Fraudulent Conveyance Explained
We spend a lot of time thinking about and writing about fraudulent conveyances here. That’s because a fraudulent conveyance can totally defeat an asset protection plan, no matter how good your asset protection attorney may be. Laws regarding fraudulent conveyances make certain types of transfers wrongful. One type of transfer that is prohibited is a transfer made within a certain period of time before a claim is made or while a claim is pending. What is a claim? Claims take many forms. Claims can be lawsuits, demand letters, or even accidents where an injured person has yet to contact the person at fault.
Let’s look at an example. Consider an oral surgeon or dentist (“doctor”) who is not properly insured and accidentally causes injury to a patient during a surgical procedure. If the patient sues the doctor, then the doctor’s personal assets are at risk. The doctor’s personal assets include cash, stocks, bonds, investment properties, and in some cases even items like cars, boats and airplanes.
What we’ve established so far is that a doctor with assets has caused an injury. Assume that no lawsuit has been filed. Even though there is not a lawsuit pending, there is a “claim” against the doctor. The doctor knows that she or he could end up owing money to the patient, and that is enough. What can the doctor do to protected assets?
The answer is complex. While the doctor can continue to move money and assets around, if the doctor moves assets to a place where they cannot be reached by the injured patient, then a court can “set aside” those transfers of assets. The bottom line is that a court can require transferred assets to be given to the injured patient, even if the doctor is no longer legally and technically the owner of the assets.
In other words, once a claim exists, it is too late to protect most assets. While one can continue moving assets while a claim is pending, it is almost impossible for an asset protection attorney to develop a plan that would make assets immune, at that point. The moral of the story is that people with assets who are engaged in professional practices (e.g. doctors, dentists, lawyers, real estate developers, etc.) need to engage an asset protection attorney before claims arise. That is the only way that a plan providing true asset protection can be developed and tailored to meet the needs of specific individuals.
It is true that some assets, in some states, are exempt assets and automatically protected. But if you are a person with assets that go beyond exempt assets, then you should consider proactively pursuing an asset protection strategy.
What is Funding?
Primary and Second Homes (non-rentals)
The first asset you need to consider is your primary residence. If you live in a state with fantastic homestead protection like Utah, then you don’t need to do anything. Your home is protected. Otherwise, you need to provide some protection for your home. The typical way to do that is to transfer or “deed” your primary residence into your asset protection trust. The same is true of any second homes that you own but don’t use to generate rental income.
Rental properties are slightly riskier than non-rental properties. As a result, there needs to be some additional insulation around them in order to protect your other assets. That additional insulation comes in the form of a limited liability company (a “LLC”). The funding works as follows:
- The LLC is created, and it is owned in the exact same proportions as the rental property to be transferred.
- The rental property is deeded into the LLC.
- The LLC is transferred into your asset protection limited partnership.
It’s very important that you follow the exact sequence described above, because in some instances it can save you money by avoiding transfer taxes and/or a reassessment for tax purposes (check with your local taxing authority and clerk of court to make sure).
Cash, stocks, bonds, precious metals, and jewelry are all considered “safe assets.” That’s because they can’t generate liabilities for you. Think about it like this: Someone can get injured on your rental property. That’s just not true of your safe assets. Because of this unique feature, your safe assets can be owned directly by your limited partnership, without the need to insulate those assets with an LLC.
Vehicles are very risky assets. As a result, they should be left outside your plan completely. Own vehicles in your personal name, and trust that your other assets are safely protected.
Free Consultation with a Lawyer in Utah
If you have a bankruptcy question, or need help with Asset Protection, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed thousands of cases. We can help you now. Come in or call in for your free initial consultation.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506