Creditors and fraudulent transfer
Fraudulent transfer rules exist to protect both present and future creditors of a transfer-or. A creditor is a person having a claim, and this claim includes, among other things, contingent, equitable, and un-liquidated rights to payment. Therefore, a shareholder’s guarantee of his corporation’s debt would make the corporation’s creditor on that debt the shareholder’s creditor, and the guaranteed corporate debt would be included in determining the shareholder’s solvency for these purposes.
You may ask yourself this question: “If future creditors are protected, how can I ever protect my assets?” While laws on this subject differ from one jurisdiction to another, the courts have distinguished between attempts to defraud specific future creditors, which won’t succeed, and protecting yourself from UN-ascertainable future, or “potential” creditors. Without the presence of proof of actual intent, courts have held that an individual can effectively protect himself against future potential creditors, provided a transfer is made sufficiently in advance of a potential future creditor problem. To put it another way, planning for your future well being is not prohibited by the fraudulent transfer laws, and advance planning is essential.
If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.