Trying to Protect Your Assets: Why Giving Money To a Family Member Does Not Work

With the current state of the housing market, many of us know of a friend, family member, or neighbor who is contemplating walking away from their home. Whether that person decides to enter into a short sale agreement or let the home fall into foreclosure, he or she may be aware of the potential liability associated with either decision. In an effort to avoid losing one’s assets due to such liability, a common scheme employed by the homeowner usually involves gifting large sums of cash or other valuable property to a trusted family member – spouse, adult child, parent, etc. Many are mistakenly led to believe that by giving the asset away that such asset becomes unreachable by the person’s creditor(s). Unfortunately, this scheme is what the law calls a fraudulent transfer/conveyance. What is more unfortunate is that this is such a common scheme that the creditor’s attorneys often begin their search for transfers such as these to successfully get those assets into their clients’ hands to satisfy outstanding liabilities.

There are two types of fraudulent transfers: (1) those made with the actual intent to defraud and (2) those made under circumstances that constitute constructive fraud. Actual fraud exists when the debtor accomplished the transfer with the actual intent to hinder, delay or defraud a creditor. A debtor’s intent is often established indirectly by what are known as the “badges of fraud.” A partial list of such badges of fraud, found both in the Nevada Revised Statutes (“NRS”) and in common law, is as follows:

• Transfer was to an insider ( e.g., a family member);
• Debtor retained possession or control of the property transferred after the transfer (ex. Debtor transferred title to his home to a family member or entity but continued to reside in the home);
• Transfer was undisclosed or concealed;
• Before the transfer was made, the debtor had been sued or threatened with a suit;
• Transfer constituted substantially all of the debtor’s assets;
• Debtor absconded (ex. Debtor fled to an offshore jurisdiction);
• Debtor removed or concealed the assets (ex. Debtor puts assets in an anonymous “private vault”);
• Debtor was insolvent or became insolvent before or shortly after a substantial debt was incurred;
• Transfer occurred shortly before or shortly after a substantial debt was incurred; or
• Debtor transferred the essential assets of the business to a lienor, who transferred the assets to an insider.

With constructive fraud, the debtor does not have to have had the intent to hinder, delay, or defraud his or her creditors. A creditor most often proves constructive fraud simply by demonstrating that the transfer was made when the debtor was insolvent or became insolvent as a result of the transfer.

The determination of insolvency is the most important factor in determining whether a transfer is voidable as either actual fraud or constructive fraud. Determination of insolvency generally rests on whether a debtor’s liabilities exceed his assets. In determining insolvency, a mistake made by debtors, and at times by professional advisors, is the inclusion of assets that are not available to satisfy creditors’ claims because such assets are otherwise exempt from execution. Thus, transfers made as part of a comprehensive asset protection plan may sufficiently reduce a client’s assets so as to render the client insolvent. Such assets that would not be included in the determination of insolvency due to the exempt nature of the asset include but are not limited to:

• Exempt property such as an interest in a spendthrift trust;
• Property transferred, concealed or moved to defraud creditors; and
• Exempt property under Federal or state law (e.g., IRA’s, homesteads, etc.; see NRS 21.090 for Nevada state specific exempt assets).

Although the stumbling block to asset protection planning known as the fraudulent transfer may seem great, at Jeffrey Burr, Ltd, we have the knowledge necessary to assist our clients with an effective asset protection plan which significantly reduces or even negates the power of the fraudulent transfer attack.

 - Attorney A. Collins Hunsaker