To help avoid fraudulent transfer claims, follow eleven important pointers:
1. Protect your assets before a claim exists
There cannot be a fraudulent transfer on a transfer that occurred before the liability. That is why it is so important to judgment-proof yourself in advance of any financial or legal difficulty. The safe strategy is to be liability-free when you protect your assets.
2. Smaller incremental transfers attract less notice than transfers of significant assets. Avoid transfers of all or most of your assets to one transferee. Eggs in one basket are more easily attacked. Assets widely scattered require a creditor to file numerous fraudulent transfer lawsuits. The cost and effort may discourage such actions.
3. Avoid insider transactions to family or close business associates. Even completely innocent transactions are often suspicious to courts and creditors. Involve non-family members as trustees or corporate officers in transferee entities. A brother-in-law with a different surname is preferable to your same surname brother. Make all transactions appear arms-length, even when they are not arms-length.
4. Establish the transfer for purposes other than sheltering assets from creditors. Your attorney’s correspondence may, for instance, show that you were instead engaged in estate planning when your irrevocable trust was prepared. And this can be persuasive. Document recitals or preambles that state an innocent legal purpose for the conveyance. And what the instrument is designed to accomplish is strong evidence of innocent purpose.
5. Carefully document everything that you receive for your property. What services were actually performed? Why are they worth their stated value? If you borrowed money, can you show canceled checks or other customary documentation to prove the debt?
6. Avoid circumspect actions. Selling your home? Avoid becoming its tenant. People seldom buy homes to rent. Selling your business? Think carefully about remaining in control as its manager. Selling a boat? Think twice about keeping it at your dock.
7. Verify the value of your property. Establish fair consideration. Have your home appraised by local real estate agents. Prove you received at least 70 percent of its appraised value. If you sell an asset for a low price, obtain photographs or appraisals to show defects or other reasons to justify the lower price. Assume the value of a recently transferred asset will be questioned. Be prepared!
8. Choose your transferees carefully. If a creditor attacks your transfer, your transferee must defend the transfer. A friendly “straw” with title to your property may not act as you want when facing litigation. He may then quickly surrender your asset or otherwise not cooperate. You then forfeit the asset by default. Transferees to questionable transfers must understand that a claim may arise and must be willing to defend against such a claim.
9. Never publicize your transfers. Why alert your creditors when you rearrange your financial affairs? This only encourages creditors to move more swiftly to protect their rights.
10. Employ multiple asset protection strategies. Why simply deed your home to one party when you can also mortgage it to a friend owed $100,000? Your creditor must then challenge both the transfer and the mortgage. This may be too ambitious and expensive a proposition.
11. Don’t overplay your hand. It is not always smart to be completely judgment-proof. Creditors forced to search too strenuously for some asset to recover may target your more valuable assets. Detract creditors with more reachable but less valuable assets.
Recent Comments