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Suffolk County Fraudulent Transfers

When most of us think about estate planning we think about making a will or a trust. Some of us may even consider planning of the possibility that one day we may be unable to make decisions for ourselves, so we execute advanced health care directives. Estate planning is all about planning for the future. One aspect of estate planning that many people do not consider is protecting our assets from future creditors. Unfortunately, when some people find themselves financial trouble and deep into debt, they make a mistake and try to hide assets from creditors. This type of activity can lead to such problems as fraudulent transfers or fraudulent conveyances. For example, if in an effort to keep property from creditors you transfer it to a trust, you may have committed a fraudulent transfer. Even if you may such a transfer without the specific intent of keeping the assets from your creditors, a court may not see it that way. As a consequence, the court may order that the transfer be reversed and that the assets be used to satisfy the debt to the creditor. This may leave you in an even more tenuous financial position. However, with advanced planning you can protect your assets from future creditors and avoid the pitfalls of being found to have made a fraudulent conveyance. To learn more about asset protection strategies, contact an experienced Suffolk County Fraudulent Transfers Lawyer who will work closely with you to establish a plan to protect your assets and avoid the legal and financial implications of a fraudulent transfer.

When is a Transfer Fraudulent?

Fraudulent transfers often occur when a person is experiencing financial difficulties and is on the brink of filing for bankruptcy. During a bankruptcy, the bankruptcy trustee has the right to seize certain assets, sell them and use the proceeds to pay creditors. Some people attempt to avoid this by selling or transferring ownership of property prior to filing for bankruptcy. As a part of the bankruptcy process, the trustee will review recent sales and transfers of property that occurred to determine if they were fraudulent.

Transfers may be considered questionable if it was made to a relative or colleague. Fraudulent intent will also be presumed if you transferred the property, did not receive reasonable compensation for it and you also were experiencing serious financial problems. Of course, if it is clear that you transferred the property in an effort to avoid using it to pay creditors, the transfer would be considered fraudulent.

A fraudulent conveyance can be either actual fraud or constructive fraud. If you transfer property with a year of a bankruptcy filing and it can be shown that your intent was to avoid paying creditors, then it is likely that the bankruptcy court will find that you committed actual fraud. On the other hand, if you transferred property for less than its reasonable value, and you could not pay your debts at the time of the transfer, then a court may determine that you committed constructive fraud. For a finding of constructive fraud intent is irrelevant.

What are the Consequence of a Fraudulent Transfer?

In many cases the person who receives the property at issue in a fraudulent transfer is aware of the fraud. Thus, the consequence of a finding that a transfer was fraudulent is that the bankruptcy trustee can actually recover the property from its new owner and use it to pay your creditors. However, if the new owner of the property was unaware that your had creditors who had claims against your property, then the purchaser will be permitted to keep the property.

How can Estate Planning help Avoid Fraudulent Transfers?

A sound asset protection plan that is a part of your overall estate plan can be an effective way to both protect assets from creditors and avoid being fraudulent transfer liability. While the law does not allow you to create an asset protection plan to evade current creditors, it is acceptable to create an assets protection plan to protect assets from future creditors.

An effective way to protect assets is by transferring assets to an irrevocable living trust. A trust agreement is an estate planning vehicle that holds property for the benefit of another person. To create a trust you as the grantor would transfer property into the trust. The trust then becomes the legal owner of the property. A living trust can be revocable or irrevocable. When you create an irrevocable trust you name someone else as the trustee. You cannot change the terms of the trust. It is permanent. Thus, you give up control over the assets. Because you give up ownership and control over the assets, your creditors cannot reach them. However, you are still able to enjoy the benefits of the assets. For example, you can name a family member as the beneficiary of the trust. This would enable you and your family to continue to benefit from the property without the property being legally owned by you.

A revocable trust, on the other hand, is not an effective estate planning to protect assets and avoid fraudulent transfers. With a revocable trust you are the trustee and have the authority to change or revoke the trust at any time. If you decide that the trust is no longer necessary, then you are free to dissolve it. With a revocable trust even though you transfer your assets to the trust, you still maintain a significant amount of control over the trust and the assets.

What can be used to fund an irrevocable trust?

Funding a living trust means transferring assets that you own to the trust. You will no longer be the owner of the assets you put in the trust. The trust will own them for the benefit for the beneficiary or beneficiaries that you name in the trust agreement. You can transfer practically any type of property to a trust. Common trust assets include bank accounts, investment accounts, real estate, jewelry, precious metals, works of art, and other collectibles.

In order to fund a trust with cash, you would open a bank account in the name of the trust and simply deposit cash into that back account. Each time you deposit money into that bank account owned by the trust, you will be adding to the trust's principal. Similarly to fund a trust with stocks or bonds, you would have to follow the same procedure: open a brokerage account in the name of the trust and transfer investments to it.

To fund a trust with real property such as a house, you would have to re-titled the property from your name to the name of the trust. A new deed will have to be executed and filed with the appropriate government agency. To fund your trust with personal property such as jewelry, works of art, antiques, or collectibles you would need to draft a document memorializing that you are transferring ownership of the property to the trust. Particularly in the case of property such as a vehicle, before any property is transferred to a trust, an expert should be consulted to advise you of the property way to effect the transfer and to advise of any negative financial consequences of such a transfer.

What are other benefits of an irrevocable trust?

In addition to protecting assets from creditors and avoiding the pitfalls of a fraudulent transfer, other benefits of transferring property to an irrevocable trust include estate tax savings and probate avoidance. If you give away assets during lifetime those assets will not be included in your taxable estate at your death. This is important as the value of the property that your beneficiaries will receive from your estate will be reduced by the amount of estate taxes that must be paid. Taxes and other debts owed by your estate must be paid before property is distributed to beneficiaries. If your estate does not include enough cash to cover estate taxes owed, other estate property such as real estate may have to be sold to satisfy the debt owed for estate taxes.

Property that your placed in an irrevocable living trust will not have to go through the probate process. Probate is the legal process during which the New York Surrogate's Court determines the validity of a will and authorizes the distribution of assets. There are several steps in probate. First the executor whom you name in your will submit your will to the Surrogates' Court. The judge will review you will and determine whether or not it is valid. If the judge determines that is valid, the court will allow the executor to being the process of administering your estate. The executor will have to first locate, inventory and determine the value of your estate. Then estate debts will have to be paid. The final step is for the assets to be distributed to the beneficiaries names in your will.

Probate takes time - often months and in some cases more than a year. During this time your beneficiaries will not have access to the property that you left for them in you will. If there are any problems during probate such as probate litigation or a will contest, then probate will take even longer. Assets that are in a trust that you made during your lifetime will not have to through probate. Instead, beneficiaries will receive the property fairly quickly after your death.

What is involved in Setting Up an Irrevocable Trust to Avoid Fraudulent Transfers?

In order for you and your estate to reap the benefits of an irrevocable living trust, it must be set up properly and at the right time. For example, in order to avoid fraudulent transfer liability, timing is important. If you have financial problems and are unable to pay your debts to your creditors, transfers made to a living trust within a year of a bankruptcy filing will be considered suspicious. It is likely that a court will determine that transfer was made with the intent to avoid paying creditors.

In addition, the language in the trust must be such that the trust is indeed an irrevocable trust over which you have no control. There are many types of irrevocable trusts that you can establish that will serve both as a meant to protect assets and avoid fraudulent transfers as well as to serve other goals. For example, the trust can be an education trust to provide for the education expenses for your children. If you have a disabled relative, you can set up a special needs trust to provide for that relative's long term expenses.

Estate planning to protect your assets can be tricky. However, it is important to consider not only strategies to ensure that your property goes to the people you select, but also to ensure that you estate assets remain intact so there will be property to distribute. The staff at Stephen Bilkis & Associates, PLLC has extensive experiencing setting up comprehensive estate plans that include asset protection strategies to avoid fraudulent conveyances as well as wills, trusts, and advanced health care directives. We will help you develop an overall estate plan that reflects your individual goals. Contact us at 800.696.9529 to schedule a free, no obligation consultation regarding your estate plan.

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