What are Fraudulent Transfers?
Fraudulent transfers or fraudulent conveyance has to do with transferring assets at less than the “fair cash value” thereby defrauding a potential creditor or the intentional divesting of assets which become unavailable for satisfaction of the creditor’s claims. Fair cash value means cash or near cash value at the time of transfer, not the price you paid for the asset.
For example, you transfer your portion of your equity in your home to your wife for $200.00 and the fair cash value of your portion of the equity was $250,000 (total value of the home was $500,000) or you transfer title to your Mercedes to your brother for $100.00. Additionally the IRS would claim that such a transfer is a gift subject to a gift tax return and assess a penalty for the non-filing of Form 709 (PDF) United States Gift (and Generation-Skipping Transfer) Tax Return.
What is Civil Conspiracy?
The “civil conspiracy theory” has been defined by the courts as (1) an agreement (2) by two or more persons (3) to perform overt act(s) (4) in furtherance of the agreement or conspiracy (5) to accomplish an unlawful purpose or a lawful purpose by unlawful means (6) causing injury to another.
To be convincing, the creditor must allege not only the conspirators committed the act but also the act was tortious in nature. The conspiracy alone is not enough to trigger a claim for civil conspiracy without the underlying tort. Lately, however, advisors have been dragged into the creditor claims as co-conspirators for suggesting and implementing everyday common asset protection strategies. This has made me more cautious, making sure that I don’t get dragged in to my own legal nightmare.
Example of Single Member LLC Membership Units and Shares in a Public Stock
SINGLE MEMBER LLCs should be avoided. The example I can use is this: If you own 1,000 shares of General Motors it’s considered a personal asset subject to a creditor claim. If the claim is perfected by litigation in favor of the creditor the owner of the 1,000 shares of General Motors will have to transfer those shares to the creditor in satisfaction of his claim. Owning single member units of an LLC is not any different. The Owner of the LLC membership units is equivalent to owning the 1,000 shares of General Motors and therefore subject to a perfected creditor claim.
Asset Protection: Placing Title of Assets in Another Legal Entity
THE CONCEPT OF ASSET PROTECTION includes the possibility of placing title in certain assets in the name of a less vulnerable spouse or other family members, or a legal entity. One should be very attentive in transferring title without an open invitation to a “fraudulent transfer” claim against the asset transferred or the possibility of death by the spouse or family member, or possible dissolution of the marriage, or a court judgment.
The most common methods of holding assets by INDIVIDUALS:
- Joint Tenancy
- Joint Tenancy with right of survivorship
- Tenants in Common
- Tenancy by the Entirety
- Community Property
LEGAL ENTITIES (Artificial person created by application of law):
- General Partnership
- Limited Partnership
- Limited Liability Company
- Corporation under Chapter “C”
- Corporation under Sub Chapter “S”
- Revocable Trust (There are many Revocable Trust variations, since a Trust is nothing more than a Contract)
- Irrevocable Trust (There are many Irrevocable Trust variations, since a Trust is nothing more than a Contract)
To learn more about avoiding fraudulent conveyance rules and how to avoid civil conspiracy theories when repositioning assets and implementation of precise asset protection systems speak with an experienced and knowledgeable financial planner and advisor in these matters such as Estate Street Partners offering free initial consultations.
I always caution against simply speaking with only an attorney and only an accountant in complex financial planning with regards to single member LLC scenarios, partnerships in Limited Liability Company formations, regulations surrounding fraudulent conveyance and civil conspiracy and asset protection. It’s best to develop or consult with a group or team consisting of an attorney, accountant and financial planner or advisor to offer you the best, well-rounded protection. You will gain a more thorough understanding of the nature of asset protection from LLC formations to avoid fraudulent conveyance and civil conspiracy judgments.