Asset Protection Trusts & Fraudulent Conveyance

A thorny issue for many asset protection trusts is whether asset transfers into a trust constitute fraudulent conveyances, which means that the transfer was done with the intention of hindering, delaying, or defrauding a specific creditor. If a court discovers that a transfer is fraudulent, it can order the transfer to be unwound, and the asset will be available to satisfy a creditor judgment.

Nearly all jurisdictions, both foreign and domestic, has some form of a fraudulent conveyance statute. However, the length of time creditors can challenge a conveyance and the burden of proof they have to satisfy to prove their claim varies greatly. For example, the majority of foreign jurisdictions will only allow a creditor to attack a conveyance as fraudulent for two years after it's made. And, in some foreign jurisdictions, the limitation period is even shorter. This contrasts sharply with most U.S. jurisdictions, which apply some four-year limitations period.

A burden of proof that is required in foreign and U.S. courts also varies. Many foreign jurisdictions require a creditor to prove a conveyance is fraudulent beyond a reasonable doubt, which is a tough standard that mirrors the burden of proof in U.S. criminal cases. However, on the other hand, most U.S. courts require only that a creditor prove that the transfer was fraudulent by a preponderance of the evidence.

Even more confusing, President Bush recently signed into law a bankruptcy reform bill that extends the time under which a bankruptcy trustee can set aside a fraudulent transfer into either a foreign or domestic asset protection trust from four years to 10 years prior to a bankruptcy filing.

"It's now imperative for clients to set up asset protection trusts long before they may actually need them to protect their assets against a potential bankruptcy," explains Dick Nenno, managing director and trust counsel for Delaware-based Wilmington Trust. "Clients also need to conduct a solvency analysis and fund the trust with only a portion of their total assets to avoid the perception they are trying to defraud specific creditors. It also helps if they have a purpose for the trust other than just protecting existing assets, like facilitating charitable giving or estate planning."