A fraudulent conveyance claim is one of the biggest threats to any asset protection plan. When these claims are successful, they can force you to move your assets from a place you thought was safe, putting them directly into your creditor’s pockets.
Fortunately, a well-crafted asset protection plan can help you avoid fraudulent conveyance claims. Here, we’ll take you through the basics of fraudulent transfer claims to prevent them from ruining your wealth defense strategy:
- What Is Fraudulent Conveyance?
- What Is Needed to Prove Fraudulent Conveyance Claims?
- Legal Questions Regarding Fraudulent Conveyance Claims
- How the Recipient of a Transfer Impacts Fraudulent Transfer Cases
- How to Avoid Fraudulent Conveyance
- Statute of Limitations
- How Offshore Trusts Stand up to Fraudulent Conveyance Claims
What Is Fraudulent Conveyance?
Fraudulent conveyance (or fraudulent transfer) is the transfer of assets to another person or entity with the intent to hinder, delay, or defraud a creditor’s ability to collect a debt. This can occur before or during a lawsuit and often involves moving assets without receiving fair value in return, especially when a creditor’s claim is likely or already exists. The law generally defines it as a civil matter, not a criminal one. Moreover, it is commonly addressed in creditor/debtor law. Judges often employ these statutes to restore assets that a debtor transferred to avoid payments to one or more creditors.
What Is Needed to Prove Fraudulent Conveyance Claims?
To make a fraudulent conveyance claim stick, a creditor needs to prove that you did some of the following:
- Transferred your property to an insider (party known to you).
- Retained possession or control of the property transferred, even after the transfer.
- Concealed the transfer from your creditor.
- Made the transfer with knowledge that you were likely to face a lawsuit.
- Transferred nearly all of your assets.
- Absconded after making the transfer.
- Removed or concealed assets from your creditors.
- Received compensation that was vastly less than the value of the transferred asset.
- Were made insolvent by the transfer.
- Made the transfer shortly before or after incurring a substantial debt.
- Transferred essential business assets to a lienor who, in turn, transferred the assets to an insider of yours.
As you might imagine, these claims tend to be successful against very recently established asset protection measures. Using a new asset protection tool in direct response to a lawsuit makes it easier for a creditor to claim fraudulent conveyance. That’s why we always recommend establishing your plan long before any legal trouble arises.
Legal Questions Regarding Fraudulent Conveyance
When deciding whether a transfer you intend to make will be viewed as a fraudulent conveyance, you need to ask yourself two questions:
- What represents fair market value or fair consideration of the assets I am transferring?
- At what point do I transfer enough assets to become insolvent?
To answer the first question, you need to determine the fair market value for your property. Do this by identifying the lowest amount it could reasonably be sold for. Case law suggests that around 70% of the property’s value is reasonable. If assets are transferred at less than fair market value, there are a couple of outcomes:
- The transferee can return the property in exchange for its purchase price.
- The transferee can be forced to pay the difference between the purchase price and the property’s full value.
When the property is purchased for fair value and the transferee did not know of fraudulent intent, you may be in the clear. Transfers are often made for below market value due to ignorance, so making such a transfer is only one strike in favor of a transfer being fraudulent. Courts are not guaranteed to reverse a sub-fair market value transfer.
Regarding the point of insolvency, you only become insolvent when your assets are not sufficient to satisfy existing debt. You must be able to satisfy your obligations as a debtor with your remaining wealth to avoid a fraudulent conveyance charge. If your transfer makes you insolvent, that’s a larger strike against you, and is more likely to result in the reversal of the transfer.
Learn about California fraudulent conveyance statutes.
How the Recipient of a Transfer Impacts Fraudulent Transfer Cases
When there is no clear case of actual fraud, a creditor will look to prove fraud. They do this through circumstances that imply fraudulent intent.
One of the main questions your creditor will ask is “To whom did you give your assets?” If you transferred them to a family member, close friend, or business associate, you’re in trouble. Clever lawyers can easily connect parties to one another, especially if there are familial and financial ties between them. When it’s determined that you transferred your wealth to an insider, especially if the transfer was for substantially below the market value of your assets, your creditor has solid ground for their fraudulent conveyance claim.
How to Avoid Fraudulent Conveyance
To avoid fraudulent conveyance, simply transfer your assets into a protective structure well before you need protection. Many people wait until it is too late to enact an asset protection plan, and while there are ways to protect yourself after the fact, acting proactively puts you in a better position.
Establish your entire asset protection plan and create the tools and vehicles you will use. Place your assets into these containers, and then use legal tools to secure your assets. You can set up your asset protection plan in a manner that allows you to 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 deep 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 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.
Statute of Limitations
Fraudulent transfer can become indisputable when statutes of limitations expire. That is, if you moved the asset prior to a certain time, the transfer is safe from creditors. The statute of limitations varies in each state. Many of them have a four-year statute of limitations for fraudulent transfer, or one year after the discovery of a transfer. In the case of bankruptcy, property transfers in the previous year will most likely be examined closely for intent to delay or hinder a creditor. If you commit a fraudulent transfer of your property, your bankruptcy proceedings could be compromised. The court could refuse to release you from other debts, based on your recent transactions. So, again, the strongest asset protection is a plan that you put in place for several years before you need it.
How Offshore Trusts Stand Up to Fraudulent Conveyance Claims
An offshore asset protection trust fares far better than its domestic counterpart for a few reasons:
- Shorter statutes of limitation: While most states have four-year statutes of limitation, which give plenty of time for creditors to file actions against you, the time limit for these cases in offshore jurisdictions tends to be much shorter. Many jurisdictions have two-year statutes of limitations, and these often start from the date of the transfer. In practice, your creditor has to discover a transfer, file a case within your offshore jurisdiction’s court system, and win it, all within only two years. We’ve never seen this happen.
- Trust-friendly laws: Top offshore jurisdictions like the Cook Islands and Nevis require creditors to bring undeniable proof of a fraudulent transfer in order for their claim to be accepted. The level of proof these places demand is virtually impossible for any creditor to provide.
- Inconvenient filing processes: In the United States, filing an action against a debtor is simple, some states even allow people to do it online. That’s not the case in offshore jurisdictions. Most trust-friendly locations require creditors to physically appear in the country to file a fraudulent conveyance claim. This is costly, time-consuming, and typically too much trouble for the average creditor.
- Lengthy trial periods: Given the high burden of proof offshore jurisdictions demand, trials tend to have long periods of evidence gathering. In some cases, the cases stretch out for so long that the statute of limitations expires, freeing the debtor from any fear of a successful claim.
Ultimately, an offshore asset protection trust is a great way to defend against fraudulent conveyance claims, especially if you set one up long before you face any legal trouble.
Avoid Fraudulent Conveyance with Help from Asset Protection Planners
Here is the good news: If the court finds reasonable evidence of fraudulent conveyance, it simply puts you back in the same position you were in prior to making the transfer.
So, in essence, there’s no reason not to try and protect your money. That said, the best outcome is having a court throw up their hands and say, “We can’t prove a fraudulent transfer in this case.” That outcome is only possible if you set up an asset protection plan long before legal action threatens your wealth.
To set up an asset protection plan that can effectively protect against these claims, reach out to Asset Protection Planners. Fill out the form below to schedule a free consultation with one of our team members.
