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Irrevocable Trust and Fraudulent Conveyance / Fraudulent Transfer

Let’s talk about fraudulent conveyance and the timing of a transfer of an asset to an irrevocable trust. The courts often assess an individual’s intentions when property is transferred. If a creditor of the person who created an irrevocable trust wants to get ahold of the trust assets, there are certain legal tests that will be employed.

First, did the grantor transfer the trust assets into the trust after incurring the liability, or before? This question will need to be answered, and if the individual can or won’t answer it, the court will be happy to flesh out the answers themselves, trust us. In fact, if the creditor had a claim to an asset and then it gets transferred to a trust, yes – you guessed it, the debtor would have a hard time convincing a court that it wasn’t done to keep the asset from the creditor. That particular asset transfer may be seen to have been two thwart the creditor’s claim. State and federal statutes on this topic vary, but rest assured that in most cases the creditor will still have to prove that the grantor intended to defraud them of the asset.

When considering fraudulent transfer, courts will look at the following badges of fraud to consider whether or not the assets were transferred in a statutorily reasonable timeframe.

  • If the transferor became insolvent because of the transfer
  • If there was sufficient consideration received in exchange for the transfer
  • Was the transfer to family, or parties with an insider relationship?
  • Does the transferor retain possession or benefits of the property?
  • Did a threat of litigation exist?
  • What was the financial situation of the debtor at the time of transfer or after transfer?
  • Was there a cumulative series of transactions after the debtor’s financial difficulties began?
  • What was the general chronology of events?
  • Was there secrecy involved in the transaction in question?
  • Was the transfer a deviation from the usual method or course of business?

The term fraudulent conveyance sounds scarier than it really is. It is simply a civil matter not a criminal one. So, it’s usually better to do it, and then make them fight for it, than it is to just roll over like a dead dog and leave the asset laying out there in the open. Put up fight. Make them work harder to take your assets than you had to work to earn them in the first place.