In today’s difficult economy, with business failures, short sales and foreclosures, many clients are seeking to protect their assets without having to file for bankruptcy. Professionals have always been concerned about asset protection. Traditional estate planning tools, such as Revocable Trusts for the non vulnerable spouse, family Partnerships and LLCs with charging order protection, and Irrevocable Trusts, whether in Delaware or other states, are just a few examples of planning tools that can also provide asset protection. However, a key concept is acting before a creditor exists or there can be fraudulent conveyance concerns. The fraudulent conveyance concepts are summarized below.
Fraudulent Conveyances
The tools mentioned above afford maximum protection if implemented in a timely manner, i.e., before suits arise or creditors exist. If property is transferred, for example, to a trust after a judgment is rendered or a lawsuit is begun, the transfer may be nullified as a "fraudulent conveyance." There are two primary ways fraudulent conveyances arise. First, a creditor may bring an action to void conveyances of the debtor that are made with the "intent to delay, hinder or defraud" creditors. Intent can be difficult for creditors to prove. Therefore, courts sometimes find the necessary "intent" in "badges of fraud." The badges of fraud include: 1. Retention of an interest in the transferred property by the transferor; 2. Transfer between family members for allegedly antecedent debt; 3. Pursuit of the transferor or threat of litigation by his creditors at the time of the transfer; 4. Lack of or gross inadequacy of consideration for the conveyance; 5. Retention or possession of the property by transferor; and, 6. Fraudulent conveyance of indebtedness after the conveyance.
Second, conveyances and gifts made by a person who is "insolvent" or will be rendered insolvent are fraudulent as to existing creditors whether or not the debtor intended to defraud. Such transfers typically include those for less than fair consideration when the debtor fails to retain sufficient assets or capital to cover future business needs or debts. Suits by creditors to avoid a transfer without consideration or upon consideration of marriage generally must be brought within five years from the date the transfer was recorded or, if not recorded, five years from the date the transfer should have been discovered. - Thus, the longer the assets are held in trust or in a family partnership, the better chance of protection. The scope of creditors protected under the fraudulent conveyance statutes is broader than may appear at first glance. For example, "existing creditors" include persons with obligations against the debtor at the time the conveyance was made although their claims may not have matured or been reduced to judgment until after such conveyance. In Hyman v. Porter, 37 Bankr. 56 (Bankr. E.D. Va. 1984), the court stated:
Applying this concept, the court voided the gift of a diamond ring from the debtor to his wife, a month before suit was commenced against him under an indemnity agreement and three years before judgment was entered.
"[A] contingent liability is as fully protected against fraudulent and voluntary conveyances as a certain and absolute claim, and whoever has a claim arising out of a pre-existing contract, although it may be contingent, is a creditor whose rights are affected by such conveyances and can avoid them when the contingency happens upon which the claim depends."
Conclusion
Particularly in today’s economy, it is essential for clients to consider how to structure their assets to protect them from creditors. Asset protection, along with income tax and estate planning, is a necessary consideration for clients who desire to keep their net worth intact. The law already provides the legal entities to enable individuals to protect their assets, and it is simply a matter of timeliness to implement a plan.
