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Reasonably Equivalent Value

As we mentioned, unless there is an actual intent to defraud a creditor, a transfer of property for any legitimate purpose will be upheld if you receive “reasonably equivalent value” in exchange. What this term means is not exactly clear from the cases, but generally we can say that the determination is usually based on valuing what you gave up and what you received. The respective values do not have to be exactly equal but close in value seems to do the trick.

For example, let’s say that as part of the planning process you transfer property into a trust for the benefit of other family members. In this situation, since you have made a legal gift, without anything in return, there is clearly no argument that you received anything of value beyond perhaps temporary peace of mind. Since there is no value returned to you, if you are then insolvent or become unable to meet your obligations, this would be a classic case of a fraudulent transfer.

As an alternative, in this type of situation, you should make sure that your plan involves the receipt of reasonably equivalent value in exchange for the transfer of your property. If you create an entity such as a corporation or LLC or FLP, the value of your interest in the company will become the key issue. The ownership interests which are issued to you can negate the fraudulent transfer argument if the valuation is correct. A transfer to a corporation in exchange for stock, or to an LLC for membership interests of equal value should not be considered to be a fraudulent transfer. Understand, however, that now the creditor will be able to seize the stock or membership interests from you so you are not likely to be better off if this is your entire plan.

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