Fraudulent Transfer to Private Charitable Foundation

Debtor inquired whether they can shelter money from a creditor by transferring the money to their private charitable foundation. The first question is whether the foundation qualifies and operates as a charitable entity for tax purposes, and if it does, the next question is whether a donation to a charity may be undone as a fraudulent transfer.

Private foundations are charitable entities set up privately by an individual or his family. The IRS has very strict guidelines about setting up private charities. Violations result in reversed charitable deductions and penalties. The charitable giver cannot have any self-dealing with the private foundation, and the foundation must have a true charitable purpose. The giver has a limited ability to be compensated to managing a private foundation. If the debtor in this case benefits from the private foundation beyond IRS limits the foundation may be disqualified for charitable deduction and the transfer of money will likely be reversed as a fraudulent transfer because of the giver’s retained benefits.

If the debtor gives to a qualified private foundation, the next question is whether the true charitable donation is reversible as a fraudulent conveyance where the giver retains no undue benefit. A debtor facing a judgment remains free to do what he wants with his money until such time as the creditor obtains a vested lien on the debtor’s property. The debtor may spend his money on frivolous endeavors such as travel, he may burn his dollars, or through money out the window of a tall building. In these examples, the money is gone, no longer identifiable, and is not recoverable. A charitable gift is traceable to the charity, identifiable, and theoretically returnable. The issue is whether the debtor had the intent to defraud his creditors in making a charitable gift so that the charity could be ordered to return the money.

I don’t know of any lawsuits against true charities for fraudulent conveyances. My impression is that a true charitable gift lacks most badges of fraudulent transfer. For example, the debtor retains no interest in the money, has no control over the money, and is making no attempt to hide the conveyance. Its possible the debtor could benefit through an income tax deduction not otherwise allowable if the same money is payable to his creditor, and in such event, a court may more likely to question the transfer. This will be an interesting legal issue if and when decided by a Florida court.

About the Author

Jon Alper is an expert in asset protection planning for individuals and small businesses.

Jon Alper

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