Estate and Asset Protection Planning
| Publication year | 1990 |
| Pages | 6 |
L.S. McCullough Jr., J.
ESTATE AND ASSET PROTECTION PLANNING—WHAT IS IT?
For many people, the phrase "estate planning" is recognized as planning for the orderly disposition of wealth on death. In fact, estate planning also encompasses planning for the accumulation, preservation, protection and management of wealth during life. When properly done, a plan should take into account all the client's income tax, estate tax and asset protection strategies in order to ensure that one area of planning does not interfere with the others and to ensure that all the client's estate needs are met. For purposes of this discussion, when reference is made to "estate planning, " it shall be deemed to encompass income tax, estate tax and asset protection planning. The main emphasis of this outline will be to focus on one element in estate planning, asset protection strategies.
FRAUDULENT CONVEYANCE AND BANKRUPTCY LAWS
In order to do effective estate planning for a client, knowledge of the laws that protect creditors is necessary. Many of these laws are found in the bankruptcy and fraudulent conveyance laws of the United States and each individual state. Using the fraudulent conveyance laws and bankruptcy laws, creditors may attempt to set aside a transfer of assets, even if that transfer was not intended to be fraudulent.
The Federal Bankruptcy Code is contained in Title 28 and Title 11 of the United States Code. Chapter 5 of the Bankruptcy Code (11 U.S.C. 501 et seq.) covers the bankruptcy trustee's powers to set aside voidable preferences. Voidable preferences are basically transfers which are not for fair and full value. These transfers can be set aside if they occur within one year of the commencement of any bankruptcy proceeding. Transfers may also be set aside if made within one year of filing bankruptcy and the transfer is to insiders such as relatives, officers, directors, or partners. Chapter 5 also gives the trustee in bankruptcy the authority to set aside fraudulent conveyances. 11 U.S.C. 548.
FRAUDULENT CONVEYANCE STATUTES
Policy. The policy behind fraudulent conveyance statutes is to avoid the depletion of the debtor's assets. Fraudulent conveyance statutes are meant to protect the debtor's unsecured creditors by preserving assets of the debtor's estate. Under §548 of the Bankruptcy Code, a bankruptcy trustee has authority to bring fraudulent conveyance actions.
Under the Uniform Fraudulent Transfer Act (UFTA), as approved by the National Conference of Commissioners on Uniform State Laws in 1984, if actual intent to defraud cannot be proven, only a creditor whose claim arose before the transfer (i.e., a present creditor) has the requisite status to bring avoiding actions as to transfers made without reasonably equivalent value by an insolvent debtor. UFTA §4. Both present creditors and future creditors (creditors whose claims arose after the transfer) have standing to bring avoiding actions as to transfers made with "actual fraudulent intent, " or transfers made without reasonably equivalent value by a debtor with unreasonably small capital or with an intent to incur debt beyond the debtor's ability to pay. UFTA §4.
Voidable Transfers. Both the Bankruptcy Code and Uniform Fraudulent Transfer Act provide for the avoidance of two general types of fraudulent transfers: (1) Transfers made with "actual intent" to hinder, delay or defraud creditors, and (2) Constructively fraudulent transfers (transfers made without actual intent but deemed to be unfair to creditors because of other indicia). 11 U.S.C. 548(a).
Actual Intent. "Actual intent" to hinder, delay, or defraud creditors is rarely subject to direct proof. UFTA §4 looks to certain non-exclusive "badges of fraud" in order to prove actual intent. These "badges of fraud" are as follows:
(i) Whether the transfer was to an insider;
(ii) Whether the debtor retained possession or control of the property transferred after the transfer;
(iii) Whether the transfer was disclosed or concealed;
(iv) Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
(v) Whether the transfer was of substantially all of the debtor's assets;
(vi) Whether the debtor absconded;
(vii) Whether the debtor removed or concealed assets;
(viii) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(ix) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(x) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(xi) Whether the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Burden of Proof. Many courts hold that once a prima facie case is shown of inadequate consideration or lack of reasonably equivalent value, the burden of proof then shifts to the transferee to establish the lack of fraudulent intent. Commonwealth Trust Co. v. Reconstruction Finance, 120 F.2d 254; Adams v. Deem, 16 N.E.2d 817; Boggs v. Fleming, 66 F.2d 859; Hutchenson v. Savings Bank of Richmond, 106 S.E. 677.
Constructively Fraudulent Transfers. A common requirement for proving a constructively fraudulent transfer is that the debtor did not receive reasonably equivalent value. Under §548(d)(2) of the Bankruptcy Code, "Value means property, or the satisfaction or securing of a present or antecedent debt of the debtor.. ." In addition to the showing of lack of reasonably equivalent value, a party seeking to set aside a constructively fraudulent transfer must also prove one of three circumstances regarding the debtor's financial condition:
(i) The debtor was insolvent on the date of the transfer or was rendered insolvent by the transfer; or
(ii) The debtor engaged or was about to engage in a business or a transaction for which the debtor's remaining capital or assets were unreasonably small in relation to the business or transaction; or
(iii) The debtor intended to incur or believed he would incur debts beyond the debtor's ability to repay them as they became due. 11 U.S.C. 548(a)(2)(B)(i)(ii)(iii).
Insolvency. Under the Bankruptcy Code, insolvency is determined by a balance sheet test. Under the Fraudulent Conveyance
Statutes, in addition to the balance sheet test, insolvency can also be presumed if the debtor is not paying his debts as they become due. For a thorough review of Uniform Fraudulent Transfer Act, see A Critical Analysis of the New Uniform Fraudulent Transfer Act, Volume 1985 University of Illinois Law Review.
STATUTE OF LIMITATIONS
Each state has differing statutes of limitation for challenging fraudulent transfers. These statutes of limitation can vary from one to 10 years. The Federal Bankruptcy Code has a one-year statute of limitations from the date of the transfer. 11 U.S.C. §548(a).
Many courts have held that the beginning date for the running of the statute of limitations is the date on which the transfer was made or, if later, the date that the creditor should have discovered the transfer. See Texas Life Insurance Co. v. Goldberg, 165 S.W.2d 790.
Because of the statute of limitations, and the fact that creditors are becoming increasingly sophisticated in attacking potentially fraudulent transfers, it is critical that clients be informed that the earlier they implement their estate planning the more secure that planning will be if a problem arises in the future. Four years is generally a safe harbor time limit.
STATE AND FEDERAL EXEMPTIONS
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