A fraudulent conveyance is a transfer of property or other assets in an effort to delay or hinder creditors from collecting on a preexisting debt. Unfortunately, even seemingly innocent property transfers that are part of your asset protection plan can be considered fraudulent conveyances under state and Federal law.
Laws that Regulate Fraudulent Conveyance
Fraudulent conveyance is a term often used in bankruptcy, but it can occur outside of the bankruptcy context as well. The majority of states have either adopted the Uniform Fraudulent Transfer Act (UFTA) or the older, but still operable Uniform Fraudulent Conveyance Act (UFCA). Bankruptcy has its own federal version of fraudulent conveyance law.
Most states define fraudulent conveyance as: “A transaction made for the intent to hinder, delay, or defraud a creditor without receiving a reasonably equivalent value in exchange for the transfer or obligation.”
Fraudulent transfers are illegal, but they are generally not considered criminal. Even if you have purposely hidden assets, you will usually not be prosecuted in a criminal court for the action.
Planning Can Avoid Problems with Fraudulent Conveyance
Proper planning can help you avoid problems with accusations regarding fraudulent transfers. In fact, accusations of fraudulent conveyance are only a problem when creditors are knocking on your door. If you plan ahead you can avoid most issues regarding fraudulent conveyance. Do not wait to create your asset protection plan.
In the following situations, it may already be too late to create an asset protection plan because you may be committing fraud by moving your assets.
• When you have accumulated a great deal of debt and are considering bankruptcy
• You are already in the middle of a lawsuit, or a lawsuit has been threatened
• In the middle of a divorce, or just before filing for divorce
• Expecting a foreclosure
• Estate planning on your death bed
Wealth management should start early. If you wait too long, then you will have no protection, and you may even have to face accusations of fraud. In addition, the tax court may also completely undermine an estate plan if there are signs of fraudulent conveyances.
Need to Know Information About Fraudulent Conveyance
Generally speaking, you should conduct your asset planning before a particular debt has occurred. That is, you need to start your estate plan or asset protection plan well before you actually need it. Below is some additional information that you need to know regarding fraudulent conveyance.
1. Fraud reaches back farther than you might think.
Transfers that occur on the eve of bankruptcy or divorce are somewhat easy to assume that fraud is involved. However, fraudulent conveyance law might reach back in time farther than you might think. For example, a bankruptcy court may consider transactions that occurred years before you filed for bankruptcy. State laws will vary on this particular issue.
2. The definition of an asset is very broad.
Fraudulent conveyance law is deliberately broad when it comes to defining the term “asset.” What you may think is not very valuable, such as family heirlooms or small tracts of real estate, will likely still fall under the definition of an asset under fraudulent conveyance law. However, if an asset is completely encumbered by a lien, fraudulent transfer law may not conclude that it is an asset because of this lien.
3. The creditor has to initiate a fraudulent transfer action.
The creditor is the one to make claims of a fraudulent transfer. No federal or state agency will police this type of transfer (except the IRS, who is often a creditor). If the creditor wants the asset, it will need to take action. Keep in mind that, if you are questioned under oath (or deposed), you cannot lie about whether you have a particular asset. Lying under oath is perjury, which is a criminal act.
4. You can be accused of fraudulent conveyance even when you did not intend to defraud anyone.
Fraudulent conveyance is based on the “intent” of the person making the asset transfer(s). However, those who have committed fraud will rarely admit that they have done so, which means that the law must come up with another way to determine if fraud has occurred. Courts look for obvious signs, or “badges of fraud” to determine if a person’s intent was fraudulent. Essentially, the badges of fraud are actions or information that make the transaction seem like fraud has occurred. When the information is all compiled, if it seems like fraud occurred, then the court will likely assume that it is – even when you did not actually intend to defraud anyone. Having multiple reasons (tax reduction, income shifting, estate planning, etc.) why you made an asset transfer can counteract what may look like fraud to an outside observer.
5. If you are on the other end of a fraudulent transfer, you may have to give the asset or money back.
If you buy or accept property or assets that seem too good to be true, it might be. If you are on the receiving end of the fraudulent property, then the creditor could contact you, and you may be forced to turn over the property. This can be a serious problem if you have already spent the funds or sold the asset.
Getting Help With Your Asset Protection Plan
Good wealth management means starting the planning process early – long before you actually need it. Thinking ahead can help you retain your assets even if you are hit with a lawsuit, file for bankruptcy, or go through a divorce. Take the necessary steps to protect your hard-earned assets! Be wise and prudent, but don’t commit fraud! We understand asset protection and can help you find the information or services you need. Get started by attending one of our live events or using our vast library of online resources.