Asset Protection Planning

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Best Ways To Avoid Fraudulent Transfer

Avoid Fraudulent Transfer 

The following article discusses the best ways to avoid fraudulent transfer. Having a solid asset protection strategy is an important part of financial planning for any wealthy individual. Claims of fraudulent transfer pose the greatest possible threat to asset protection structures. In spite of the “F” word that may throw off the layperson, fraudulent transfer that we are discussing here is a civil matter, not a criminal one.

What Is Fraudulent Transfer?

Fraudulent transfer of assets, also known as fraudulent conveyance occurs when a person makes a transfer of assets with the explicit intent to delay or defraud creditors. The law governing fraudulent transfer of assets in the United States is the Uniform Fraudulent Transfer Act (UFTA). In 2014 the Uniform Law commission developed its viable replacement, the Uniform Voidable Transactions Act (UVTA). The new act more accurately represents its civil nature. This is very different from fraudulent conversion, which is taking someone else’s property.

There are two types of fraudulent transfer. They are actual and constructive fraud. A transfer made to an asset protection structure in order to render a debtor insolvent constitutes actual fraud. The debtor’s intent to defraud the creditor is proven in a successful fraudulent transfer claim. The jurisdiction where the asset protection structure is held determines the burden of proof required.

Constructive fraud occurs when a debtor unloads assets for less than a reasonably equivalent value. This would include “selling” assets to friends or relatives for far less than they are worth or gifting them away. Debtors and creditors will commonly argue about what is considered a reasonably equivalent value for contested assets.

Jurisdiction Matters

Jurisdiction Matters

Asset protection structures, including trusts and limited liability companies, are subject to the laws of the jurisdiction where they are held. There are a number of reasons why it is preferable to use an offshore jurisdiction over a domestic jurisdiction for asset protection planning.

The most important reason for using an offshore jurisdiction has to do with fraudulent transfer claims. It is because that most of the leading offshore jurisdictions that specialize in asset protection do not recognize foreign judgments. Creditors are required to travel to the jurisdiction where the asset protection structure is held and have their case tried by the local courts. This means airfare, hotel rooms, and legal fees. Creditors are usually discouraged from making claims of fraudulent transfer in offshore jurisdictions because the cost and time required are very high.

If a creditor does try to bring a claim of fraudulent transfer in an offshore jurisdiction, the odds are not in their favor. Offshore jurisdictions tend to have much higher burdens of proof than domestic jurisdictions. The burden of proof for claims of fraudulent transfer lies firmly on the shoulders of the creditor in offshore jurisdictions such as the Cook Islands and Nevis. Creditors must prove beyond a reasonable doubt that the debtor intended to defraud them, specifically, as opposed to any other creditor, when transferring their assets. They must also prove that making the transfer rendered the debtor insolvent.

Offshore Statutes

Statutes of limitations in offshore jurisdictions are generally much shorter than statutes of limitations in domestic jurisdictions. In some favorable jurisdictions, such as the Cook Islands, the statute of limitations that help you avoid fraudulent transfer claims is as short as one to two years. Once the statute of limitations has passed, a creditor is no longer able to make a claim against a transfer of assets held in an offshore asset protection structure.

In addition to asset protection structures, jurisdiction matters on timing state to state as well. The timing of a fraudulent conveyance in California might be different than the statute of limitations in New York.

How To Avoid Fraudulent Conveyance

How To Avoid Fraudulent Transfer

Individuals looking to protect themselves from fraudulent transfer claims should take the following steps:

1. Pay Attention to Timing

Timing is a very critical component to avoiding claims of fraudulent transfer. The importance of the timing of transfers is two-fold. Creditors frequently use timing to establish intent to defraud. A person who makes a transfer when it was reasonable to assume a creditor would make a claim on those assets is likely to face fraudulent transfer claims. Claims of fraudulent transfer are likely if a transfer is made when one could reasonably anticipate that a creditor will make a claim on those assets. Situations where it is reasonable to assume creditors will make a claim include after defaulting on a loan or immediately before filing for a divorce.

What if you waited too long? Don’t fret. There are excellent international options that can protect assets after the fact. An offshore trust has a trustee who resides outside of your court’s jurisdiction. The trustee can refuse to turn over trust assets to your enemies at law. Remember, fraudulent transfer in this context is a civil matter only, not a criminal one.

2. Avoid Insolvency

Another major component to avoid fraudulent transfer claims is whether or not the debtor is solvent. If a transfer of assets renders a debtor insolvent for the purpose of satisfying a creditor’s claim, it is possible that transfer will be deemed fraudulent. It is advisable that individuals avoid making transfers which would make them unable to repay their debts.

3. Keep Intentions Above Board

Branch Banking & Trust Co. v. Hamilton Greens, LLC is a good example of the effective use of a Cook Islands trust for asset protection. In this case, Branch Banking and Trust (BB&T) lent $3.375 million to Hamilton Greens LLC in 2006. Richard Bellinger and two other individuals personally guaranteed the repayment of this loan. In February of 2011, Hamilton Greens LLC defaulted on the loan. Branch Banking & Trust Co. filed a suit against Richard Bellinger and the other individuals in May of 2011 to enforce the personal guarantee.  BB&T tried to obtain a summary judgment in their favor on July 1, 2011 but were denied so that the other parties could complete their discovery.

In November of 2011, Richard Bellinger established an asset protection trust in the Cook Islands. He funded this trust with $1.7 million of his personal assets. In  in January of 2013, a $4.9 million summary judgment was levied against Bellinger. Bellinger did not pay the ordered amount. In August of 2013, Branch Banking & Trust Co. attempted to make a claim of fraudulent transfer of assets against Richard Bellinger. Bellinger testified that he created the trust for his future financial security and to protect against potential claims from his ex-wife.

In the Cook Islands, the burden of proof for fraudulent transfer claims is beyond a reasonable doubt. BB&T had an obligation to prove beyond a reasonable doubt that Bellinger made the transfer. They had to prove he did so with the intent to defraud them specifically. They were unable to find evidence or testimony which proved intent to defraud Branch Banking & Trust Co.


As a result, Richard Bellinger won the case and his $1.7 million in personal assets remained protected in the Cook Islands trust. Based on the timing of the transfer, it would certainly appear that Mr. Bellinger made the transfer in order to avoid paying BB&T Co. Had the burden of proof been clear and convincing evidence, the verdict may not have been as favorable. Clear and convincing evidence is the burden of proof in most domestic jurisdictions. However, short of a sworn confession, it is next to impossible to prove intent beyond all reasonable doubt. The Bellinger case is a testament to the strength of the protection provided by the Cook Islands trust. Had Mr. Bellinger abided by trust best practices and transferred his assets earlier, his defense would have been even stronger.

4. Consult A Professional

Asset protection planning frequently involves the use of complex structures which require knowledge of the laws in multiple jurisdictions. Failure to know the law or establish asset protection structures properly can hinder your ability avoid fraudulent transfer. The laws regarding transfer of assets are subject to interpretation and are not always clear or easy to understand. Using offshore structures require knowledge of the laws of multiple jurisdictions and how they interact with one another. Individuals will often find it was worth it to spend money upfront on a solid asset protection structure. Seeking advice from a qualified asset protection specialist is the best way to avoid claims of fraudulent transfer.


Consequences for Fraudulent Transfer

There is a big difference between fraud and fraudulent transfer. Fraud is a criminal offense. Fraudulent transfer, on the other hand, is a civil matter. Fraud occurs when an individual intentionally uses deception for the purpose of personal gain. Fraud is subject to the penalties of criminal courts. Penalties for fraud can include fines and imprisonment. In contrast, civil courts hear cases regarding fraudulent transfer of assets.

Creditors can reach unprotected assets if a transfer is deemed fraudulent. In the majority of cases, only assets which creditors are seeking to claim are denied protection, unless one holds them in an effective asset protection structure. The remainder of the assets will remain untouched. This includes including any assets included in the transfer over the value of the creditor’s claim. According to the American Bar Association, “only the portion of a fraudulent transfer that is necessary to satisfy a creditor’s claims is avoidable under the UFTA.”

A claim of fraudulent transfer is not generally going to send anybody to jail. However, they are quite costly for the unprepared in terms of lost assets. In terms of “how to avoid fraudulent transfer,” the best way that a person can defend against having a fraudulent transfer made against them is to avoid the basis for that claim. Engage in asset protection planning well before anticipated creditors appear on the horizon. This is far and away the most effective way to avoid such a claim. This asset protection plan should center around the use of offshore asset protection tools such as offshore trusts and LLCs. Assets transferred into a properly established asset protection structure years in advance of a claim will likely have passed the statute of limitations. Creditors are unable to make effective claims against transfers of assets on which the statute of limitations has expired.

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