Edward D. Brown, Esq., CPA, LL.M
Is a transfer of assets as a proactive risk management strategy a “per se” voidable transaction? There is ample case law to support that transfers made just to “cover all the bases” are
not voidable transactions For example, transferors who engage in professions, such as the legal or medical professions, which carry a multitude of risks, may desire to set aside a nest egg of funds that are better positioned to be safely isolated from the day-to-day risks of one’s daily endeavors. This does not equate to acting with intentions to hinder, delay or defraud a creditor.
If an asset protection trust is funded at a time that no creditor is on your trail, funding such a trust is permissible (and in fact legislatively sanctioned in seventeen states in the US and in many offshore jurisdictions). The US Supreme Court (
Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc.,119 S. Ct. 1961 (1999)) in addressing whether a debtor could be prevented from transferring assets prior to a judgement, stated that so long as the fraudulent transfer laws do not otherwise apply, the debtor can freely proceed with such transfers. In this seminal case, the United States Supreme Court chose not to apply an equitable pre-judgment remedy of a preliminary injunction restraining a party from transferring its assets, stating:
[W]e suspect there is absolutely nothing new about debtors trying to avoid paying their debts, or seeking to favor some creditors over others—or even about their seeking to achieve these ends through sophisticated . . . strategies. The law of fraudulent conveyances and bankruptcy was developed to prevent such conduct; an equitable power to restrict a debtor’s use of his unencumbered property before judgment was not.
In other words, making transfers to protective structures is legitimate planning, so long as the transferor is not facing an existing or anticipated creditor with regard to an act that the transferor has already committed.
In cases where asset protection trusts have been successfully challenged, the courts’ rulings have been based mostly on (i) the settlor not properly moving assets into the trust; (ii) the trust provisions not being properly drafted; or (iii) fraudulent transfers that were determined from the fact that either the debtor was motivated because of an expected claim or judgment, or the debtor did not retain sufficient assets to cover anticipated financial obligations. These successful challenges to such transfers are not determined simply from the fact that an “asset protection trust” was involved. If the latter were determinative, these various court rulings could have been a page or less in length.
Nevertheless, there is no guarantee that a court will not conclude there was an intention to delay creditors, and, if so, if the court has jurisdiction over the trustee who received the transfers, the trustee may be compelled to return those transfers. This uncertainty as to what a court may infer regarding intent in hindsight contributes to the popularity of offshore trusts that have a trustee who is not subject to the jurisdiction of the U.S. court nor bound by a U.S. judgment. For an example of offshore asset protection trust laws, see the laws of Antigua/Barbuda, Bahamas, Belize, Bermuda, Cayman Islands, Cook Islands, Cyprus, Gibraltar, Jersey, Labuan, Mauritius, Nevis, Saint Vincent and the Grenadines, Seychelles, and the Turks and Caicos.
Although offshore trusts greatly enhance the armor around trust-owned assets, there is no such thing as a bulletproof structure. Much like the shingles vaccination or flu shot, taking such precautionary measures can go a long way in providing protection, but due to the almost limitless nature of other strains and factors, it is always
possible a creditor could penetrate assets to some degree (even if this is because the trust-creator and the trustee strategically and voluntarily cooperate with the creditor in the effort). Nevertheless, proper planning almost undoubtedly leaves the transferor in an invariably better position than had he or she not taken any such proactive measures.
*The information in this article is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Greenspoon Marder LLP or the individual author(s), nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
About Greenspoon Marder
Greenspoon Marder is a national full-service business law firm with 240 attorneys and 26 locations across the United States. We are ranked amongst
American Lawyer’s Am Law 200, as one of the top law firms in the U.S. since 2015. Since our inception in 1981, our firm has been committed to providing excellent client service through our cross-disciplinary, client-team approach. Our mission is to understand the challenges that our clients face, build collaborative relationships, and craft creative solutions designed and executed with long-term strategic goals in mind. We serve Fortune 500, middle-market public and private companies, start-ups, emerging businesses, individuals and entrepreneurs nationwide.
Natalie Villanueva, Director of Marketing
954.333.4308 | firstname.lastname@example.org
This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.