The Basics of Asset Protection: Fraudulent Conveyance and Voidable Transfers
In our last article on the basics of asset protection, we discussed legal ownership and how creditors can only take assets that their debtor legally owns. So the next logical question is if someone has a creditor, why not just transfer all their assets to someone else – a spouse, a sibling, a child, or a trust?
The answer can be found in fraudulent conveyance laws, also known as voidable transfer laws in some jurisdictions (like California). Fraudulent conveyance and voidable transfer laws protect creditors from debtors who transfer their assets solely to avoid that particular debt. If a creditor attempts to enforce a judgment and finds that the debtor has transferred assets with the intent to hinder, delay, or preclude the creditor from satisfying their judgment, the creditor may go back to court and ask for various remedies under fraudulent conveyance/voidable transfer statutes, including unwinding the transaction where the transfer took place.
It is important to note that a creditor need not have already obtained a judgment or even filed a lawsuit to be considered a creditor under these laws. A potential claimant who does not know the extent of the damages suffered or who only has a potential or conditional claim which will come to fruition sometime in the future may also benefit from these provisions.
What does this mean for asset protection planning? It means the best time to do your asset protection planning is when you have no known or expected creditors. We can still do planning when a creditor is already known and existing, but these structures and transfers may not protect you against the potential creditor that you are faced with now. However, you can protect yourself against future and yet unknown creditors. Waiting for the current storm to be over may be the very time necessary to protect yourself from the next storm. The biggest takeaway is that timing is crucial, and in most cases, the sooner you act, the better.
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