An
asset protection trust
is best thought of as
a legitimate and internationally
recognized vehicle for
a solvent and substantial
person to place a portion
of his wealth into a
secure entity which allows
that person substantial
control over the assets
yet protects these assets
from future unanticipated
creditors. Where the
settlement of the trust
occurs long before any
significant creditors
or liabilities materialize
and where the transfer
involves only a portion
of the settlor's assets,
leaving him patently
solvent after the transfer,
the asset protection
trust is a very effective
tool. It is rarely this
simple in practice.
One
overriding concern
for the settlor and
his advisors is that
no transfers to the
trust be violative
or any state or Federal
fraudulent conveyancing
laws. Often a prospective
settlor will defer
asset protection planning,
including the settlement
of an asset protection
trust, until he is
beset with liabilities,
lawsuits and sometimes
judgment creditors.
Advisors must be very
careful in these circumstances
because, even though
the planning might
be effective to protect
the asset from creditors,
all participants in
the transaction, including
the advisors to the
debtor, may be subjected
to civil and criminal
liability.
It
is worth analyzing
whether or not the
simple act of settling
an asset protection
trust, the sole admitted
purpose of which is
to insulate the transferred
assets from creditor
attack, is, in and
of itself, sufficient
to cause the transfer
to the trust to be
vulnerable in domestic
courts as a per se
fraudulent transfer.
The
problem arises because
all of the sets of
domestic fraudulent
conveyancing laws under
which a transfer to
an asset protection
trust might be analyzed
have one thing in common.
Every transfer with
the "actual intent" to delay, hinder or defraud creditors is subject to attack, even if the creditor
is a future unanticipated
creditor at the time
of the transfer. There
are no cases directly
on point although some
authority exists for
the proposition that
a transfer to a single
purpose trust designed
to protect assets from
future unanticipated
creditors is permissible.
Historically,
because of the difficulty
in proving actual subjective
intent to defraud a
creditor, common law
courts have pointed
to "badges" of fraud as evidence of the settlor's subjective intent. Any asset protection
planner should be familiar
with these "badges" 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:
1.
the transfer or obligation
was to an insider;
2.
the debtor retained
possession or
control of the property
transferred after
the transfer;
3. the transfer or
obligation
was disclosed or
concealed;
4. before the
transfer
was made or obligation
was incurred,
the debtor had been
sued
or threatened
with suit;
5. the transfer
was of substantially
all of the
debtor's assets;
6. the debtor
absconded;
7. the
debtor
removed
or
concealed
assets;
8. the
value
or
the consideration
received
by
the
debtor
was
reasonable equivalent
to the value of
the asset transferred
or the amount
of
the
obligation
incurred;
9.
the
debtor
was
insolvent
or
became
insolvent
shortly
after
the
transfer
was
made
or
the
obligation
was
incurred;
10.
the transfer
occurred shortly
before
or shortly
after a
substantial debt
was incurred; and
11. the debtor transferred
the essential assets
of the business
to a lienor who
transferred the
assets to an
insider of the
debtor.
In
addition to minimizing
these "badges", a careful planner should emphasize the other business justifications for the
settlement of a foreign
trust. 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. Careful
justification of the
independent business
reasons for the foreign
trust should make it
difficult for an aggrieved
creditor to effectively
argue that a transfer
which was not fraudulent
under any objective
criteria was nevertheless
fraudulent because
the transferor harbored
some internal subjective
actual fraudulent intent.
