Avoiding Fraudulent Transfers

Avoiding Fraudulent Transfers

Having a solid asset protection strategy is an important part of financial planning for any wealthy individual. Claims of fraudulent transfer pose the greatest possible threat to asset protection structures. Fraudulent transfer of assets, also known as fraudulent conveyance occurs when a person makes a transfer of assets with the explicit intent to delay or defraud creditors. The law governing fraudulent transfer of assets in the United States is the Uniform Fraudulent Transfer Act (UFTA). In 2014 the Uniform Law commission developed its viable replacement, the Uniform Voidable Transactions Act (UVTA). The new act more accurately represents its civil nature. This is very different from fraudulent conversion, which is taking someone else’s property.

There are two types of fraudulent transfer. They are actual and constructive fraud. A transfer made to an asset protection structure in order to render a debtor insolvent constitutes actual fraud. The debtor’s intent to defraud the creditor is proven in a successful fraudulent transfer claim. The jurisdiction where the asset protection structure is held determines the burden of proof required.

Constructive fraud occurs when a debtor unloads assets for less than a reasonably equivalent value. This would include selling assets to friends or relatives for far less than they are worth or gifting them away. Debtors and creditors will commonly argue about what is considered a reasonably equivalent value for contested assets.

Asset protection structures, including trusts and limited liability companies, are subject to the laws of the jurisdiction where they are held. There are a number of reasons why it is preferable to use an offshore jurisdiction over a domestic jurisdiction for asset protection planning. The most important reason for using an offshore jurisdiction has to do with fraudulent transfer claims. It is because that most of the leading offshore jurisdictions that specialize in asset protection do not recognize foreign judgments. Creditors are required to travel to the jurisdiction where the asset protection structure is held and have their case tried by the local courts. This means airfare, hotel rooms, and legal fees. Creditors are usually discouraged from making claims of fraudulent transfer in offshore jurisdictions because the cost and time required are very high. If a creditor does try to bring a claim of fraudulent transfer in an offshore jurisdiction, the odds are not in their favor. Offshore jurisdictions tend to have much higher burdens of proof than domestic jurisdictions. The burden of proof for claims of fraudulent transfer lies firmly on the shoulders of the creditor in offshore jurisdictions. Creditors must prove beyond a reasonable doubt that the debtor intended to defraud them, specifically, as opposed to any other creditor, when transferring their assets. They must also prove that making the transfer rendered the debtor insolvent.

Offshore Statutes

Statutes of limitations in offshore jurisdictions are generally much shorter than statutes of limitations in domestic jurisdictions. In some favorable jurisdiction, the statute of limitations that helps you avoid fraudulent transfer claims is as short as one to two years. Once the statute of limitations has passed, a creditor is no longer able to make a claim against a transfer of assets held in an offshore asset protection structure. In addition to asset protection structures, jurisdiction matters on timing state to state as well. The timing of a fraudulent conveyance in Utah might be different than the statute of limitations in New York.

How To Avoid Fraudulent Transfer

Individuals looking to protect themselves from fraudulent transfer claims should take the following steps:
• Pay Attention to Timing: Timing is a very critical component to avoiding claims of fraudulent transfer. The importance of the timing of transfers is two-fold. Creditors frequently use timing to establish intent to defraud. A person who makes a transfer when it was reasonable to assume a creditor would make a claim on those assets is likely to face fraudulent transfer claims. Claims of fraudulent transfer are likely if a transfer is made when one could reasonably anticipate that a creditor will make a claim on those assets. Situations where it is reasonable to assume creditors will make a claim include after defaulting on a loan or immediately before filing for a divorce. What if you waited too long? Don’t fret. There are excellent international options that can protect assets after the fact. An offshore trust has a trustee who resides outside of your court’s jurisdiction. The trustee can refuse to turn over trust assets to your enemies at law. Remember, fraudulent transfer in this context is a civil matter only, not a criminal one.
• Avoid Insolvency: Another major component to avoid fraudulent transfer claims is whether or not the debtor is solvent. If a transfer of assets renders a debtor insolvent for the purpose of satisfying a creditor’s claim, it is possible that transfer will be deemed fraudulent. It is advisable that individuals avoid making transfers which would make them unable to repay their debts.
• Consult A Professional: Asset protection planning frequently involves the use of complex structures which require knowledge of the laws in multiple jurisdictions. Failure to know the law or establish asset protection structures properly can hinder your ability avoids fraudulent transfer. The laws regarding transfer of assets are subject to interpretation and are not always clear or easy to understand. Using offshore structures require knowledge of the laws of multiple jurisdictions and how they interact with one another. Individuals will often find it was worth it to spend money upfront on a solid asset protection structure. Seeking advice from a qualified asset protection specialist is the best way to avoid claims of fraudulent transfer.

Consequences for Fraudulent Transfer

There is a big difference between fraud and fraudulent transfer. Fraud is a criminal offense. Fraudulent transfer, on the other hand, is a civil matter. Fraud occurs when an individual intentionally uses deception for the purpose of personal gain. Fraud is subject to the penalties of criminal courts. Penalties for fraud can include fines and imprisonment. In contrast, civil courts hear cases regarding fraudulent transfer of assets. Creditors can reach unprotected assets if a transfer is deemed fraudulent. In the majority of cases, only assets which creditors are seeking to claim are denied protection, unless one holds them in an effective asset protection structure. The remainder of the assets will remain untouched. This includes including any assets included in the transfer over the value of the creditor’s claim. According to the American Bar Association, “only the portion of a fraudulent transfer that is necessary to satisfy a creditor’s claims is avoidable under the UFTA.” A claim of fraudulent transfer is not generally going to send anybody to jail. However, they are quite costly for the unprepared in terms of lost assets. In terms of “how to avoid fraudulent transfer,” the best way that a person can defend against having a fraudulent transfer made against them is to avoid the basis for that claim. Engage in asset protection planning well before anticipated creditors appear on the horizon. This is far and away the most effective way to avoid such a claim. This asset protection plan should center around the use of offshore asset protection tools such as offshore trusts and LLCs. Assets transferred into a properly established asset protection structure years in advance of a claim will likely have passed the statute of limitations. Creditors are unable to make effective claims against transfers of assets on which the statute of limitations has expired.

How To Avoid A Fraudulent Conveyance

To avoid fraudulent conveyance, simply transfer your assets into a protective structure well before you need protection. The problem is that many people wait until it is too late to enact an asset protection plan. There are ways to protect yourself after the fact. But you are in a better position by acting before the need arises. When you properly protect your assets, creditors have a difficult case to prove fraudulent intent. It is important to note that fraudulent conveyance / transfer is a civil issue. It is not a criminal matter and in almost all cases you cannot go to jail for it. Establish your entire asset protection plan and create the tools and vehicles you will use. Place your assets into these containers and then legal tools secure your assets. You can set up your asset protection plan so you can activate it when you are in a legal battle. This is the key to properly creating an asset protection strategy. You do it when you don’t have to. Set up all of your tools and move your assets legally. Thus, you activate your asset protection plan and your wealth is protected when legal storms arise. You can activate your asset protection plan all the way into a legal battle, if needed. With an offshore trust, for example, you move your assets out of reach of the U.S. legal system. The best way to avoid fraudulent conveyance rulings, however, is to you set up your asset protection before you need it. There are some things that you can do after legal action has started. It is just a lot more pleasant experience in the courtroom if you had acted beforehand.

Avoid Fraudulent Conveyance Legal Actions

A judge would be hard pressed to legally force you to dissolve a legal entity that you have established. He can evaluate the following “badges of fraud.” If a judge challenges part of your asset protection planning as a fraudulent conveyance and the other side wins, it is really not all that painful. A court can only try to put you back into the same financial condition you were before you enacted your asset protection plan.

A Civil Matter, Not Criminal

It is important to note that the terms “fraudulent transfer” and “fraudulent conveyance” are often misunderstood. Many people mistakenly confuse these two technical legal terms with the civil tort of common law fraud or even with criminal fraud. It is not either. However, as a result of this misconception, some people become fearful that asset protection planning could make them liable for damages in tortuous fraud or even charged with criminal fraud. It is just the opposite. The assets are yours and you have the right to protect them if it is in your best interest.

Fraudulent Conveyance Court Rulings

Several state court decisions, as well as most federal courts have held that fraudulent conveyances to avoid creditors’ claims are not tortuous fraud and are not criminal fraud. Thus, a creditor who tries to assert that part of your asset protection planning involved some sort of fraudulent conveyance does not have the legal capacity to charge you with the crime of fraud and cannot seek additional civil damages based on the common law theories of fraud, deceit, or misrepresentation. “There is nothing whatever wrong with respondents pursuing their own interest. Indeed, the fact that it is entirely proper and entirely predictable is the very premise of the point we are making. That, this new remedy will promote unregulated competition among the creditors of a struggling debtor.” A fair and proper reading of the opinion suggests, clearly, that the transfer of freely alienable property by a debtor is lawful and the creditors, likewise, are free to pursue their legal rights.

The Badges of Fraud

The following are badges of fraud used by courts to determine whether or not the transfer should be deemed a civil fraudulent conveyance:
• That the transfer or obligation was made to an insider.
• That the debtor had retained possession or control of the property transferred, even after the transfer.
• That the transfer or obligation had not been disclosed or was concealed.
• That before the transfer was made or the obligation was incurred, the debtor had already been sued or threatened with suit.
• That the transfer had been substantially all the debtor’s assets.
• That the debtor had absconded.
• That the debtor had removed or concealed the assets.
• That the value of the compensation received by the debtor was relatively close to the value of the transferred asset or the amount of the obligation incurred.
• That the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
• That the transfer occurred shortly before or shortly after a substantial debt had been incurred.
• That the debtor transferred the essential assets of the business to a lien or who transferred the assets to an insider of the debtor.

What Is An Asset Protection Plan?

In summary, just as any creditor can try to attack the creation of an asset protection plan, any debtor has the right to establish one. The creditor may suggest that certain transfers of your assets to other people or entities or investing money in exempt asset vehicles (such as annuities) constitute a fraudulent transfer or fraudulent conversion. They can claim that you made the conveyances with the intent, or effect, to hinder, avoid, or delay creditor collection. Someone can challenge just about any asset protection conveyance as “fraudulent” for a time period between six months to four years dependent on state specific statutes. The time limit is called statute of limitations on fraudulent conveyance. This is the case even if the challenging creditor had no claim when you activated your asset protection planning.

Why You Need Specific And Valid Asset Protection Techniques

Under some circumstances, assets can be protected without having to give up all ownership interests. For example, assets may be placed in a joint tenancy, tenancy-by-the-entirety or be owned through a limited partnership or placed in a retirement plan.

Joint Tenancy

These techniques have shortcomings, however. Holding real estate or other assets as joint tenants with right of survivorship still would allow a creditor to force partition and sale of the debtor’s interest. The only benefit would be if the debtor dies before the creditor perfects his claim. Then it is too late for the creditor to enforce his claim against the debtor’s interest.

Limited Partnerships

Limited partnerships, if properly drafted, can offer some protection for assets owned by the partnership. For example, if the debt is unrelated to the partnership’s activities, the creditor will only be entitled to the income allocated to the debtor’s partnership interest, if the general partner decides to distribute the income. Further, the creditor will not gain any interest in the asset itself or any other rights in the partnership. However, if the lawsuit is related to the activities of the limited partnership, then creditors can reach all partnership assets and all assets of the general partners. In such instances, limited partners risk the loss of their investments in the partnership.

Retirement Plans

Retirement plans may also offer significant asset protection. The U.S. Supreme Court has ruled ERISA-qualified plans are protected against creditors. Regular IRAs have no federal protection, but are protected in some states by statute. However, there is still some question whether Roth IRAs are similarly protected. Revocable or living trusts offer no asset protection to the creator of a trust since the creator still has control over the assets and can be required to use them to pay legitimate debts. In most states, irrevocable trusts are not much better if the creator retains an interest as a beneficiary since that interest can still be reached. In addition, in almost every state, the trust is subject to a legal doctrine known as the Rule against Perpetuities. This may limit the creator’s ability to protect the assets for unlimited future generations or to take advantage of generation-skipping transfer tax exceptions. Additionally, the trust’s investments are limited by Securities and Exchange Commission (SEC) regulations, so certain foreign investments are not accessible to the domestic trust. Domestic trust assets are easy for lawyers to discover and attack as fraudulent. The burden of proof is typically fairly easy to meet, and the transfer need only have been fraudulent as to any creditor, even one not part of the lawsuit. Once the transfer is proven fraudulent, the entire amount of property in the trust is set aside and available for all current creditors. There is not great expense or risk to attacking domestic trusts. Usually, it is done on a contingency fee by the creditor’s attorney. Finally, there are long statutes of limitations to attack a fraudulent domestic transfer; six years or more is typical.

Fraudulent Transfers Lawyer

When you need a Utah Fraudulent Transfers Lawyer, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews


Recent Posts

How Soon After Chapter 7 Can I Buy A Car?

What Is Divorce Mediation?

Parent Visitation Attorneys Utah

Inherited IRA In Estate Planning

How Do You Tell My Spouse I Want A Divorce?

Tax Planning And Estate Plans

Ascent Law St. George Utah Office

Ascent Law Ogden Utah Office