Fair consideration or the fair value of the property is what a reasonably sensible seller would be able to sell the asset for, using commercially reasonable methods.<\/p>\n

This doesn\u2019t mean the price must equal the precise fair market value. In the case of a home or other real estate, a payment of at least 70% of the actual market value is sufficient consideration.<\/p>\n

The law recognizes that some belongings are difficult to market under distress conditions, but publicly listed securities can be sold for a known price any business day.<\/p>\n

If a debtor sells securities for considerably less, the courts can conclude there was no fair consideration.<\/p>\n

When less than fair value is paid, the transferee can be required to return the property, but only upon the repayment of what he paid.<\/p>\n

Otherwise, the debtor may be required to pay the difference between what was paid and the actual fair value of the asset as determined by the court.<\/p>\n

A transferee is protected if he acts in good faith without knowledge of fraudulent Intent and pays fair value. This fair value does not have to be money. It can be the exchange of other property or even services. The court will closely examine the services rendered to ascertain it was worth its claimed value.<\/p>\n

Consideration, however, cannot be for future services, but must be for services previously or concurrently rendered. The second question is when does a debtor become \u201cinsolvent\u201d?<\/p>\n

Recall that a conveyance is not fraudulent if the debtor was left with sufficient other assets to satisfy creditor claims.<\/p>\n

The law says you are \u201cinsolvent\u201c if the market value of your total property is less than the amount necessary to pay your apparent liability on your existing debts as they become fixed and due. Liabilities include all your debts whether now due or due at a future date, contingent or non-contingent, disputed or undisputed.<\/p>\n

The important point to bear in mind is that you cannot transfer assets for less than fair consideration when your remaining assets will not cover your apparent liabilities as they fall due.<\/p>\n

In short, the law does not prevent you from making valid gifts of your property, as long as you stay adequately funded to fully pay those debts, you can reasonably anticipate as due and payable in the future.<\/p>\n

When you transfer property without fair consideration and the transfer makes your liabilities exceed your assets, the courts automatically infer the transfer was made with fraudulent intent.<\/p>\n

However, creditors cannot easily prove your state of mind or compel you to confess fraudulent intent. They are left with the burden to prove fraudulent intent through circumstances or factors that tend to prove intent.<\/p>\n

Such factors include the relationship between transfer or and transferee, whether the transfer was for all or only a small part of the debtors\u2019 assets; whether the transfer was concealed, or whether the transfer or had knowledge of the claim or possible claim.<\/p>\n

Again, these factors only suppose fraudulent intent. They do not create the presupposition of fraud. Often, the transfer can be effectively explained away as an attempt to accomplish justifiable estate planning, investment, or business objectives.<\/p>\n

The court may then uphold the transfer as appropriate even though its ultimate effect was to hinder, or delay, creditors claims.<\/p>\n

It is easier for a creditor to recover under a claim of constructive fraud, or fraud-in-fact because the creditor can then ignore the issue of intent. Here the creditor need only show the claim existed(whether known or not), the transfer was for too little consideration, and the transfer rendered the debtor too insolvent to cover the creditor\u2019s claim.<\/p>\n

It\u2019s difficult to understand fraudulent conveyances in conceptual terms, so let’s look at a few case examples to demonstrate transfers that may be viewed as fraudulent, and others that are valid:<\/p>\n

Example 1: <\/strong><\/p>\n

You acquire a business loan of $750,000. While the note was in good standing, you make a gift of virtually all your assets to various family members. A year later, your business fails and the bank looks to recover on your guarantee. Would a court find the gifts to be a fraudulent transfer and order them set aside? Probably not.<\/p>\n

(1) There was no consideration, nothing received in exchange because the assets were gifted.<\/p>\n

(2) The transfer did render you insolvent since your business failed and you were left with too few assets to pay the bank note.<\/p>\n

Now the third issue \u2013 was the bank note guarantee a probable liability? It was a possible liability, but that doesn\u2019t make it a probable liability. Lawyers here would focus on whether you could reasonably predict the failure of your business and the need to pay on your guarantee.<\/p>\n

The bank\u2019s attorney would point to all the signs of business decline to show the likelihood of liability. Your attorney would take the reverse position, and he would probably succeed, but that\u2019s far from an exact statement because no exact statement can be made.<\/p>\n

As with so many areas of law, the final determination is one-sided. For this reason, you cannot expect your legal representative to ever guarantee your assets are safe. Your lawyer will, as an alternative, give you a qualified \u201cpractically\u201d or \u201cprobably\u201d safe, or those they are the safest they can possibly be under the conditions.<\/p>\n

Example 2:<\/strong><\/p>\n

Buck lives in Texas. He transferred his home to his brother as trustee in trust for Buck\u2019s minor children. Homes inTexas are homesteaded and therefore exempt from creditor claim. At the time of transfer, Buck had a $200,000 lawsuit against him from a rodeo incident where one of his bulls mauled a competitor. Buck has no other assets to satisfy the claim. This would not be a fraudulent conveyance because creditors had no right to the home to begin with since it was homesteaded. This example exemplifies the point that creditors cannot declare a fraudulent conveyance unless their right to the asset had been hindered.<\/p>\n

Example 3: <\/strong><\/p>\n

Assume that Buck owned $300,000 worth of nonexempt assets, and in the face of several lawsuits acquired exempt property with the $300,000.This is a more difficult case.
Most courts hold that it is not a fraudulent transfer because there is a fair value exchange-even though the replacement asset is beyond the reach of creditors.<\/p>\n

This rein forces the soundness of an asset protection plan that exchanges non-exempt assets for exempt assets. However, not all courts agree this approach is legitimate. Decisions vary between courts.<\/p>\n

This stresses still another complexity in asset protection planning court rulings do vary; in fact, the same court may change its own position on an issue over time. This adds to the uncertainty whether your asset protection plan is totally safe.<\/p>\n

At the least, it requires your attorney to thoroughly research recent cases in your state to more accurately predict how the court will view your transfers, should they be challenged.<\/p>\n

Example 5:<\/strong><\/p>\n

Suppose John transferred title to his home (nonexempt)to his new bride, (20 years his junior) who, in return, promised to care for him in his later years. What would happen if he later went bankrupt?<\/p>\n

The bankruptcy court could overturn this transfer if the transfer took place after the debts were incurred. Because the liabilities existed at the time, the transfer would most likely be set aside as fraudulent. Why?<\/p>\n

Because the consideration anticipated future services rather services that had been previously or concurrently furnished. This form of consideration is not sufficient.<\/p>\n

Now, if John had no debts at the time of the transfer, the property could not have recovered by later creditors. They could not logically dispute the transfer was to defraud, hinder or delay their efforts to the property when they were not even creditors at the time. These cases give you only a glimpse of some of the possible situations, but they hopefully provided you with a general idea of fraudulent and non-fraudulent transfers.<\/p>\n

The bottom line with actual fraud cases is this: your creditor must prove you actually intended to hinder, delay, or defraud your creditors. Historically, because of the difficulty in proving actual subjective intent to defraud a creditor, common law courts have pointed to\u201cbadges\u201d of fraud as evidence of the settler\u2019s subjective intent.<\/p>\n

Any asset protection planner should be familiar with these \u201cbadges\u201d and should document any transfer to minimize these factors. The badges identified by the Uniform Fraudulent Transfer Act, which may be utilized to infer actual subjective intent, are whether or not Fraudulent transfer law provides remedies for creditors (people or businesses to whom money is owed) who find that their debtors(people or businesses who owe money) are unfairly transferring assets beyond creditors\u2019 reach.<\/p>\n

It is thus a limitation on debtors\u2019 freedom of contract and of disposition. Current law can be traced to a 1571 English statute.<\/p>\n

Other badges of Fraudulent Transfers<\/strong><\/p>\n

In particular, fraudulent transfer law allows creditors to avoid transfers of property or obligations incurred to the extent these transactions are made either with the intent to hinder, delay or defraud creditors (the words of the original 1571 statute), or are made for less than reasonably equivalent value and leave the transfer or are in a precarious financial state.<\/p>\n

Remember, a classic fraudulent transfer occurs if a person, when pressed by creditors and in an effort to avoid collection activity, transfers his or her car or home to relatives for little or no consideration<\/strong>.<\/p>\n

Under the Act, a creditor of the person transferring the car or home would have the ability to ignore this change of title and could sue the relative for the value of the car or home. Similarly, a gift of property or money made when the transfer or is insolvent (that is, does not have enough assets to satisfy all creditor claims) is also a fraudulent transfer. This is but one instance of the maxim that one must be \u201cjust before being generous.\u201d<\/p>\n

1. The transfer or obligation was to an insider;<\/p>\n

2. The debtor kept possession or control of the property transferred after the transfer;<\/p>\n

3. The transfer or obligation was disclosed or concealed;<\/p>\n

4. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;<\/p>\n

5. The transfer was of substantially all of the debtor\u2019s assets;<\/p>\n

6. The debtor left suddenly, fled, absconded;<\/p>\n

7. The debtor removed or concealed assets;<\/p>\n

8. The value or the consideration received by the debtor was a reasonable equivalent to the value of the asset transferred or the amount of the obligation incurred;<\/p>\n

9. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;<\/p>\n

10. The transfer occurred shortly before or shortly after a substantial debt was incurred;<\/p>\n

11. The debtor transferred the essential assets of the business to a lien or who transferred the assets to an insider of the debtor.<\/p>\n

In addition to minimizing these \u201cbadges,\u201d a careful plan should emphasize the other business justifications for the settlement of a foreign trust.<\/p>\n

Provided a trust is properly crafted and careful settlement procedures are followed, the issue of whether or not a trust formed with the sole purpose of protecting assets from creditors is per se fraudulent should never come up; because any carefully conceived plan will document substantial and independent business justifications for the trust.<\/p>\n

Careful justification of the independent business reasons for the foreign trust should make it difficult for a distressed creditor to effectively argue that a transfer, that was not fraudulent under any objective criteria, was nevertheless fraudulent because of the transfer or harbored some internal, biased, actual fraudulent intent.<\/p>\n

The use of a family limited partnership is a popular way to turn attractive assets (i.e. an apartment house) into unattractive assets. It is also a technique whereby the asset protection trust may indirectly own U.S. situs assets (situs means location).<\/p>\n

The asset becomes unattractive to a creditor because, by placing the apartment house into the limited partnership, the judgment creditor\u2019s remedy changes. The judgment creditor cannot execute directly upon the apartment house and force its sale.<\/p>\n

Instead, the remedy is outlined by the Uniform Limited Partnership Act which provides that \u201cOn application to a court… by a judgment creditor, the court may charge the partnership interest of the partner with payment of the judgment… the judgment creditor has only the rights of an assignee of the partnership interest.\u201d<\/p>\n