Understanding the Fraudulent Transfer Rules

The Articles below were taken from Newsletters we issued on the subject.  We recommend that you read them carefully so that you will be prepared to work together with us to take the proper steps and act with the proper timing to protect your assets and income stream.

Keep this in mind: You are not the person who will decide whether the payments or transfers you made are considered fraudulent.  That decision will likely be made by a judge - perhaps one who believes that it is his or her responsibility to redistribute wealth - or who has some other non-disclosed and perhaps non-rational concept about people who take asset protection seriously.  

We will be pleased to discuss this vital subject with you to answer your remaining questions.

FROM OUR NEWSLETTER ARTICLE ENTITLED:

FRAUDULENT TRANSFER RULES
-or-
WHY YOU SHOULD INITIATE YOUR
ASSET PROTECTION PROGRAM NOW!

"As long as I am allowed to redistribute wealth from out-of-state companies to injured instate plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone else's money away, but so is my job security, because in-state plaintiffs, their families and friends will re-elect me."       (A recent quote from a state supreme court judge.)

As an unabashed American born and raised capitalist, I am greatly intimidated by the tremendous prejudice that exists in America, and other nations, against those who have wealth. Not only are those who have few assets prejudiced, but there is an overriding prejudice that exists in the judicial system - especially among elected judges.

Folks When did you ever think you would read that some judges in America think it is good public policy to "redistribute wealth" to "give away someone else's money" to rule for the purpose of being "re-elected?" If you are among those who have never faced a judge or jury that was prejudiced against you, or if you are among those who think that what happens in court is based upon fairness and impartiality - you have just never been to court!

And, if you have never read the law on the subject of Fraudulent Transfers, read it early in the day - so you have time to calm your nerves before the day is over.

In the event of a dispute with a lender, former spouse, judgment creditor, some government agency or bankruptcy trustee that files a claim on your assets, or perhaps an unhappy heir, an intense examination of public and private records will likely be ordered or permitted by the court. That means you will have to disclose what you have owned and explain why you no longer own it, to whom you transferred it and on what terms, or why it is no longer available to pay your debts, judgments, or the claims of others against you.

If the transfer was within the Statute of Limitations period for the jurisdiction in which you reside, or the subject property resided, no matter to whom or for what reason the transfer was made, you will likely be required to prove that the transfer was legally made and not a fraudulent transfer. This could become very difficult and result in disclosures which may lead to other problems - unless you have carefully documented the transfers at the time they were made.

The following is a brief discussion of some of the issues which must be carefully considered when moving assets into an asset protection program, whether it be a domestic or offshore program. Ready this very carefully.

STATUTE OF LIMITATION ON TRANSFERS You must be concerned with the statue of limitations in your home jurisdiction as well as in the place to which you have transferred your assets. For example In a number of states an action based on a transfer of assets which was made with the intent to hinder, delay or defraud creditors will be heard if it is brought within four years of the date of the transfer in question - OR - within one year after the transfer was or reasonably could have been discovered by the creditor, up to seven years after the actual transfer date.

"Intent" is an important term here! Who determines what your intentions were - the judge who wants to get re-elected, the attorney who is getting paid a portion of what is collected, or you, "the evil robber baron who has hidden his money offshore so that he could cheat his just creditors?" It is very likely that proving that your intentions were honest and were not to "hinder, delay or defraud" the creditor who did not get paid will require that you make a full disclosure of your assets and program. This would open your program up to anyone who could get a copy of the public record of the courts, including the tax boys and other creditors or to overly aggressive folks who think they have found some deep pockets to pick.

So, even though your assets may be tucked away somewhere in a "tax heaven" and even if you are successful in keeping them offshore - you may not have the freedom to enjoy them because you are found guilty of fraud, with all its serious consequences.

(Now I admit I am a businessman, not a lawyer - but how many of you folks can afford to hire Roy Black, F. Lee Bailey, Johnny Cochran or someone like that after all your assets are in hiding in the Caribbean or South Pacific and cannot be accessed without admitting you have control - which would destroy your defense. And, how many business people can afford to spend the time and effort required defending against accusations of financial fraud instead of "minding the store?").

"WITHIN _____ YEARS AFTER THE TRANSFER WAS MADE" is another operative phrase here. The statue does not begin to run until the transfer is made (completed). Planning to transfer, beginning the transfer, signing the papers but not recording them and similar incomplete actions do not start the clock ticking. Completed transfers start the statute!

Here are a few other terms, phrases, and statements which you must make sure you fully understand and have not done violence to in your asset protection or offshore programs.

Future Foreseeable Creditors These are defined as presently foreseeable creditors whose claims foreseeably could get rights enforceable against the transferor's property. (Foreseeable is a subjective word - like beauty - and the claim of foreseeable by the creditor's attorney may likely get you in court and force you to disclose what you do not want to disclose - to the creditors and to the tax authorities).

Unreasonably small capital The message here is that if you started a business venture with "unreasonably small capital" and the business was unable to pay its debts at some future date (the law does not define 'future')- the creditors could attack your asset protection or offshore trust program, gifts or other transfers, and your assets not in a protection program. How? On the basis that these assets should have been available and that the business would not have failed except for the transfer, or that you have wrongfully withheld your assets from the venture. The creditors could claim they granted credit to the venture based upon your general credit standing and that the assets withheld or moved offshore, etc., were included in their credit decision.

Let's be realistic - how many businesses do you know that ever started out with enough capital - and what is enough, anyway and in whose opinion, and how do you prove who is right? If it was the opinion of the judge quoted above, the treasures of Solomon may not have been enough. And, if the creditor's claims are not totally outrageous (possibly in the mind of a judge seeking re-election or who sees his or her responsibility to include "redistributing wealth" or to include righting all the social wrongs that have ever been done or who is politicking for a Federal appointment, etc.), you may well be required to prove you did not fraudulently transfer the assets which may ultimately require full disclosure.

Remember that corporate shields and other such protections will not stand up against proven fraud and/or perjury - at least not unless everything is very well done and very well documented. 

BADGES OF FRAUD The Uniform Fraudulent Transfers Act (UFTA) is debtor oriented legislation and sets out Badges of Fraud which are circumstantial evidence of actual intent to hinder, delay or defraud. Some of these badges are also elements of what is called "constructive fraud." Although the UFTA requires that "clear and convincing evidence" is required, remember the term "evidence" is a highly subjective term and remember who could be holding the scales - not the lady who's eyes are covered - but it could be a judge and/or jury that is already prejudiced against you and who wants to use your case to "send a message" to the State or Federal Judiciary Selection Committee, or to the voters, or to other "morally corrupt and contemptible people like you - who have made their riches off of the backs of the poor and disadvantaged masses." 

Once the plaintiff's attorney has "pinned" one or two "Badges" on you - the burden of proof will likely shift to you - at least to the point that you may end up disclosing your entire program to the court, your adversaries, and therefore to the tax agents.

What are some Badges of Fraud that might be pinned on you - like a donkey at a child's party - by the creditor's attorney who is blindly stabbing about, attempting to pin the Badge (tail) on the donkey?

1. The debtor removed or concealed assets, or absconded with the assets (read moved them into some asset protection trust or IBC or offshore trust without adequate compensation - in the opinion of your adversary).

2. The debtor retained possession, control or enjoyment of the asset(s) after the transfer (read you are the "poder generalissimo" - general power of attorney - over the IBC or it can be proven that you really still own and control the asset as the sole trustee or signatory on the accounts or serve as trustee with insiders, family or friends, or have a debit card on an offshore bank account, etc.).

3. Transferring assets to an insider, friend or relative. A transfer to a FLP or LLC might be claimed to be fraudulent because it is said to be transferred to an insider. The plaintiff's attorney will make this claim if the FLP or LLC is controlled by the debtor or by family, friend or relative and/or simply because of the inability of the creditor to get at the assets of the FLP or LLC.  If the judge does not think the plaintiff's claims are over reaching, then the matter gets settled in court and the plaintiff will be entitled to discovery. (Read You transferred your assets into a FLP and then moved the limited interests into offshore trusts in the name of your heirs - so the plaintiff's attorney claims your inability to pay your debts, or judgments was the result of setting up partnership interests based upon something other than capital contributed and that you are hiding your assets from your creditors by wrongfully placing them into the name of your heirs through the FLP vehicle. Or, he argues that since you control the LLC, or Corp. which is the general partner in the FLP which now holds your assets, that you simply transferred them to yourself to avoid your just debts.)

4. The transfer, or the obligation being litigated, was concealed. (Read you attempted, or it is claimed that you attempted, to move your assets out of your control and to do it in such a way that the facts would be hidden - like paying fees to your own offshore IBC, or violating proper accounting rules when buying and selling goods and services to or through your offshore business.

5. The debtor was sued or threatened with litigation prior to the transfer - creditors were in hot dispute.

6. Transferring all or substantially all your assets.

7. Making a transfer of assets shortly before, or after, a substantial debt was incurred.

8. Inadequate consideration for the transfer - how did you value the interest transferred offshore - or that you sold to some third party - (Mr. Smith How can you convince the court that you do not have a private agreement with Mr. Jones that will allow you to reacquire the asset from him when this case is settled? Your answer is Mr. Lawyer, I do not have to prove that to anyone - you have to prove that such an agreement exists! You are technically correct, but if you ever reacquire, or enjoy or control or sell the asset, and it becomes known, you have a problem.)

9. Transferring the assets through the ownership of a "friendly" creditor and then out the back door to an insider, friend or relative - (read excessive discounts on factored receivables, property mortgaged to (and foreclosed upon by) an offshore trust or the same private bank in which you hold deposits of some type). 

Folks, there is a lot more to this than may reasonably be discussed in this type newsletter. Please do not take our attempts at humor to indicate a lack of seriousness about this critical subject. What stands at risk is your entire program and being branded as one who has committed financial fraud - a "Badge" that you could never remove.

A claim by the plaintiff's attorney that you have fraudulently transferred your assets offshore, or out of your name to hide them from your proper creditors may very likely result in a complete disclosure of your entire program - with all the problems that would produce. However, if the statute of limitations has passed - there is no claim. Of, if the transfer is properly documented and care taken, at the time of the transfer, to demonstrate that the transfer was properly made, many other problems might be avoided.

There are genuine solutions and means to protect yourself and your program in the event that it is claimed that transfers were made fraudulently. To do so requires not only good advice and careful documentation, but also the passage of time.

FROM OUR NEWSLETTER ARTICLE ENTITLED:

PROTECTING YOURSELF AND YOUR ASSETS
AGAINST CLAIMS OF FRAUDULENT TRANSFER!

"I felt naked, violated, stripped of my dignity and my pride. How did they get all that information about me?  This is America, what ever happened to privacy?  Is there nothing sacred? Have they all been plotting against me? Those people knew things about my financial affairs and personal relationships that no one else knew and they used it against me at every opportunity putting their own twist on everything. Plus, the lawyers and judges seemed to have their own little code a language only they understood so I never really knew what they were talking about. Every time I raised my voice in my defense, I just got in deeper and deeper. And, worse of all, I had to go home and tell my family that everything we had all worked so hard to put away for the future, and had so carefully hidden from everyone, was gone! It was just all gone! Then, as if to add insult to injury there are the fines and penalties and interest to pay. I can not even pay my bills now how am I ever going to pay off the government? I am ruined!"

Dear Reader: These are the words spoken recently by a personal acquaintance one who was always too busy to listen, too busy to learn, too busy to plan and too busy to get the help he needed. He was so busy making money that he had no time to carefully plan how to keep what he made; and when things went wrong for him in his business again for lack of careful planning and wise counsel he not only lost all he had but they found what he thought was hidden and out of their reach and took it!

Remember: You are not the person who will decide whether the payments or transfers you made are considered fraudulent. That decision will be made by a judge, or some government official or appointee. Of course your counsel will have the opportunity to speak, but so will the creditor’s or government’s attorney. And, no matter what anyone says, it will only be the greatest of skill that will keep you from having to prove you did not commit fraud, rather than simply defending yourself against the accusations of others. Their arguments will be based on their view of the substance of the transaction(s), not on form, and they will argue from the fact that you have assets remaining while your creditors suffer..

This particular newsletter is devoted to a list of basic errors that many people commit which could result in a loss of asset protection and in providing the "opposition" an opportunity to pierce the veil of the entity that you paid so much money to get set up to protect your personal assets. In this newsletter, we are going to use the term "liability veil" to include the "veil" set up by any entity trust, limited partnership, LLC, or corporation. Remember, just because you do your business through some type of business entity does not automatically guarantee that you will not be made personally liable for the actions or debts of that entity.

How do you lose the protection of your business entity; how may the "liability veil" be pierced? As you read the following material, keep in mind that the principal violation in all these items is that there has been an incomplete or improper separation between you and the respective business entity, or between different business entities. This allows the "opposition" to claim that the business is simply an "alter ego" of yourself, or that the two business entities are really just one.

1. Did you properly register your organization with the state and local government agencies required by law and is that registration maintained or renewed as required? Many offshore jurisdictions require that the company or trust be registered and a tax or license fee be paid, just as in the USA ( City, County, State Licenses ). And, if your organization is organized in another state or country than the jurisdiction in which you operate or own property, you may very likely be required to register in that jurisdiction, as well, and pay the appropriate fees.

What is the penalty for not paying the fees required and not properly registering your organization in every jurisdiction in which you operate it may well be that legal action brought in that jurisdiction will ignore the business entity and look to you personally, or you may find that the state does not recognize your entity since you did not pay the license and/or registration fees, and the courts will view your business as a proprietorship which would tend to make your personal assets available to the government or your creditors,

In Florida, for example, if you fail to file the proper annual registration for your business entity and pay the appropriate fees, you may be held personally liable for it’s debts. If you simply allow the business entity to go out of business and into involuntary liquidation without filing proper forms and information that the entity is being liquidated and paying the appropriate fees, you may be held personally liable for its debts. This may also be the case in other jurisdictions in which you do business or hold assets.

2. Have you commingled cash or assets? In those instances which should be rare, if ever that you utilize the funds of your entity for personal items, you must keep accurate records and make a specific reimbursement immediately. Where you utilize personal funds for the expenses or benefit of the business entity, there must be a specific and immediate reimbursement, with proper documentation.

If you utilize personal assets for the business or business assets for personal purposes, you must keep accurate records, under most circumstances, and exchange normal remuneration. If you drive a "company car" then you must keep records and reimburse the company for the use of that car pay mileage pay some reasonable rental or, at a minimum, take steps that allow you to make your case that the entity was properly reimbursed for the personal use of the asset. It is imperative that you be able to clearly demonstrate that the entity and you are separate financial parties and that your personal transactions with the entity were proper and on an "arms-length" basis. If one business entity utilizes the assets of another business entity, the same rules apply.

Consider the business person who purchases equipment in his own name and then leases it to the business. If the business has a claim that is related to the asset that businessperson has opened their personal financial situation to the creditors of the business. If it is desirable to purchase assets to be utilized by the business, then place those assets into a legal entity and document that the lease is made at an arm’s length value and terms and keep proper records for the leasing company and the lessor.

Too many people make their decisions about records and reimbursements and the need for separation of assets into various entities based on income tax return considerations. While income taxes are an important issue, asset protection is even more important. Remember that taxability and asset protection are not the same. You may properly have the tax liability for assets and/or income that is within a properly structured liability veil.

3. "When I need to make an important business decision, I close the door to my office, put my feet on the desk, and have a Board meeting with myself! After all, it’s my money; I built this organization with my own sweat why do I need to ask anyone else what to do or how, or with whom to do it?" There should be people involved in important decisions for the entity and their presence and participation should be recorded (see next item). These additional people should not be limited to family or relatives or employees, but should include people who are independent of the business entity. Why? To show that this is not simply an "alter ego" but is clearly a separate entity with a distinct management. And, having an active Board which participates in important company decisions is simply good business.

Of course these other people may be friends or even professional advisors it is not required that they be stockholders or that they have a direct financial interest in the outcome of the decision or the operation of the business. They objective is to show that you are not the only and indisputable decision-maker and that there is no one to whom you must account. These other Board members should vote on financial issues involving you like salary, bonuses, and other compensation and distribution items.

4. Keep proper records. If you do not keep proper records, or have inadequate records, documenting important decisions for the business entity, especially financial decisions, the "opposition" may well argue that there is no veil of protection and thereby attack your personal assets, or, in the case of personal liability, attack the assets you have "protected" in various entities.

Whether the meeting is the Board of Directors of a Corporation, or the Partners, or Members, or Trustees whatever name or type of entity, the rules are the same. Document each important decision. It is not normally a good idea to make a record of the discussions or who voted how, just record the fact that the issue was discussed and decided in a certain manner. Then make sure that each person in attendance signs the minutes. If one or more of those charged with decision making is not present, physically, but participated by telephone or video conference, or otherwise, they should still be required to sign a copy of the minutes and the copy they signed should be retained in the records.

5. Never sign or endorse documents or agreements personally. When you sign any document or contract for the business entity, make certain that the name of the entity is on all documents and that you sign in your official capacity and indicate that capacity. Also, carefully read every document to make certain that there is nothing within the document that indicates that you are accepting personal liability. If it is necessary for you to personally guarantee a transaction for your business, look for an alternative. If there is no alternative, then make certain that the Board requests your endorsement and that the entity agrees to personally indemnify you against any liabilities that may arise. Alternatively, if the personal endorsement has to do with the purchase of an asset, purchase the asset through another entity and then lease it or rent it to the entity that will use it keeping in mind what has been written.

6. Always properly identify your entity. If you are working through a corporation, for example, always identity the entity as a corporation so that creditors and agencies or individuals know they are dealing with a corporation and not with you, personally. Likewise, if the entity is a trust and you are a trustee, then make certain that the trust is properly identified in the documents and also the fact that you are acting on behalf of, not instead of, the trust, or other entity. If you give your creditors, or the government or individuals the opportunity to claim that they thought they were dealing with you on a personal basis, be sure they will do so.

These are simple rules that are easily followed no rocket science here. However, it is failure to take care of these small things that are used so often to pierce the "liability veil" and take you personal assets to pay for business liabilities or take you business assets for personal liabilities. Remember, the opposing attorney or agent will be diligently searching for any event or transaction they may use to claim that you and the business are really the same person that there is no separation of substance between the two and therefore the assets of one should be available to the creditors of the other.