If you have an estate plan and also have creditors, you could be a fraud perpetrator — without knowing it or intending to defraud anyone. In some circumstances, creditors can challenge gifts, trusts, and other strategies for leaving assets to heirs as fraudulent transfers. Here is how to keep your estate plan from running into trouble.
Two Types
Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). The law allows creditors to challenge transfers involving two types of fraud:
- 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.
- Constructive fraud: This is a more significant threat 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 debts as they become due. Generally, constructive fraud rules protect only present creditors or those whose claims arose before the transfer was made or obligation incurred.
Know Your Net Worth
When it comes to actual fraud, you may not be safe just because you were not purposefully trying to defraud creditors. 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 a greater risk because of how insolvency is defined and gifts are made. When you make a gift, either outright or in trust, you do not receive reasonably equivalent value in exchange. 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. Even if you are not having trouble paying your debts, it is possible you might meet the technical definition of insolvency. Also keep in mind that fraudulent transfer laws vary from state to state. Therefore, you should consult an attorney about the law where you live.
Build a Better Plan
Besides knowing the law, you can protect your estate plan in several ways. Work with a professional estate planner and be sure to reveal everything about your financial situation that might be relevant to building a creditor-resistant plan. Also manage any debts by working with creditors to negotiate reasonable repayment plans. We can help if you are having trouble balancing your budget or managing your assets.