Increasing drought frequency and severity in a warming climate threaten forest ecosystems with widespread tree deaths. Canopy structure is important in regulating tree mortality during drought, but how it functions remains controversial. Here, we show that the interplay between tree size and forest structure explains drought-induced tree mortality during the 2012-2016 California drought. Through an analysis of over one million trees, we find that tree mortality rate follows a “negative-positive-negative” piecewise relationship with tree height, and maintains a consistent negative relationship with neighborhood canopy structure (a measure of tree competition). Trees overshadowed by tall neighboring trees experienced lower mortality, likely due to reduced exposure to solar radiation load and lower water demand from evapotranspiration. Our findings demonstrate the significance of neighborhood canopy structure in influencing tree mortality and suggest that re-establishing heterogeneity in canopy structure could improve drought resiliency. Our study also indicates the potential of advances in remote-sensing technologies for silvicultural design, supporting the transition to multi-benefit forest management.