Estate planning aims to help individuals achieve several important goals — primary among them, transferring wealth to loved ones at the lowest possible tax cost. However, if you have creditors, you need to be aware of how fraudulent transfer laws can affect your estate plan. Creditors could potentially challenge your gifts, trusts, or other estate planning strategies as fraudulent transfers.
Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). The act allows creditors to challenge transfers involving two types of fraud.
The first is actual fraud. This means making a transfer or incurring an obligation “with actual intent to hinder, delay, or defraud any creditor,” including current creditors and probable future creditors.
The second type is constructive fraud. This is a more significant risk for most people because it does not involve intent to defraud. Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.
‘Insolvent’ means that the sum of your debts is greater than all of your assets at a fair valuation. You are presumed to be insolvent if you are not paying your debts as they become due. Generally, constructive fraud rules protect only present creditors — those whose claims arose before the transfer was made or obligation incurred.
When it comes to actual fraud, just because you were not purposefully trying to defraud creditors does not mean you are safe. A court cannot read your mind, and it will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So, before you make gifts or place assets in a trust, consider how a court might view the transfer.
Constructive fraud is risky because of the definition of insolvency and the nature of making gifts. When you make a gift, either outright or in trust, you do not receive reasonably equivalent value in exchange. So, if you are insolvent at the time, or the gift you make renders you insolvent, you have made a constructively fraudulent transfer. This means a creditor could potentially undo the transfer.
To avoid this risk, calculate your net worth carefully before making substantial gifts. We can help you do this. Even if you are not having trouble paying your debts, it is possible you might meet the technical definition of insolvency.
Finally, remember that fraudulent transfer laws vary from state to state, so you should consult an attorney about the law where you live.