It all starts with the Client. Remember, a client who is sued or about to be sued and has his life savings on the line will do almost anything. As an attorney, it is imperative that you counsel your client against doing anything that is illegal. The sooner you and your clients begin to plan, the more protective and effective your protection plan will be. If your client has been sued it is likely too late to implement an asset protection plan.
When designing an asset protection plan, an attorney should always assume that a Creditor is going to try and attack the Client’s preservation strategy.
The number one tool for a creditor to use to attack your Client’s asset protection plan is by alleging a Fraudulent Transfer was made.
Most states have adopted the Uniform Fraudulent Transfers Act or a similar variation thereof. Always look to your state statutes when it concerns fraudulent transfers and conveyances.
Another source for Fraudulent Transfers is the Bankruptcy Code (11 USC §548). The Bankruptcy Code avoids transfers made with intent to hinder, delay, or defraud creditors.
Fraud is typically thought of as being difficult to prove because of the subjective actual intent that must be established. However, actual intent can be inferred by various circumstances which are known as Badges of Fraud. Remember, the evidence requirement for establishing fraud is clear and convincing evidence. There are various Badges of Fraud and for purposes of this blog, I am only going to list the 5 most common.
1. Transfer to an Insider
Transfer of property by a debtor to a partnership, family member, or friend may be fraudulent if it is to an insider. For instance, if the partnership is controlled by the debtor and/or his family, then the actual intent can be established and thus the transfer may be set aside. Even if a legitimate reason for the transfer exists, due to the insider nature, a creditor likely will try to set aside the transfer.
2. Creditors were in Hot Pursuit
If the debtor is being sued or is about to be sued prior to the transfer, then actual intent can be inferred. This is why it is so important to begin asset protection as soon as possible.
3. Transfer was of all of the debtor’s assets
This occurs when the debtor transfers most all of his or her assets. Now, just because you transfer most all of your assets does not always mean a fraudulent intent will be inferred. If you received full consideration for the transaction then you will likely be able to overcome the Creditor’s argument.
4. The consideration was not of equivalent value.
Did the debtor receive consideration that was reasonably equivalent to the value of the assets transferred? Again, if you transfer all of your rental properties to your son for $100.00, then you are likely going to be subject to this argument.
5. The debtor was insolvent or became insolvent
When most people are sued, they likely have assets. When they transfer those assets, they then personally become insolvent. This is the exact type of situation that will lead to fraud being found (see #2 above).
If the debtor was insolvent or became insolvent shortly after the transfer was made, then a Creditor will be able to argue that it was a fraudulent transfer. Again, in many cases multiple badges will be used together to bolster a Creditor’s argument. Again, if the debtor received full consideration for the transfer, then a Court is less likely to find fraud, even if the debtor became insolvent shortly thereafter.
Any attorney who is thinking about advising clients on asset protection must become very familiar with fraudulent transfers. The best way to become familiar is to stay updated with current case law. One of the best sources for Fraudulent Transfer case law is in the Bankruptcy Courts. Since state statutes are very similar to the fraudulent transfers under the Bankruptcy Code, it can help aid practitioners in avoiding pitfalls. Also, always look to your own state case law as well.