Reasonably Equivalent Value Required To Avoid Fraudulent Transfer

Fraudulent conveyance is always the largest issue in asset protection planning. A debtor has a strong defense to a fraudulent conveyance threat if the debtor can prove that he sold or transferred an asset for value. For example, if a debtor sells an asset to a third party and receives money or property in return the debtor is left with the equivalent amount of assets and the creditor is not harmed thereby. The question often is how much money does the debtor need to receiver for a transfer of asset in order to avoid allegations of a transfer to defraud creditors.

For fraudulent conveyance purposes, the test applied to a transfer is one of “reasonably equivalent value.” (“REV”). REV is not the same as fair market value. A debtor is not expected to sell assets for full fair market value to avoid the taint of fraudulent conveyance. The law permits debtors to sell at a discount for whatever reason. There are a few court decisions which attempt to define REV in relation to fair market value. The general guideline is referred to as “the 70% Rule” which is that a transfer is fair if the consideration received is at least 70% of fair market value. People should plan on receiving more than 70% of FMV in order to better defend challenges of asset transfers.

After the transfer the debtor still has the problem of explaining what he did with the consideration he receives. The consideration for the transfer, whether it be 100% or 70% of fair market value, still has to be protected from creditors after the conveyance.

If a debtor transfers an asset which is exempt from creditors the creditor can transfer the asset for any amount of money, even for no money, without fear of attack under fraudulent conveyance statutes. There is no such thing as a fraudulent transfer of an exempt asset.

 

Last updated on May 22, 2020