Legal Methods of Asset Protection

  Fraudulent Transfers
(And How To Avoid Them)

 
If you wait to protect your assets until someone brings a lawsuit against you, it's too late. 

Anything you do to remove your assets from the reach of your creditors after a lawsuit is filed is likely to be a "fraudulent conveyance." That means the courts can and will seek to obtain repossession from the transferee. One specialist in the field says that if you are in a high risk profession or occupation, you must keep some assets (or insurance) available to your creditors or the courts can recover any assets you transfer to relatives or protected entities.

You must take steps to protect your assets before
there are any potential claims against you.

Like estate planning, if you wait until you have a problem, it's too late to solve it. Like insurance, lawsuit protection planning must be done when you don't think you need it.

The various state courts have indicated that there must not be any reasonable prospect of a specific claim against you at the time that you put your assets beyond the reach of your creditors. In most states, that seems to be a period of one to three years before any claim is filed against you.

Protecting Assets Without Defrauding Creditors

When you are seeking to use an irrevocable trust to protect some family assets from future lawsuits, it's important to be aware of the legal rules against defrauding your present and potential creditors by transferring your property in a manner to prohibit them from getting an attachment in satisfaction of their claims. The law refers to this as a fraudulent conveyance. 

. According to Bill Comer, "fraudulent conveyances under the Uniform Fraudulent Conveyance Act are defined as those: 

1. made when the transferor was insolvent or was rendered insolvent by incurring an obligation or making a transfer and the obligation incurred or the transfer made was without a fair consideration; 

2. conveyances made without fair consideration when the transferor was engaged in or about to be engaged in a business or transaction which leaves the transferor with an unreasonably small capital; 

3. conveyances made or obligations incurred without fair consideration when the transferor believes he will incur debts beyond his ability to pay as they mature, and 

4. conveyances made or obligations incurred with actual intent to hinder, delay or defraud either present or future creditors." 

Generally, a fraudulent conveyance/transfer requires that you have the intention of hindering, delaying or defrauding your creditors. Because intent is difficult to prove, the courts have developed a set of guidelines they use to determine if a transfer of assets without adequate consideration is a fraudulent transfer. These are referred to as "badges of fraud". 

However, if you are solvent at the time that you transfer some assets to another person without adequate consideration, you are far less likely to be found guilty of a fraudulent transfer. Thus, a critical aspect of avoiding a fraudulent transfer is to know whether you are solvent.  
 

Privacy Versus Secrecy

A fraudulent transfer is not necessarily a felony. But when there is an overt effort to hide what is being done or to hide the assets, then the effort may become a full blown felony under U.S. law.

Some subscribers who have talked to me by phone have asked why I don't devote much space to the subject of privacy. That's gotten us into a discussion of the difference between financial privacy strategies and a desire to ensure secrecy from all sources -- including the government. Those who are seeking to evade taxes (which is a felony in the U.S.) and to launder money are looking for some way to hide their assets and income from the government under the guise of seeking privacy. Many government employees involved with these issues regard the subject of privacy as a code word used by those seeking help to implement illegal transactions.

Where there is an excessive or near paranoid concern for privacy (aka secrecy), there is likely to be a fraud against potential creditors.

Most of the lawyers who actually do a lot of asset protection work advocate full disclosure to the various tax agencies and any other regulatory agencies. (I believe the other lawyers are living on borrowed time.) 

Partnerships, limited liability companies, corporations and private foundations are entities authorized by law. Individuals have certain rights and powers without the consent of the state. A corporation or partnership only exists as a creature of the law. Without virtually full disclosure of the financial affairs of the partnership or corporation, the state won't grant the entity the benefits of a separate entity with it's own rights under the law. Trusts do not require registration with any government agency because they are simply contracts between the grantor/creator of the trust and the trustee. While revocable trusts don't provide any asset protection, an irrevocable trust might provide some protection. 

But there are some forms of asset protection that rely on secrecy and evasion rather than on openly making use of the law. When that happens, the desire for privacy can overlap into a potential felony. If secrecy, subterfuge or fraud are essential to the success of an asset protection device, the odds are that it's illegal.

    Further details about fradulent transfers are available in our subscriber's web site

    NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article.

    About the author:

    Vernon Jacobs is a CPA who works as a tax author and consultant.  He can be reached by phone at (913) 362-9667.

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