Fraudulent conveyance or fraudulent transfer is attempting to avoid a debt by moving assets to another person or legal entity. It is a civil matter, not a criminal one. It is commonly addressed in creditor/debtor law. The statutes are often employed to restore assets that were transferred away in order to avoid payments to one or more creditors. It is also a common action brought by judgment creditors and trustees in bankruptcy cases.
Fraudulent conveyance can be averted by enacting an asset protection plan in anticipation of a future lawsuit. Assume someone will sue you. There are ways to protect assets after a lawsuit. But it is best to protect yourself before you need it. By doing it in a timely fashion one need not be concerned about fraudulent transfer claims.
Anytime you convey an asset in order to defraud or delay a legitimate creditor, you are engaging in fraudulent conveyance. However, even if you are aware that your assets are at risk and you move that asset out of reach, you have NOT committed a crime. In almost all cases it is merely a civil matter and you cannot go to jail for it. This includes moving your assets into an asset protection vehicle in the heat of legal battle.
Proving Fraudulent Conveyance
An asset protection plan helps prevent creditors from seizing your assets. However, those without proper plans, put assets at risk. The most common scenario is where a creditor can reach your assets is through proving fraudulent transfer or conversion. This is done by proving that you have done the following:
- Transferred your property
- Received less than fair market value for the property, and
- The transfer left you unable to satisfy a creditor
It must be all three of these to be a fraudulent conveyance of your property. Creditors have their own process to convince courts that your assets should be within their reach. They may do this by proving that your transfer was fraudulent. There are various paths a creditor can take to your assets. But whether or not they can reach them is another matter. This supports the biggest point in asset protection in order to avoid fraudulent conveyance: act well before you are under legal duress.
Fraudulent transfer laws are based on the principle that your property constructively belongs to a creditor if you are unable to satisfy your obligations as a debtor. In order to establish this there are a couple of questions to answer:
- What represents fair market value or fair consideration? and
- At what point do you become insolvent?
Addressing the first question, fair market value and consideration for your property is this: what you can reasonably sell your property for? Not necessarily the exact price your property is worth. But what you can reasonably expect to gain from selling your property? 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 their purchase price.
- The transferee can be forced to pay the difference between the price they paid and the property’s full value.
When the property is purchased for fair value and the transferee had no knowledge of fraudulent intent, he or she may be in the clear. Courts scrutinize exchanges of services for property and only services rendered at the time of the exchange or previously suffice. A guarantee of future services does not.
The second point is this: at what point do you become insolvent? Let’s say you transfer property and you still have the ability to satisfy a creditor. In that case, there isn’t a fraudulent transfer of assets. You become insolvent when your assets are not sufficient to satisfy existing debt. You can gift your property. However, you must be able to satisfy your obligations as a debtor with your remaining wealth.
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. To whom did you give your assets? Was the transfer private? Did the transferee have any information that would make the courts believe that the transfer was fraudulent? If you are faced with a legal storm where your assets are jeopardized, you may have to defend challenges to your property or assets. Courts will scrutinized a sale when transferred for less than fair value. This is especially the case if the transfer left you insolvent to satisfy your obligation.
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. Laws vary in each state. Many of them have a 4 year statute of limitations for fraudulent transfer, or 1 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 fraudulent transfer of your property, your Bankruptcy proceedings could be unpleasant. The court could refuse to release you of other debts, based on your recent transactions. So, the strongest asset protection is a plan that you put in place for several years before you need it.
Don’t Transfer to Friends or Family
Be selective when you choose where to put your property. Your loved ones can get sucked into the mess very quickly if they participated in the fraudulent conveyance of your property. This means that someone will likely sue them. Then the courts could force them to return the property. If they transferred it again, they could be liable to repay for the value of the property.
Here is the good news. If the court finds basis for raising fraudulent transfer of your property, the outcome is simple. It is essentially to try to put the debtor back into the same position that he or she was in before the transfer was made. If the assets are safe and secure in a properly drafted offshore trust, for example, the fraudulent conveyance claim is mere words.
So, in most cases it is better to put up a fight. Best to put the assets in a safe and secure legal tool beyond the reach of the creditor. The risk of doing so are low. And the rewards are that if you do it right, you may very well keep what is yours.