Defenses to Fraudulent Transfers

Conversely, a court or jury may take into account facts and circumstances that may imply that the purpose of the transfer was other than avoiding the payment of one’s debts. Presumably, transfers associated with or made for legitimate business purposes would fit in this category as would transfers made for estate planning reasons. This creates an interesting paradox: on the one hand, transfers to a spouse or one’s children have traditionally been looked upon suspiciously. However, since such transfers are common for accomplishing legitimate estate planning objectives, transfers and gifts which are consistent with valid estate planning motivation may be viewed as lacking the requisite intent to defraud a creditor. Similarly, a transfer to a corporation or other entity composed of one’s spouse and children can have a legitimate estate planning or income tax motivation, or it may be accomplished purely as a way to avoid or reduce one’s ability to pay debts.

Although cases on the topic do not provide much guidance, certain general principles of law can be drawn:

  • The mere existence of the transfer without other suspicious activities is generally insufficient to establish fraudulent intent;
  • All of the facts and circumstances of the case and the credibility of the debtor-transferor are crucial in determining whether fraudulent intent exists; and
  • Business or familial motivation for the transfer is critical in rebutting an inference that the transfer was accomplished primarily with the intent to avoid the payment of creditors.

Statute of Limitations

An action by a creditor to set-aside a transfer as a fraudulent transfer must be filed within a specified time period. For the creditor who is trying to prove an actual intent to defraud, the lawsuit must be filed on or before four years after the transfer was made or within one year from the date the transfer could have been reasonably discovered, whichever is later. In no event, however, can the lawsuit be started seven years after the date of transfer. In cases in which actual intent to defraud did not exist but “reasonably equivalent value” was not exchanged or a transfer rendered the debtor insolvent, the creditor must bring his suit within four years from the date the property was transferred.

The ideal time to create an asset protection plan is before there are any potential creditors. That way, transfers into a plan should not fall within the fraudulent transfer statutes.

If you make transfers at a time when a lawsuit is imminent or pending or at a time when you have an outstanding obligation, the outcome will be less certain. The success of the plan will be dependent upon your ability to demonstrate remaining solvency and a purpose for the arrangement other than an intent to defraud a creditor.

For instance estate planning and business planning transactions may provide excellent estate planning benefits as well as legitimate risk management features which will be discussed in the succeeding chapters. As part of a coherent plan, the overall structure can avoid the costs and expense of probate, minimize estate taxes, shift income to lower tax bracket family members, and accomplish a myriad of sophisticated business strategies. Since all of these are worthwhile and valuable objectives, depending on the circumstances it may be difficult for a creditor to establish that an intent to defraud was the motivation for creating the overall plan. This is particularly so if this plan is structured so that it cannot be claimed that you were rendered insolvent at the time the plan was established.


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