Books have been written about
fraudulent transfers. Mention Asset Protection and you'll have questions about this important
topic. It's not necessary to become an expert on fraudulent transfers,
but you should know the basics. Your Asset Protection Plan can't become
that sound financial fortress unless it can withstand a fraudulent transfer
claim – an especially important point if you have already been sued
or have a present liability.
Asset Protection Planning is a vaccine, not a cure. The only sure way to avoid fraudulent transfer claims is to protect yourself before you're in trouble. Once you have a lawsuit or liability, many otherwise protective strategies are no longer effective – just as a vaccine loses effectiveness once you are afflicted with a disease. The best protection is preventative planning.
The fraudulent transfer laws give claimants the right to unwind or revoke certain transfers made by debtors so that the transferred property can be seized by the judgment creditor. In other words, under certain circumstances, the courts invalidate sales or gifts by debtors. Whatever the debtor sold or gave away is transferred back to him or her, so the creditor can seize the property. These laws prevent debtors from transferring property to defraud their creditors. A fraudulent transfer can partially or totally destroy your protection. For sound protection, you must title your wealth free of these potential claims. Fraudulent transfers are obstacles to that goal because creditors can recover assets no longer in your name. Fraudulent transfer laws distinguish effective protection from the ineffective disposition of assets.
Judgment creditors use fraudulent transfer laws to reach assets transferred to a spouse, family member, friend, corporation, partnership, trust or any other third party. Creditors succeed when they convince the court that the transfer was a last-ditch effort to defraud them.
So a fraudulent transfer challenge is often the true test of an Asset Protection
Plan. To recover, the
creditor must prove: 1) there was a gift or transfer of property, 2) for less than fair value,
and 3) which left the debtor insolvent. This, of course, greatly simplifies
what is in actuality a complex law. There are often differences of opinion
between lawyers and courts as to what constitutes a fraudulent transfer.
The fact that a creditor might, recover a fraudulently transferred asset doesn't necessarily mean that every creditor tries. Few fraudulent transfers are recovered by creditors. One reason is that few judgment creditors discover fraudulent transfers, or the amount owed the creditor, or value of the transferred assets, may be too small to justify the creditor's time and expense to attempt recovery. Moreover, there may be many competing creditors, and recovery by one creditor isn't worthwhile to that creditor when the creditor must share the recovery with other creditors. Finally, the procedural obstacles to recovery may be too great. For example, International Asset Protection imposes procedural barriers that make it extremely costly and time-consuming to attempt recovery.
A creditor then may have legal recourse under the fraudulent transfer laws as a theoretical remedy, but they might not find it their practical remedy when they must overcome too many firewalls. The creditor's legal right to reclaim fraudulently transferred assets becomes academic when the creditor won't assert those rights in practice, but this shouldn't encourage fraudulent transfers. Also, it's faulty to base your plan upon the mere hope that a fraudulent transfer won't be discovered or acted upon by a judgment creditor. The best plan is one where your creditors can't recover assets as a matter of law, and won't attempt recovery as a matter of practicality.
This doesn't suggest that it's too late to attempt to protect yourself once you have been sued. It does mean that you'll have fewer good options and that your resultant plan may be somewhat less effective than one completed before you incur liability. The greatest danger to your financial safety may be the lawyer who tells you that "nothing can be done" because you have already been sued. True, fewer things can be done. But until your assets are already seized by your creditor, you do have options. Also remember, a fraudulent transfer is not a crime. It is simply a creditor remedy to recover assets.
Planning delves more into the "why, when and under what circumstances assets were re-titled to their now safer refuge." Courts don't want their judgments ignored, and they're less cooperative with debtors whose last-minute shenanigans put their assets out of harm's way. Then there's that tactical question about how and why your plan came to be. I must convince a judge that your plan had an innocent purpose. It must essentially pass a "sniff test" that doesn't offend judicial sensibilities. Here's where the Asset Protection planner meets the greatest challenge.