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Kevin O'Leary Mr. Wonderful Asset Protection

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How to Avoid Fraudulent Conveyance

To avoid fraudulent conveyance, simply transfer your assets into a protective structure well before you need protection. The problem is that many people wait until it is too late to enact an asset protection plan. There are ways to protect yourself after the fact. But you are in a better position by acting before the need arises. When you properly protect your assets, creditors have a difficult case to prove fraudulent intent.

It is important to note that fraudulent conveyance / transfer is a civil issue. It is not a criminal matter and in almost all cases you cannot go to jail for it.

Establish your entire asset protection plan and create the tools and vehicles you will use. Place your assets into these containers and then legal tools secure your assets. You can set up your asset protection plan so you can activate it when you are in a legal battle. This is the key to properly creating an asset protection strategy. You do it when you don’t have to. Set up all of your tools and move your assets legally. Thus, you activate your asset protection plan and your wealth is protected when legal storms arise.

You can activate your asset protection plan all the way into a legal battle, if needed. With an offshore trust, for example, you move your assets out of reach of the U.S. legal system. The best way to avoid fraudulent conveyance rulings, however, is to you set up your asset protection before you need it. There are some things that you can do after legal action has started. It is just a lot more pleasant experience in the courtroom if you had acted beforehand.

avoid fraudulent conveyance

Keeping It Safe

  • Protect yourself now. There are ways to safely transfer your assets once a liability exists, but it is best to do so beforehand.
  • Transfer your property for reasons other than delaying or hindering a creditor.
  • Seek experienced help in your asset protection planning.

If you hold your assets in a proper protection plan before the need arises, you could very well weather a legal storm that would otherwise destroy a lifetime of accumulated wealth.

Avoid Fraudulent Conveyance Legal Actions

Can a judge “make you dissolve an asset protection structure and force you to turn money over to the plaintiff?”

A judge would be hard pressed to legally force you to dissolve a legal entity that you have established. He can evaluate the following “badges of fraud.” If a judge challenges part of your asset protection planning as a fraudulent conveyance and the other side wins, it is really not all that painful. A court can only try to put you back into the same financial condition you were before you enacted your asset protection plan.

asset protection plan

A Civil Matter, Not Criminal

It is important to note that the terms “fraudulent transfer” and “fraudulent conveyance” are often misunderstood. Many people mistakenly confuse these two technical legal terms with the civil tort of common law fraud or even with criminal fraud. It is not either. However, as a result of this misconception, some people become fearful that asset protection planning could make them liable for damages in tortious fraud or even charged with criminal fraud. It is just the opposite. The assets are yours and you have the right to protect them if it is in your best interest.


Court Rulings

Several state court decisions, as well as most federal courts have held that fraudulent conveyances to avoid creditors’ claims are not tortious fraud and are not criminal fraud. Thus, a creditor who tries to assert that part of your asset protection planning involved some sort of fraudulent conveyance does not have the legal capacity to charge you with the crime of fraud and cannot seek additional civil damages based on the common law theories of fraud, deceit, or misrepresentation. (Grupo Mexicano De Desarrolla, S.A., et al v. Alliance Bonde Fund, Inc.) Moreover, since there are no penalties to doing so. If the asset protection plan keeps the asset away from your creditors, as has been the case when using a Cook Islands Trust, why does it matter if a court claims that it was a fraudulent transfer?

Supreme Court Justice Antonin Scalia observed the following: “There is nothing whatever wrong with respondents pursuing their own interest. Indeed, the fact that it is entirely proper and entirely predictable is the very premise of the point we are making. That this new remedy will promote unregulated competition among the creditors of a struggling debtor.” A fair and proper reading of the opinion suggests, clearly, that the transfer of freely alienable property by a debtor is lawful and the creditors, likewise, are free to pursue their legal rights.

law scrabble

“Badges of Fraud”

The following are badges of fraud used by courts to determine whether or not the transfer should be deemed a civil fraudulent conveyance:

  1. That the transfer or obligation was made to an insider.
  2. That the debtor had retained possession or control of the property transferred, even after the transfer.
  3. That the transfer or obligation had not been disclosed or was concealed.
  4. That before the transfer was made or the obligation was incurred, the debtor had already been sued or threatened with suit.
  5. That the transfer had been substantially all the debtor’s assets.
  6. That the debtor had absconded.
  7. That the debtor had removed or concealed the assets.
  8. That the value of the compensation received by the debtor was relatively close to the value of the transferred asset or the amount of the obligation incurred.
  9. That the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
  10. That the transfer occurred shortly before or shortly after a substantial debt had been incurred.
  11. That the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.


Asset Protection Plan

In summary, just as any creditor can try to attack the creation of an asset protection plan, any debtor has the right to establish one. The creditor may suggest that certain transfers of your assets to other people or entities or investing money in exempt asset vehicles (such as annuities) constitute a fraudulent transfer or fraudulent conversion. They can claim that you made the conveyances with the intent, or effect, to hinder, avoid, or delay creditor collection. Someone can challenge just about any asset protection conveyance as “fraudulent” for a time period between six months to four years dependent on state specific statutes. The time limit is called statute of limitations on fraudulent conveyance. This is the case even if the challenging creditor had no claim when you activated your asset protection planning.


Case Law

In order to prevent the discharge of a particular debt because of a debtor’s misrepresentation, a creditor must prove the following: That the debtor made a false representation with the purpose and intention of deceiving the creditor; the creditor relied on such representation; his reliance was reasonably founded; and the creditor sustained a loss as a result of the representation. See, In re Lange, 40 B.R. 554 (D.C.Ohio 1984); In re McGrath, 7 B.R. 496 (D.C.N.Y.1980); In re Hunt, 30 B.R. 425 (M.D.Tenn.1983).

The debtor must be guilty of positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality. Neal v. Clark, 95 U.S. 704, 5 Otto 704, 24 L.Ed. 586 (1887); Gabellini v. Rega, 724 F.2d 579 (7th Cir.1984); In re Pedrazzini, 644 F.2d 756 (9th Cir.1981); Massachusetts v. Hale, 618 F.2d 143 (1st Cir.1980); In re Preston, 47 B.R. 354 (E.D.Va.1984); In re Byrd, 4 C.B.C. 205, 9 B.R. 357 (D.D.C.1981); [1978] U.S.Code Cong. & Ad.News, 6453. The burden is on the creditor to prove the debtor’s culpability by clear and convincing evidence. In re O’Karma, 46 B.R. 422 (D.C.Pa.1984); In re Schwartz, 45 B.R. 354 (S.D.N.Y.1985); In re Browning, 31 B.R. 995 (S.D.Ohio 1983); In re Musser, 24 B.R. 913 (W.D.Va.1982); In re Colasante, 12 B.R. 635 (E.D.Pa.1981).



So, whereas it may have been ideal to establish an asset protection structure well before the litigious event, if properly implemented, it will not harm you. It may be desirable to avoid fraudulent conveyance rulings. But sometimes the unexpected happens. When a new issues arises that occurs after you have established the proper asset protection strategies, having the structure in place before or after the event will certainly give you a strong foundation in making you “creditor remote” or “judgment proof.”