In the face of an uncertain economy and increased exposure to costly litigation, a growing number of individuals are embracing asset protection mechanisms to insulate their assets and ensure their wealth preservation. Though the benefits of utilizing these structures are extensive, there are both federal and state prohibitions concerning the nature of transfers to an asset protection arrangement which could render the creditor protection provided by these structures ineffective.
Transfers made with the intent to delay, defraud, or hinder creditors or those which cause the debtor to become insolvent are deemed fraudulent conveyances. Most states have implemented either the Uniform Fraudulent Conveyance Act (UFCA) or the Uniform Fraudulent Transfer Act (UFTA) to address fraudulent conveyance issues. Federally, the Bankruptcy Act contains similarly pertinent provisions.
Fraudulent conveyances should be avoided when making asset transfers as they allow creditors to seek, depending on the applicable law, a variety of remedies which would not have been afforded to them otherwise. Under the Bankruptcy Code, Section 550, a creditor may recover from the debtor either the property transferred or the value of the property transferred. While there is a judicial preference to return the actual property, monetary compensation may be awarded when the property’s value has depreciated significantly.