Fraudulent transfers are a notable legal concern for anyone with an asset protection plan. These are claims that a creditor can bring against a debtor to assert that a transfer was made with the intent to avoid paying a legal judgment.
In certain cases, a fraudulent transfer claim can trigger legal action, undo asset movements, and even come with legal consequences for the debtor making the transfer. To help you avoid a situation where a creditor successfully brings one of these claims against you, we’ve put together this article covering the basics of fraudulent transfers.
- What Is a Fraudulent Transfer?
- The Two Types of Fraudulent Transfers
- How Creditors Prove a Fraudulent Transfer
- Statute of Limitations
- How to Avoid a Fraudulent Transfer Ruling
- Offshore Asset Protection Trusts: The Best Way to Avoid Fraudulent Transfer Claims
- California’s Unique Criminal Law on Fraudulent Transfers
What Is a Fraudulent Transfer?
A fraudulent transfer (sometimes called fraudulent conveyance) is any transaction made by a debtor with the express intent to hinder or avoid their creditors. These transfers are defined under the Uniform Voidable Transactions Act (UVTA), which replaced the Uniform Fraudulent Transfer Act (UFTA). The act also stipulates that transfers can be voided if the debtor does not receive reasonably equivalent value for the assets they transferred.
Common examples of actions that can be perceived as fraudulent asset movement include:
- Gifting property to a family member or friend
- Selling assets for less than fair market value
- Moving money into a trust or LLC after a lawsuit is filed
- Transferring ownership of a business to a spouse or relative
The Two Types of Fraudulent Transfers
Fraudulent transfers tend to be classified into two formats:
- Intentional fraudulent transfers: As the name implies, these are made with the express intent to keep assets out of a creditor’s hands.
- Constructive fraudulent transfers: These transfers contain elements that appear fraudulent, but were likely made due to a mistake or error in judgment. A transfer can be ruled voidable if it was made:
- For less than reasonably equivalent value
- While the debtor was insolvent (or made the debtor insolvent)
- When the debtor should have expected the transfer would interfere with their ability to pay future debts.
How Creditors Prove a Fraudulent Transfer
Proving a fraudulent transfer, specifically one that was done intentionally, is very difficult for creditors. They must show clear evidence of intent or financial recklessness on the part of their debtor by proving the transfer exhibits these “badges of fraud”:
- Transfer to an insider (e.g., family member, business partner)
- Debtor retained possession or control after the transfer
- Transfer was concealed
- Transfer occurred shortly before or after a debt was incurred or a lawsuit filed
- Debtor was sued or threatened with suit before the transfer
- Debtor was insolvent at the time or became insolvent because of the transfer
- Compensation received was not equivalent to the value of the transferred assets
- The transfer was unusual or rushed
There is no particular number of these badges that a court requires, and a single one is usually not enough to prove fraud. However, if a creditor can show that their debtor’s transfers meet several of these criteria, they may be able to have a court rule in their favor.
This is a good time to note that offshore jurisdictions, particularly the Cook Islands and Nevis, have an extremely high burden of proof on fraudulent transfers. Any creditors hoping to pin a claim on their debtor in these jurisdictions will likely need to find a transfer that exhibits most of the badges of fraud. That said, we have never seen a defendant or judgment debtor lose in the Cook Islands or Nevis.
Statute of Limitations
Most states allow creditors to challenge fraudulent transfers for up to four years after the transfer or one year after discovery, whichever is later. However, the exact period can vary depending on the jurisdiction and whether actual or constructive fraud is being claimed.
Offshore jurisdictions tend to have shorter fraudulent transfer periods, usually two years after the transfer. Let’s be clear on what this means. Some people think that in trust jurisdictions such as the Cook Islands that the assets are not protected for two years. Not true. The trust protects the assets right away. It is simply that the creditor has a small window of time to challenge the transfer. Notably, even if the creditor does beat the clock, the creditor will almost surely lose.
How to Avoid a Fraudulent Transfer Ruling
To avoid a fraudulent transfer ruling, you need to set up an asset protection strategy that is well-documented and established long before any legal action takes place. Some things you can do to limit your risk of being hit with a claim are:
- Plan Early and Proactively – Don’t wait to establish an asset protection plan until you’re being sued. A plan that is set up long before any legal action occurs is more likely to be viewed as legitimate in the eyes of a court.
- Ensure Reasonably Equivalent Value – When you make a transfer, ensure that you receive fair market value for your assets.
- Avoid Transfers During Financial Distress – Any transfers made during a lawsuit or while you are burdened with debt will get scrutinized.
- Document the Intent and Purpose – Documenting the reasoning behind your transfer will help you prove the validity of your transfer to the court.
- Use Independent Trustees and Managers – If you work with family or close business partners, don’t appoint them to your trust or transfer assets to them. Courts view these people as “insiders” whom you control, and can force you to reverse the transfer.
- Consult with Professionals – Always work with experienced professionals, like those at Asset Protection Planners, when setting up an asset protection strategy. They will help you avoid costly mistakes and ensure that you don’t make a transfer that could be viewed as fraudulent.
Offshore Asset Protection Trusts: The Best Way to Avoid Fraudulent Transfer Claims.
Offshore asset protection trusts provide a powerful defense against fraudulent conveyance claims for the following reasons:
- Immunity to U.S. court rulings: Offshore trusts are based outside of the United States and have different laws. As sovereign jurisdictions, they are also free from the burden of enforcing U.S. court rulings. In practice, this means that if a court in the United States deems a transfer fraudulent, but an offshore trust was involved, it doesn’t matter. The creditor who brought the claim against you will have to take their case to the offshore jurisdiction’s court, and win there, to get their hands on your assets.
- Short statutes of limitations: Top offshore jurisdictions have one or two-year statutes of limitation, which is about two fewer years than most states. Your creditor will have to discover the transfer, file a claim in a foreign court, and win a case all within that short time period, which is enough to deter most creditors.
- Difficult filing requirements: Some offshore jurisdictions require a creditor to file their fraudulent conveyance claims in person. This is time-consuming and expensive. In fact, many creditors will simply give up if they have to jump through this particular hoop to take your assets.
- Trust-friendly laws: Many of the places where offshore trusts are based have laws that favor debtors rather than creditors. One of the most notable ways these laws come into play is by requiring the creditor to bring unimpeachable evidence of fraudulent transfer. This burden of proof, which is the same that the U.S. uses in criminal cases, is very difficult to generate for financial transfers.
- Procedural and logistical hurdles: Even with a short statute of limitations, creditors often can’t act fast enough. They must discover the transfer, hire local attorneys, and file in person in the Cook Islands — all before the deadline. Many never make it that far.
As with all asset protection methods, the above benefits work best when you set up a trust long before you actually need it. If you attempt to set one up while going through a lawsuit, it may work. However, if you wait too late, you may not have the trust fully established by the time your judgment is handed down. Plus, a judge will look at the arrangement with suspicion if you build it while a lawsuit loss appears imminent.
California’s Unique Criminal Law on Fraudulent Transfers
Most of the time, a fraudulent transfer case is a civil matter; the only penalty is that your assets will be placed back into the original account, where your creditor can lay claim to them. However, that’s not the case in California.
California stands alone in its approach to fraudulent transfers. Under California Penal Code § 154, transferring assets with the intent to hinder creditors is considered a criminal act—not just a civil issue. That said, there are some questions as to whether California enforces the law in this manner.
While the law is on the books, no one has ever been convicted under this statute. In practice, prosecutors have not pursued such cases, likely due to the difficulty of proving intent and the complexity of international trust law.
However, the existence of this statute can:
- Scare California residents away from using offshore structures
- Create additional scrutiny during litigation
- Serve as a strategic tool for creditors to pressure settlements
If you’re in California and considering offshore trusts, you must consult with a qualified professional. While the risk of prosecution remains theoretical, it’s never a good idea to expose yourself to this type of risk without the help of someone who knows what they’re doing. So, consult a professional such as an attorney or consultant on our staff.
Work with Asset Protection Planners and Avoid Fraudulent Conveyance
Ultimately, fraudulent conveyance is something you need to account for when creating an asset protection plan, but it’s not something you need to fear. Receiving a fraudulent transfer ruling won’t generally land you in jail or result in severe fines. It’s simply an unfavorable ruling that may be unenforceable if you play your cards right.
However, receiving such a ruling can be avoided by acting promptly. If you spend time creating an asset protection plan, you don’t want it to be challenged just because your creditor has a clever lawyer. That’s why we help people set up offshore trusts that stand up to fraudulent conveyance claims. In fact, we have yet to see a single creditor breach a Cook Islands trust that we’ve established.
If you’re ready to truly protect your assets, we’re here to set up an ironclad offshore trust for you. Fill out the form on this page to schedule your free consultation with one of our team members.
