Definition of “Insolvency” for Fraudulent Conveyance

The May edition of the Florida Bar Journal contains an article Mr. Robert Meyer about whether a disclaimer for estate planning purposes can be set aside as a fraudulent conveyance against creditors of an heir or trust beneficiary. The article includes an interesting discussion of the meaning of insolvency for purposes of fraudulent transfer allegations.

One of the most important badges of fraud for purposes of assessing a fraudulent conveyance is the debtor’s insolvency, or solvency, before and after the conveyance in question. The article points out that Florida statutes and other laws do not clearly define solvency or show how to measure solvency. The principle issue is whether assessment of solvency includes in the debtor’s assets those assets that are exempt from creditors such as homestead property, annuities, and retirement funds.

Computation of solvency under Bankruptcy law excludes exempt assets; the tax code definition includes exempt assets. Florida Statute 726.103, the article points out, states that, “a debtor is insolvent if the some of the debtor’s debts is greater than all of the debtor’s assets” or secondly, the debtor is generally not paying his debts when due. The first part of the Statute’s definition does not specify whether exempt assets are considered, and therefore, the second test of debt payment becomes most important.

In any event, additional court rulings would help better define test of solvency for Florida asset protection law.