The successor trustee provisions that do exist often require court involvement that careful drafting could have avoided.

There’s rarely any generation-skipping transfer tax analysis. A trust intended to hold assets for multiple generations, which most of these templates contemplate, is a GST-taxable structure if it’s not planned correctly. A 40 percent flat tax on taxable distributions doesn’t care that the trust’s cover page said “bulletproof.”

There’s almost never any SECURE Act coordination. The SECURE Act changed inherited retirement account rules substantially in 2020. SECURE 2.0 added more in 2023. If a client names one of these trusts as the beneficiary of an IRA, the income-tax consequences depend entirely on how the trust is structured relative to the post-SECURE rules. Templates assembled before 2020, or assembled without attention to those changes, often have provisions that produce exactly the wrong result: forcing distribution of the entire inherited account balance in a single tax year, at the worst possible rate.

The Drafting Quality Problem

I mentioned substantive issues first because they’re more consequential than drafting quality. But I’d be leaving something out if I didn’t note that the execution of these templates is often poor in ways that create their own problems. Provisions that cross-reference the wrong section number. Defined terms used in one article that weren’t defined anywhere. The trust refers to the person who created it as “Grantor” throughout the document and then switches to “Trustor” in one provision without explanation. None of these are fatal on their own. Collectively they suggest that nobody read the document end to end with the question of whether it actually worked.

What a Real Irrevocable Trust Looks Like

An irrevocable trust that actually accomplishes what it’s supposed to accomplish starts with a clear statement of purpose. Not a marketing statement — a legal purpose. Is this for income tax planning? GST planning? Asset protection for someone other than the grantor? Medicaid planning? Each of those goals has different structural requirements, and they’re not all compatible with each other.

It specifies governing law, and if the choice is a state other than California, it actually establishes the infrastructure for that choice to be respected. It resolves the grantor trust question intentionally, not by accident. It has complete distribution provisions, a definite termination rule, a Rule Against Perpetuities savings clause, and contingent takers. It addresses tax elections, digital assets, incapacity, and retirement accounts. It includes a trust protector with defined powers to respond to law changes over the trust’s lifetime.

None of those things are optional add-ons. They’re what makes a trust work.

The name on the cover doesn’t do any of that. The drafting does.

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Eric Ridley is an attorney in Port Hueneme, California. His practice is limited to estate planning, trust administration, probate, and related wealth planning matters.