Fraudulent Transfers: What If You Already Have A Problem?
If you failed to protect your assets before you were facing a lawsuit, you will have a big problem. At that point, just about any attempt at transferring or otherwise trying to protect your assets will likely be construed as fraud.
What does this mean in practical terms? Here’s an example:
Imagine you have been called by a person who says that he has a claim against you for one reason or another (no suit has been filed). You remember the person; and even though you think he has no basis to make a claim against you, you decide to play it safe and make “gifts” of your assets to your spouse and children.
If the claimant is successful and obtains a judgment against you which he cannot collect, the transfers will likely be held to be a fraudulent transfer by the court unless significant non-asset protection motives can be proven for the transfer.
A Classic example:
Dr. Smith goes into the operating room where he is supposed to amputate a diabetic patient’s right leg. Dr. Smith did not notice that the surgery techs prepped the wrong leg; and, in fact, Dr. Smith amputated the wrong leg. Dr. Smith figures this out in post op.; and instead of sticking around to console the patient and his/her family, Dr. Smith digs out his Doctor’s Wealth Preservation Guide to review and then calls his local attorney to immediately start drafting an asset protection plan.
Dr. Smith and his attorney immediately transfer Dr. Smith’s brokerage account and vacation home (value $2,000,000 collectively) to separate limited liability companies in hopes that this move will protect Dr. Smith from the lawsuit he is sure will arise from his amputating the wrong leg of his patient.
Sure enough, Dr. Smith is sued six months later by the patient for $10,000,000 (which seemed to be a just price to the personal injury attorney now that the client has NO legs after the second amputation). Dr. Smith has a 1-million/3-million-dollar medical malpractice insurance policy.
During the deposition, Dr. Smith testifies truthfully that he transferred all his major assets to limited liability companies one week after the surgery but before the lawsuit for malpractice was filed. The attorney for the patient asks for and receives a temporary restraining order to freeze the assets in Dr. Smith’s limited liability companies until a resolution of the case is complete.
The case goes to trial and the jury comes back with a $7,000,000 verdict in favor of the patient/plaintiff.
What is the outcome of Dr. Smith’s asset protection plan? Dr. Smith has violated the fraudulent transfer rules, and the court reverses Dr. Smith’s transfers and directs him to liquidate his brokerage account and sell his vacation property and hand over every penny to the patient.
The lesson from this story is simple: Create an asset protection plan while you still have the chance. Don’t wait. And definitely never make fraudulent transfers. If Dr. Smith had had his vacation rental and brokerage accounts asset protected prior to amputating the wrong leg, those assets would have been protected and the court would not have been able to tell Dr. Smith to liquidate the assets and give the money to the patient.
In other cases, fraud may be more difficult – but not impossible – to prove, including in the case of selling an asset 1) for less than its fair market value or 2) when a claim for damages against the seller is known.
Basically, fraudulent transfer laws will prevent you from removing assets from your estate after you know of potential claims against you. Even if a creditor cannot prove actual fraud, you still need to worry about constructive fraud when making transfers of assets after a claim for damages has occurred.
There is only one surefire way to prevent transfers of assets from being overturned by a court: make the transfers before any liability occurs. Protect your assets now, before there is a claim. And to ensure that the protection sticks and is legal, be sure to work with an asset protection expert.
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