The Island and the Jail Cell

What a couple from Nevada learned about protecting their money the hard way, and what it tells you about every “bulletproof” trust ever sold at a free dinner

In the spring of 1998, Denyse and Michael Anderson did something that, on paper, had worked beautifully. Years earlier they had taken several million dollars and sent it about as far from an American courtroom as money can go: into a trust on the Cook Islands, fifteen specks of coral and palm in the South Pacific, closer to Tahiti than to Los Angeles. The Cook Islands had built an entire industry around one promise. Put your money here, and no United States judgment can touch it. A creditor who wants it has to fly to Rarotonga, hire a local lawyer, and start the whole case over from scratch under island law, against a clock that has usually already run out.

The Andersons’ trust had a clever feature, the kind the brochures brag about. If an American court ever ordered them to bring the money home, that order itself would trigger a clause removing them as trustees, so they could honestly tell the judge they no longer controlled the money. The trust was built to make compliance impossible. That was the selling point.

Then a federal judge in Nevada ordered them to bring the money home.

They said they couldn’t. The trust had done exactly what it was designed to do. And the judge, unimpressed, found them in civil contempt and sent them to jail until they complied (FTC v. Affordable Media, LLC (9th Cir. 1999) 179 F.3d 1228, 1240-1241).

Sit with that for a second, because it’s the whole story in miniature. The protection worked. That is precisely why they went to jail.

Here is the thing nobody selling asset protection wants you to understand. A wall built to keep your money away from a court keeps it away from you too. And when a court can’t reach your money, it reaches the next thing in the room. You.

The Andersons eventually got out. Others were less lucky. A man named Stephan Lawrence moved roughly seven million dollars into an offshore trust two months before a $20 million judgment landed on him, told the court he was powerless to bring it back, and sat in a jail cell for years while the judges and the trustee waited him out (In re Lawrence (11th Cir. 2002) 279 F.3d 1294, 1300-1302). A Pennsylvania man named Beatty Chadwick was jailed over money a court believed he had hidden offshore and stayed there for fourteen years. Civil contempt is supposed to coerce, not punish, so eventually a judge has to let you out when it becomes clear jail won’t change your mind. Fourteen years is how long “eventually” can take.

These are not stories about exotic island law failing. The island law worked. These are stories about people who confused a wall with a fortress, and forgot they were standing on the wrong side of it.

I think about these cases a lot, because the people in them were not fools. They were successful. They had something worth protecting, and a real fear of losing it, and someone sold them a beautiful answer to that fear. The fear was the genuine part. The answer was the product.

I do this work because of my father.

When he died, his estate didn’t go where he intended. A remarriage, a plan that didn’t account for it, and the people he meant to provide for watched it pass to someone else. No villain, no fraud, nothing dramatic. Just a gap between what he wanted and what the paperwork actually did, and a family on the wrong side of that gap forever. You don’t forget watching that happen. It is the reason I practice law the way I do, and it is the reason I have very little patience for people who sell fear-relief that doesn’t work.

Because that is the business. Asset protection is sold to a specific feeling: you built something, and you lie awake imagining it taken. A lawsuit. A divorce. A car accident with a number at the end of it you can’t cover. The IRS. The feeling is real and reasonable. And an entire industry exists to sell relief from it, the way a roadside stand sells umbrellas when the sky goes gray.

Some of what they sell is real. Most of what gets pitched to California residents at steak dinners and in social-media videos is not. And California, it turns out, is one of the hardest places in the country to make the fancy stuff work.

Start with the most common pitch: put your rental property or your portfolio in an LLC, and your personal creditors can’t touch it.

That part is roughly true, and it’s good advice. If someone wins a lawsuit against you personally, the law usually limits them to a “charging order,” which means they can intercept money the LLC pays out to you but can’t seize the building inside it or take over the company. They wait at the mailbox. They don’t get the keys.

Then the seminar adds the upgrade. Form your LLC in Wyoming or Nevada, they say, where the protection is ironclad, and you get something California can’t touch.

For a Californian, this is mostly a fantasy with a filing fee. If you live here and the company holds California property or you run it from your kitchen table, you have to register it in California and pay California’s $800 annual tax anyway, and when a California creditor comes after you, a California judge applies California’s rules. Those rules are weaker. A creditor here can foreclose on your interest and, in the right circumstances, reach the company’s assets directly.

We know this because of a man named James Baldwin. Baldwin ran a Delaware LLC as something close to a personal bank account, took roughly a hundred million dollars out of it over the years, then turned off the spigot the moment a judgment hit. A California appeals court looked at the Delaware paperwork, looked at how he’d actually used the company, and let the creditor pierce straight through to the assets anyway (Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 220-223). Delaware formation didn’t import Delaware protection into a California fight. The lesson Baldwin paid for: the protection is in how you run the thing, not where you filed the articles. Treat the company as your wallet and a court will treat it as your wallet too.

So people climb the ladder to the next promise: a trust you set up for your own benefit, sometimes domestic, sometimes offshore, that walls your money off from everyone.

In California, a trust you create for your own benefit does not protect you from your own creditors. The statute says so in plain words (Prob. Code, § 15304). It isn’t a close question and it isn’t a loophole waiting for a clever drafter. California simply does not let you be the person who funds the trust, the person who benefits from the trust, and the person whose creditors can’t reach the trust, all at once.

People assume a spendthrift clause, the standard language that’s supposed to keep creditors out, is a force field. It leaks. A few years ago the California Supreme Court worked through exactly how much a creditor can pull out of one, and the answer was more than most people expect: a creditor can reach the full amount of any distribution that’s due to come out, plus a slice of future payments on top (Carmack v. Reynolds (2017) 2 Cal.5th 844). And if the money is owed for child support, the clause does essentially nothing. In one case a father’s trust had a special provision designed to switch off distributions the moment a creditor came near. A court ordered it to pay his child support anyway (Pratt v. Ferguson (2016) 3 Cal.App.5th 102). The trust said no. The law said yes.

One more wall people lean on, and the one that fails most quietly: the IRS doesn’t play by these rules at all. A federal tax lien reaches right through the spendthrift language that stops everyone else (United States v. Bess (1958) 357 U.S. 51; Leuschner v. First Western Bank & Trust Co. (9th Cir. 1958) 261 F.2d 705). The government wrote the rules. It is not bound by your trust.

Which brings us to the product I most want you to recognize when it walks toward you, because it is being sold hard to Californians right now and it is the one that can end with a criminal-defense referral.

It goes by a name engineered to sound like nobody could question it: the “non-grantor, irrevocable, complex, discretionary, spendthrift trust.” Sometimes the “643 trust,” after the tax code section it misreads. Sometimes a “copyrighted trust.” Sometimes a brand name with a flag and a quote from the Constitution. The pitch is intoxicating. Sell your appreciated real estate to the trust, run your whole life through it, and never pay income tax or capital gains tax again, safe from every creditor and every court.

In August 2023 the IRS sat down and wrote, in a formal memo, that this exact product is a scam (IRS Office of Chief Counsel, AM 2023-006). Not a gray area. The memo names the structure, names the “643” tax theory, and explains why it’s wrong: a trust has to pay tax on its income and its capital gains, full stop, and the promoters are taking an obscure accounting rule about how trusts allocate income and pretending it’s a magic exemption. The IRS put the whole scheme on its public list of abusive tax-evasion schemes. The agency that audits you announced, in advance, that it considers this thing fraudulent.

The asset-protection half is just as hollow, and it fails for the reason you already know: you funded the trust, and you benefit from it. That’s self-settled, and § 15304 voids the protection the moment you do it. The promoters have a workaround. They call you the “Compliance Overseer” instead of the owner, and insist you’re not really the beneficiary, even as the paperwork has the trust paying your mortgage, your car, your insurance, your kid’s tuition. A California judge will look past the title to the facts. The question a court asks is simple, and the marketing materials answer it for you: who lives in the house, and who pays the bills out of the trust? You do. Calling yourself an Overseer doesn’t change who sleeps in the bedroom.

Now look at who’s selling it. Almost always a non-lawyer, a “trust consultant” or “strategist,” working a seminar room or a video feed. Behind him, on the paperwork, a lawyer licensed in some other state, Texas or New York or Nevada, whose name rides on an official-looking “opinion letter.” That lawyer cannot practice in California and never looked at your situation under California law. When you point this out, the promoter produces the trump card: the documents are copyrighted, he’ll say, and the lawyer owns the company that sells the copyrights, so it’s all legal.

That sentence has no legal meaning. Copyright protects the words on the page from being photocopied. It is not a license for an unlicensed person to sell you a legal document and tell you how to use it. In California that’s a crime, the unauthorized practice of law (Bus. & Prof. Code, §§ 6125, 6126), and our courts have shut down non-lawyer trust mills for exactly this, especially when the target is elderly. Read the fine print and you’ll find the seller has disclaimed away every consequence. You carry all of the risk. And when the audit notice arrives, the man from the seminar is gone, and you are alone with the bill.

So what does work?

The honest answer is quieter than the pitch, and that quiet is the tell. The single best asset-protection move available to a California family is also the one nobody runs an ad for, because it protects your children rather than you.

It’s a trust you set up for your kids, with an independent trustee who decides if and when to make distributions, full discretion, nothing your child can demand on a fixed date. Because there’s no fixed share your child can force out, there’s nothing for a future ex-spouse to claim in a divorce or a creditor to attach after a lawsuit. Your child still benefits. The people chasing your child don’t reach it. It works for the exact reason the self-settled trusts fail: it isn’t for you.

I ask every parent the same question, and I’ll ask you. Do you want a slice of what you leave your child landing in the hands of a son-in-law or daughter-in-law you can’t stand, in a divorce you can see coming? Nobody says yes. Leaving it outright, or in a trust that just hands it over at thirty, answers that question the wrong way. The discretionary trust answers it correctly. That’s the whole move. It’s undramatic, it’s real, and it would have saved my father’s intentions if anyone had done it for him.

The rest of real protection is just as unglamorous. Liability insurance sized to what you’d actually lose, the cheapest and most reliable protection you will ever buy. Retirement accounts, which carry their own legal armor. Clean LLCs for investment property, run as real companies and never holding your home. A family LLC or partnership when you’re moving wealth down to the next generation, as long as you don’t live off it. And if you genuinely are high-exposure, a surgeon, a developer, a personal guarantor on big loans, then yes, sometimes a serious offshore structure built years before any claim, by a lawyer who does this for a living, makes sense. Built right, it doesn’t make you bulletproof. It makes you expensive and slow to collect from, enough that most reasonable creditors settle for less and move on. That’s the real product. Not invulnerability. Friction.

Here’s the rule under all of it, the one that defeats every clever structure when it’s broken: you cannot do any of this once the trouble is in sight. Move your assets after a claim is on the horizon and a court will simply unwind it, reaching back four years under California’s fraudulent-transfer law and ten years in bankruptcy. Protection built the week before the lawsuit isn’t protection. It’s evidence.

When somebody promises you “bulletproof,” they are not describing a legal structure. They’re naming the feeling you walked in with, and selling it back to you at a markup. Nothing is bulletproof. Every real tool has a known way it can fail, and the people who tell you otherwise are the ones who haven’t told you the whole story.

The Andersons learned that on the far side of a wall they’d paid good money to build, looking back at a judge they couldn’t satisfy and a jail cell they couldn’t argue their way out of. The protection worked. That was the problem.

Real protection doesn’t require you to lie to a judge, outlast a contempt order, or bet that the IRS won’t read its own memo. It’s built early, built clean, built honest, and built mostly for the people you love rather than for the fear in your own chest. It’s quieter than the pitch. It’s also still standing when the pitch is in a courtroom transcript.

If you’ve got one of these “tax-free” or “bulletproof” trusts already, don’t wait and don’t panic. Bring it in, and let’s unwind it cleanly before anyone official comes looking. And if someone is pitching you one now, you already know what the man from the seminar won’t tell you. The answer is no.

Eric Ridley is a California estate planning attorney. Ridley Law’s practice is limited to estate planning, trust administration, probate, wealth management, and financial planning.

This is general information, not legal advice, and reading it doesn’t make you a client. Your plan depends on your own facts. Federal tax, bankruptcy, and the trust laws of other states fall outside a California practice and call for the right specialist.

Ridley Law · 567 W. Channel Islands Blvd., Suite 210, Port Hueneme, CA 93041 · 805-244-5291 · eric@ridleylawoffices.com