At the Florida Bar’s Annual Wealth Protection Seminar, in Miami Florida, attorney Jonathan Alper presented, “Where Does Florida Law Stand on Fraudulent Transfers?” The following is an edited transcript of his presentation:
My task today is to give an update on where we are on fraudulent transfers in the state of Florida. I think we’ve been in a 10-year bull market of fraudulent transfer planning. I don’t mean that in the sense they are more effective today than before. I meant that in the sense that they often occur, and I seem to encounter various attempted conveyances or ideas for conveyances, and also because attorneys who refer clients to me, who have come up with various ideas and plans as they find that they are now freely able to think and advise and discuss the issue.
I believe that there are attorneys who like tax and there are other attorneys who do not get tax or like tax. This session will be for those who do not like tax. There is no math. What I am going to try to do is discuss more practical assets of the fraudulent transfer issue as a practitioner as opposed to an academic. While my materials have some cases, I did not conduct an exhaustive search or Shepardization of the cases because this discussion is not intended to be a recitation of new cases. For those who practice asset protection, I’d like to try to teach you from my experiences what works, what doesn’t work, how you should treat the issue, and most importantly, the mistakes that I see most often.
I would like to take an overview and a practical view. Most ideas of fraudulent transfers in practice do not come from attorneys. I do not sit down with someone and say, “Okay, let’s just transfer everything to someone else” because I know it’s not going to work. Fraudulent transfer ideas come mostly from debtors, and the idea starts with the phrase, “What if…”. What if I gave everything to my wife? What if we have a trust? What if we combined things and put my real estate in an LLC? So the issue usually starts with a “what if” and it arises during a client meeting.
Even the best ideas that are effective usually start with the client. You cannot research in some legal “cookbook” or manual about how to do a fraudulent transfer. That’s not where these ideas come from. Our role, I think, is to deal with the “what if” issues and to know the law better than our clients do – even though they often Google research their ideas and can read the fraudulent transfer statute.
I think the biggest mistake is the “what if” clients look at fraudulent transfers on too high a level, sort of a birds-eye view. They focus on things like the badges of fraud, thinking that they have an answer or explanation for why their “what if” proposal is not a fraudulent transfer. The client will say, “What if I create a trust for estate planning. Doesn’t that mean I don’t have the intent to defraud?” Well, maybe. But that is not the only issue – it’s just one of the issues. What I do is go back and re-read the statutes, and I learn more each time. Every time I read the statute, I learn something new – possibly because every time I read it I have had more experiences and more “what ifs.”
I’m not going to sit here and read the statutes with you. I want to concentrate on some definitions in the statutes because if we understand the statute definitions, you will have a better sense of what does work and what doesn’t work and how to deal with the “what ifs” that come into your office. So, we’ll go through some of the important definitions and try to get a better understanding.
I often have to tell a client whose back is against the wall, or they think it is, or they see a problem down the road and they are scared (even though they may win the lawsuit). They believe they need some extreme asset protection solution. They believe (and some attorneys too) that they are smarter than the statute. They believe that they can come up with some new plan and an explanation that is going to work. For example, they will convince themselves that it is good estate planning to put everything in tenants by the entireties because everybody does it, I’ve always done it, and they have an explanation or excuse to transfer assets to their spouse. Or, my financial advisor recommends annuities; why can’t I buy an annuity? They seem to think they will be able to, by one explanation or one reason, justify their “what if” plan.
I will try to explain to this client that the fraudulent transfer statutes were written by smart people, and the more I read the statutes the more I realize that the people who wrote them and/or modified them over the years – these people collectively are smarter than most all of my clients and are smarter than most of us here (with maybe a few exceptions). The people who wrote the statutes are really smart. When you read them, you are going to find out that they really cover everything for all possible types of conveyances. I cannot figure out how clients think they can imagine a plan that the client and I know is intended to protect the client from creditors, and try to find a hole in the fraudulent transfer statute. So the first thing is to be humble and realize that the people who wrote the fraudulent transfer laws may be smarter than you. If your client comes up with some last minute asset protection plan that they think is going to work, if you really read the statute, you will probably find that a creditor could challenge the plan as a fraudulent transfer. That doesn’t mean you shouldn’t do the transfer, it just means that you are not smarter than the statute.
Let me start by providing some examples of what I’m talking about in terms of definitions. The way I approach the fraudulent transfer statute is I try to explain things at the highest level. There is a statute on present creditors only (F.S. 726.106) and there is a statute for present and future creditors (F.S. 726.105). The first test, at least on the present creditors, I call the “math test” – it’s just a numbers analysis. The statute is simple – it’s nothing to do with intent – it’s math. The statute says if you are dealing with present creditors and the debtor makes a transfer, the test is (a) whether the debtor received reasonably equivalent value (that’s math) and (b) was the debtor insolvent (that’s also math). Insolvency is also defined by statute (F.S. 726.103). Let’s look at the two mathematical analyses and make sure we understand. We will concentrate mostly on reasonable value because that is often misunderstood.
Reasonably equivalent value is not fair market value. Most people think it is, but it is not. There are some cases on the definition of “reasonable value” and one is in the materials (In re: Goldberg, 229 B.R. 877 (Bkrtcy. S.D. Fla. 1998). There are cases that say that reasonably equivalent value is value “in the ballpark” of market value. If you are in the ballpark of value, you can give someone a good deal and still make a transfer for reasonably equivalent value. One of the cases states that a transfer value as low as 70 percent of fair market value is still reasonably equivalent. I don’t advise that you stretch it that far. But it is clear that if you do a transfer and sell something for “real money” it does not have to be at the appraised value, it has to be in the ballpark.
Insolvency is the harder one because transfers while the debtor was insolvent or that leave him insolvent are going to be fraudulent transfer. The statutory definition of insolvency is that a debtor is insolvent if the sum of his liabilities are greater than his assets. A typical client response is: “I transferred the real estate in my name, but I had $1 million in an IRA and a $1 million homestead, and I could have, if I wanted to, take the money out of the homestead or the IRA and pay this creditor off, so I’m solvent. I have the money. It just happens that these assets are exempt. But the transfer of my non-exempt real estate or non-exempt cash was at a time when I was solvent and it didn’t leave me insolvent.” The drafters of the statute are smarter than that. So you have to get back to the definitions.
An asset is defined as almost anything you own, but it excludes things that are exempt. If you own something that is exempt under Florida law, there are two consequences. You can freely transfer that asset because it is not an asset subject to fraudulent transfer (that’s good), but in terms of insolvency, you don’t get credit for it (that’s bad). People who have $1 million in an IRA and a $1 million homestead and have limited non-exempt assets (such as non-homestead real estate) then the transfer of the real estate is really, for insolvency purposes, a transfer of all of their assets, because “assets” excludes exempt assets. What will people try to transfer? They are going to transfer things that are non-exempt. They are going to transfer everything that is non-exempt. I find that if you look at the definition, almost all of these transfers are transfers that occur during insolvency or leave the debtor insolvent.
Now the “what if” comes in: “Well, you are comparing my assets to my debt. I have lots of debts. I have $1 million mortgage on my homestead, and the only thing I owe the creditor is $500,000. I have all of this other debt to put into insolvency.” The insolvency definition excludes debts that are secured by exempt assets (it doesn’t say mortgages on your homestead, but that is really what it means). So when you are doing this math test, it is important to concentrate on the definition of assets and the definition of debts. I think you are going to find that most of your clients who come in with their “what ifs” are going to be making transfers that are either during insolvency or that lead to insolvency.
The intent of transfers, and the badges of fraud, are not involved in the math test as to present creditors. They only come in when you are looking at the other statute (F.S. 726.105) with regard to present and future creditors, it says “(a) with the actual intent to … defraud… or (b) without receiving a reasonably equivalent value …”. Because intent is hard to prove, the fraudulent transfer statute and bankruptcy law apply these well-known badges of fraud. The mistake I see is that almost any transfer is going to violate one or more of the badges of fraud. There are cases that say that just because you miss one of the badges of fraud it does not make a transfer a fraudulent transfer.
In court, the creditor’s attorney is going to argue that your client broke rule number 6 or rule number 5 and therefore the debtor failed the badge of fraud and it is a fraudulent transfer. Understand there are several cases, most of them in bankruptcy court, that explain that you have to look at the whole picture as to what the debtor’s intent was and then also consider insolvency. If you have a bona fide transfer, even the good ones where they are made to third parties – not insiders – and where they are made for reasonably equivalent value, they still may fail one of the badges. Don’t be dissuaded by it – get the law that says that’s okay and you may defend the transfer. The cases that we are talking about refer to what is called the “totality of circumstances.”
The definition of “asset” is important. There are a couple of other definitions that I want to point out and one is the definition of a claim (F.S. 726.102). A creditor is anyone who has a claim, but claim is very, very broadly defined. Claim doesn’t mean a judgment. Claim doesn’t mean that the debtor is in default. Claim doesn’t mean a cause of action accrued. Claim in the statute means there is a debt owed, so almost anybody could come in as a claimant or allege that a transfer was made when there was a claim pending because the definition of claim is so broad as is the definition of transfer (which means every mode of parting with an asset – which means cash, granting a security interest, granting a right or equitable interest in property).
The next statute definition I want to address is a fraudulent loan (F.S. 726.201). I see lot of “family loans.” Here’s how it goes: “I owe my father (brother, mother) money. They gave me money when I started my business (went to college). I told them I would pay them back. In fact, I signed a note. I haven’t paid them back so now that the bank is after me, I think I’m going to pay them back.” Sometimes the client owes a family member money, and they want to trade that debt for interest in a property or they propose to trade that debt for an interest in an LLC. The basic premise of the “what if” is satisfaction of a debt to an insider.
You have to read this definition carefully because it says that where there is no payment or demand on a loan (for two years), the loan is presumed to be fraudulent. Usually when I see these loans, there may be a promissory note but often there is not. Almost always there is no payment history. The debtor has not been paying the loan and there is nothing on tax returns to show a loan payment. There have been no demands, letters, or lawsuits for over two years. But as soon as the debtor gets in trouble with a lender, all of a sudden the parent, partner, or friend makes a demand for the loan.
I don’t think that the debtors understand that the liability, this “what if”, is not going to work. If it doesn’t really look like a real loan with demand and payment, the idea that the family creditor all of a sudden is going to demand and sue and get liens on property or is going to get paid off is going to be subject to attack under this statute. It’s another example of they (the statute authors) have thought of everything. It’s a common “what if” that I see all of the time. It’s something people believe is going to work because they believe there is a debt. There may be a debt – but if it hasn’t acted like a debt, the courts may not treat it as a debt.
The fraudulent conversion statutes are under a separate statute (F.S. 222.30). Again, it is important to understand the definitions here. Fraudulent conversion is any transfer of a non-exempt asset to an exempt or immune asset. In this statute, future and present creditors are treated alike. Also, under this statute, you have to show the intent to defraud (bringing in the badges of fraud).
The next topic I want to talk about is transferee liability. What I tell the client when the client presents a “what if”, such as “What if I give this asset to my partner or to my family member?” I ask, “Do you really want to get your family members involved in your problems?” That’s really the biggest thing about transferee liability, even if it’s a spouse. Although there is no liability to a transferee that has acquired something in good faith and paid reasonably equivalent value, the law says that if there is a fraudulent transfer, the creditor sues the transferee to recover. But moreover, if the transferee has sold the asset or spent the money, the creditor can get a money judgment against the transferee for the value of the asset.
For example, a client proposes, “I’m going to give all of my money to my wife.? If the wife then spends the money (or does something with it) and the money is longer there, the creditor now has a cause of action for a judgment against the wife for the money if the transferee has dissipated the property. You know at least that the recipient of the property is going to be a defendant in the lawsuit and is likely going to have to have a separate attorney representing them. So even if we are not talking about money damages, by making a transfer to someone you like, you are going to be basically dragging someone into your problems. It’s not a nice thing to do, and it often doesn’t turn out that well. Please, debtors, before you come up with some ideas of who is going to get your property, consider the effect it is going to have on these people.
Everybody knows the statute of limitations on fraudulent transfers is four years. Sort of. The question comes, when does the clock begin to run? I think this is interesting. The clock obviously starts to run (under one view) when the transfer is made. So if you made a transfer in 2006 and we are now in 2013, the general rule is that you are beyond the statute of limitations. But there is another part to the statute that says it begins when the transfer was made or when it could have been “reasonably discovered.” I haven’t figured this one out yet. Maybe because I haven’t been involved in a case that involved this particular issue. I think that the statute definition applies to situations where the debtor made an affirmative attempt to hide the transfer.
I saw a case where the debtor prepared a deed to a friend but doesn’t record it. They made a transfer effectively between themselves but affirmatively took steps to hide it from the public. The clock is not running at that point. But I don’t think the statute means that the transfers could have reasonably been discovered only when the creditor takes the debtor’s exam after entry of a judgment. It is common sense that a creditor could argue that I didn’t know he made the transfer until I got a judgment and took his deposition and then I found out he made the transfer. If that is when the clock begins running, then no transfer would ever pass the four-year statute of limitations because the creditor wouldn’t know until he asked the questions. Probably, for transfers that are made on the record, like a transfer of title on a stock account or a deposit of money into the bank, the clock starts when that transfer is made because there is no intent to hide it. Someone could have discovered it if they knew to ask. If it looks as if the debtor tried to hide the transfer or to make it just between friends, I don’t think the clock is going to begin to run at that time.
The other thing I wanted to get into today is something I had an experience with within the past year – the statute of limitations under the proceedings supplementary statute (F.S. 56.29). Proceedings supplementary, I have found, is a misunderstood and under-utilized collection technique from the creditor’s side. You should read the statute – it’s one page and very simple. For example, it starts off with the right for the creditor, when it starts a proceeding supplementary, to require that the debtor appear before a magistrate and be questioned in court about the nature of assets and transfers of assets. The debtor has to bring with him whatever materials are demanded such as stock certificates, partnership agreements, etc. I have found that this is a much more intimidating tool than just being asked to sit in a deposition at a court reporter’s office. I had one case many years ago where it led to collection of money. The judge said either give this back or you are going to jail under contempt. This statute includes enforcement by contempt. Not for not paying the debt – we can’t imprison people for failing to pay their debts – but for failure to abide by the order of the court in a proceeding supplementary.
There is the additional remedy for attorney’s fees against the debtor. This means tacking on more money to a noncollectable judgment, possibly, but it does make it a bigger number to compromise. I won’t get into the details of the statute’s procedures and remedies.
From the asset protection side, I find proceedings supplementary can be intimidating. When a client comes in with the “what ifs” and says they want to make a fraudulent transfer that will really frustrate the creditor, and all of these pie-in-the-sky defenses, I try to point out this proceeding supplementary statute and emphasize that the creditors on the other side have some remedies that are going to help them pressure you. The good news from the debtor’s standpoint is that a lot of creditor attorney’s don’t use proceedings supplementary, or they don’t understand it or misuse it. A creditor opens the proceedings supplementary by motion and which will generally be granted. It is usually as a predicate to open up a fraudulent transfer action. That’s part of it. My point is that when you read the statute, you will see that there are other remedies in proceedings supplementary not just limited to opening up the forum for fraudulent transfer. I think that clients need to be aware of it.
Getting back to the statute of limitations, there is something in the proceedings supplementary that says you can reverse a transfer to a relative or confidential party (insider) made within one year or after the service of process. This is how it came up in one of my cases. A lawsuit was filed in 2005 or 2006. Within a year of that, the debtor transferred some LLC interests to an insider. The debtor was sitting back and smiling and saying the clock has run and the four years is over. “I did the transfer six or seven years ago.” However, the transfer is still within the statute under the proceedings supplementary because it was done within one year of service of process. The issue was: how can we have two statute of limitations running? Is it the four year under the fraudulent transfer or the one year under the proceedings supplementary? It doesn’t seem right and it doesn’t seem fair that we can go back beyond the four years.
There are several cases on this issue. One of them came out in the bankruptcy court in the Middle District in a bankruptcy proceeding. The ruling was that the proceedings supplementary statute is independent, and it runs on a separate train track. It goes its own way from the fraudulent transfer statutes, and therefore, the statute of limitations under the proceedings supplementary can be applied and you can come back and go after an asset that was transferred within one year of the service of process even though it was four or more years ago. But the court pointed out that this only applies to personal property. It does not apply to real estate. When talking about personal property, we are not just talking about jewelry – we are talking about partnership interests, LLC interests, etc. and lot of these debtors have already put real estate inside LLCs. Watch out for and make sure you tell your clients about the proceedings supplementary statutes. Hopefully, the creditor attorney is not experienced enough to use it. You will find, however, the bigger law firms and those with more sophisticated creditors are familiar with it.
The next thing I want to talk about is the liability of third parties to fraudulent transfers for planning or being involved in the transfers. The higher courts in Florida (the appellate courts and the Supreme Court) finally understood something that Dennis has been preaching for over a decade: fraudulent transfers are not common law fraud. Common law fraud involves lying, cheating, stealing, taking money from old ladies with the intent to lie, cheat, and steal incurring damages. It’s doing bad stuff to good people and you make money doing it. That’s common law fraud. Fraudulent transfers law is a collection remedy, a collection tool, to undo the planning that was designed to protect assets from judgment creditors. It’s not the lying, cheating, intent to harm and there are no incremental damages involved in fraudulent transfer planning.
The courts have understood the distinction which has distinguished fraudulent transfers from common law fraud. Common law fraud is an intentional tort. There are two types of recovery theories: contracts and torts. Fraud is a tort. The collection remedy of a fraudulent transfer is not a tort because, for example, it doesn’t result in damages, etc.
Remedies of conspiracy in aiding and abetting are available for torts. You can have a conspiracy to commit a tort and aiding and abetting to commit a tort. Also torts have other consequences. One of the cases in the materials talked about personal jurisdiction. You have personal jurisdiction over a party if they commit a tort in Florida. For actions other than torts, aiding and abetting, conspiracy, and other kinds of theories don’t apply. Once you show that fraudulent transfer is not fraud, is not a tort, then all the theories of third-party liability will not apply and that is the law in Florida. There is no such remedy for fraudulent transfer. One of the cases I was involved with involved a brokerage company, a financial firm. The Freeman case involved a bank. It’s not just causes of action against an attorney, but the financial firms that handle the money. In Florida we have case law that sort of shields the people from the conspiracy and other theories based on tort.
But that is not really the practical end of this. Most of the judges at the high levels “get it.” But the judges that most of us will come in front of on a day-to-day basis don’t get it yet. A litigating attorney told me last week that he was in front of the judge and the creditor was trying to get damages against a third party involved in a fraudulent transfer. The judge made some comment that he helped this debtor commit a fraud and that’s horrible and there has to be a remedy. The attorney successfully came in well-prepared with cases I alluded to and by putting a Supreme Court case in front of the judge, changed the judge’s mind. What’s instructive is that you will often go before judges in the county and circuit court level who haven’t heard about these third-party liability cases because they don’t deal with them every day. These judges may have the same mind set or prejudice that everyone had years ago that a fraudulent transfer is a fraud and anyone who is involved should be held liable. So, be prepared. Don’t assume that the judges in county or circuit court who deal with foreclosures and domestic matters deal with this every day – they don’t. Don’t assume that they are not smart – they are smart – it’s just that they have other things on their plate besides asset protection planning. The reality is that you have be prepared by having the cases with you.
The Yusem case stated that fraudulent transfers are a collection tool only. Danzas Taiwan Ltd. v. Freeman said that because it is not a tort you cannot get jurisdiction. There are many, many cases that agree with the absence of third party liability that came out of the bankruptcy arena that came out much earlier. I cited a couple in the materials (Mack v. Newton and Elliott v. Glushon). The bankruptcy courts in other jurisdictions got this distinction much earlier. Again, on a practical side I find that the bankruptcy judges are more aware of this distinction and most of them get it because these judges deal with these cases day in and day out. Most of the law on fraudulent transfer you’ll find is made in the bankruptcy court. They deal with this stuff every day (not mortgage foreclosures and divorces). Most of the law is made in the bankruptcy court. Most of the law absolving people from assisting and aiding and abetting fraudulent transfers had been the law in other bankruptcy districts for some time.
What I just said about the law and third party liability – don’t interpret that as unlimited permission to do whatever you want to do. My guidelines are that I don’t handle or take control of the assets. I don’t want the money in my trust account. I’m just here to discuss the law. Don’t become a player in your client’s game. Don’t believe that just because there is some Florida Supreme Court case that you are going to be able to do just anything. You must use common sense.
Common sense tells me that I discuss the law with my clients. I don’t draft documents. I don’t draft deeds to transfer property. Maybe I’ll do an estate planning document but it has to be straightforward. I don’t want to draft irrevocable trusts when there is a judgment on the horizon. Send your asset protection clients to an estate planning attorney. If they need to transfer real estate, let them go to a real estate attorney. Don’t try to do it all. Again, use common sense. You don’t want to become a witness in your client’s case. I think your role as an asset protection planner should be educating the clients on the law. But don’t join the game. Don’t touch the money or draft transfer documents. Don’t back date documents. Just don’t do it.
Most important – don’t litigate your own cases. If you have a client who, before they came to you, made some kind of questionable transfer, you don’t have to (or want to) be the one in court defending it. By giving the advice and consulting, you will be connected to the transfer. You don’t need to be the one in court before the judge for the creditor attorney to turn around and point at this guy who assisted these transfers. I think most of the people I know who advise on asset protection are not litigators and they don’t litigate their own cases.
I want to discuss a few of the “what ifs” I have seen from time to time. I’m sure you have some of your own “what ifs.” The most popular “what if” is transferring assets to a spouse. If a debtor has joint accounts with a spouse, if the debtor has no individual accounts, and if the debtor has non-exempt money coming in from a business, I think there is a defense (which has been recognized in cases) that if the debtor is doing what the debtor has always done (if the husband and wife have a long-standing practice of owning their assets jointly). The debtor does not have to set up special accounts in his own name because there is a potential lawsuit so he can preserve the money on the table to make it easy for the creditor to get the money. He doesn’t have to change his historical practices to make it easier for the creditor. That is different than changing the debtor’s practice to make it harder for judgment creditors. But, if the debtor’s practice has been that all money is in joint accounts or all assets are owned jointly and he is continuing his present practice, I think this is a reasonable defense against fraudulent transfer cases.
“What if” I give everything to a trust for my children? The client doesn’t understand that once he does that, he can’t get the money back. They usually don’t like that when they find out that by giving money to their children they are not supposed to take the money back. Of course, it’s a gift and it’s to an insider so it usually doesn’t work if there is a potential threat on the horizon.
What about paying a valid debt to an unrelated third party? In bankruptcy there is a preference concept about paying unsecured debts. In bankruptcy you must treat all unsecured debts equally so if you make a payment to an unsecured creditor within 90 days, it is deemed a preference and the trustee can get it back. F.S. 726 addresses paying an antecedent loan to an insider. Paying off even a valid loan to an insider, is still a preference outside of bankruptcy if it was done within a year to an insider. Just because you can pass the bankruptcy preference doesn’t mean you pass the preference for fraudulent transfer in circuit court. These are two different preference concepts.
Another “what if” is, “I own a piece of real estate with a partner (parent, brother) and I owe them on a loan. What if the non-debtor partner/friend/parent makes a demand upon me that I transfer the property to an LLC or partnership, they demand that I pay off the loan, so it wasn’t my idea, it was his idea. He’s the one that wrote me the letters and demanded that I make the transfer.” Years ago, I believed that, but I don’t believe it anymore. The problem with that is if you look at the statutes, if you make a transfer to an insider when you are insolvent and the transferee knew or had reason to know you are insolvent, it could be set aside as a fraudulent transfer. The idea of creating a demand or note to show the creditor, or the court, that it wasn’t the debtor’s intent – that it was someone else’s idea – you’ve now established that this third party knew you were insolvent. So the debtor’s plan is self-destructive. The creditor can come in and say that the partner knew you were insolvent, he knew you were in trouble, and that is why he made the demand. The fact that he made the demand of the transfer shows that he was part of it – that he knew about it. Therefore, trying to initiate a transfer to an assignor by a demand from the assignor solves one problem but creates another. It creates the problem that the assignor/transferee knew of the debtor’s insolvency, or had reason to know of the insolvency, and it’s going to hang the debtor up on that statute.
“What if I take the real estate and put it into a partnership, don’t I therefore get reasonable equivalent value because I have obtained an interest in the partnership?” Yes, but reasonable equivalent value is just one of the tests. There are cases out there where the reasonable value defense has failed when debtors fund partnerships and LLCs. It is still considered a fraudulent conversion to hinder or delay creditors. The fact that the debtor got reasonable equivalent value does not resolve his intent. Courts look at the totality of the circumstances. If it looks like there was not a good business reason to move things to a partnership, or if the transfer was done when there is a problem on the horizon, I don’t think receiving an interest for the transfer is going to solve a fraudulent conversion problem. It may – you can argue it – but don’t bet the farm on that argument.
Here’s a “what if” that might actually delay a creditor. “What if I close my bank account then move the account to another state or change banks?” This is basically a shell game as a debtor moves the money to stay ahead of the creditor. That is sort of interesting. If a debtor has a bank account in their own name and they go from Bank of America to Wells Fargo or Bank of America to E*Trade or some other internet bank or a bank outside the state of Florida, I don’t think that is a transfer because they haven’t transferred title. Technically, it’s not a conversion either because they have not converted the money into an exempt asset. I don’t think it’s a permanent solution because at some point under the equitable remedies available under the fraudulent transfer statute the creditor can get an injunction to stop the shell game. It’s certainly better than just leaving the money on the table.
Under that “what if” I would say you don’t want the debtor to lie so when the debtor testifies at a deposition or fills out a fact information sheet, that at the time the debtor testifies that the money is where he says it is at the time of the testimony. If he says the account is at Bank of America today, it doesn’t have to be at Bank of America tomorrow. Changing banks is not a permanent solution, and there may be remedies to stop it, but I’ve seen people do this, and so far I haven’t seen an argument that it is a fraudulent transfer because there is no transfer of title. If the money remains non-exempt, you have not done a fraudulent conversion or fraudulent transfer.
“What if I do something for estate planning like put the asset in an estate planning trust, a CRT, or whatever?” The question I ask is “Why?” In other words, does the debtor have an estate tax liability? If you are saying you are doing something for estate tax planning, do you have an estate tax issue? You don’t have to have $10 million, maybe you have less, but do you reasonably have an estate tax issue? If you have $1 million to $2 million in assets and you are married, and you did something for estate tax planning, I don’t get it. If someone is going to come with an estate planning excuse they need to be able to explain why this actually helped them with an estate tax issue.
“What if I just take the money and buy an annuity?” Well, how old are you? That may be a reasonable plan for someone 60 – 70 years old, and it may be defensible. You don’t have to stop your retirement planning just because someone is suing you. You don’t have to stop contributing your normal amount to your IRA. You don’t have to stop contributing what you have been contributing year after year after year into a retirement plan. You don’t have to leave the money on the table and put your retirement at risk. It helps if the debtor has a financial planner making financial recommendations. The debtor can’t just say “estate planning” or “retirement planning” without an explanation. In bankruptcy cases, I’ll often look to the age of the debtor and other income of the debtor to evaluate investments in financial products. Is he working? Is he disabled? These other factors will be applied to come up with a reasonable analysis whether buying an annuity or life insurance product or an estate planning trust is valid or whether it was just another scheme to protect the money.
I didn’t cover everything, but you just have to be practical about this stuff. Don’t be naive. Don’t believe your own plan won’t be challenged under fraudulent transfer statutes. Understand that the statutes are well-written and it is very, very difficult to beat the statutes. It is also very difficult to beat a well-funded and knowledgeable creditor. In closing, you’ll find there are cures and there are treatments in asset protection planning. Buying a homestead is a cure; everything else is a treatment. With treatments, the client can negotiate better, and he will put himself in a better negotiating position. But understand, these are only treatments. Some work; some don’t. But don’t believe this “what if” that you come up with is some kind of permanent cure to your situation.
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