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Tic Toc . . . Tic Talk
Tics and fraudulent conveyances, now is the time

By Tim Berry, JD - Email Editor

Date : December 8, 2009

If you’re the typical reader, you probably have a few properties that are upside down, that is to say that the value of the liens against them exceeds the value of the property itself.

When you start moving assets around, the biggest hurdle is typically the fraudulent transfer statutes, laws that generally say a creditor is allowed to go after the debtor and or a 3rd party, if the debtor made a transfer of assets to the third party.

Bill Clinton time: what is the definition of “asset”?

Let’s take a look at California’s Fraudulent Transfer law, Cal. Civ. Code §3439.01:

(a) "Asset" means property of a debtor, but the term does not include, the following:
(1) Property to the extent it is encumbered by a valid lien.
(2) Property to the extent it is generally exempt under
nonbankruptcy law.
. . .

Did you guys read that? Let me put it into "Timspeak". If you are upside down on your real estate, it is probably not an asset for purposes of the fraudulent conveyance laws. That means you probably have a green light to start moving it around.

Sure it may be doom and gloom in the real estate market, but this doom and gloom presents you with a fantastic window of opportunity to make sure your future growth is protected.

Example: You have 5 rental properties, each of which has a deed of trust/mortgage encumbering at least 110% of the fair market value of the property. You want to hang on to the properties as you think the market is going to come back. You decide to plan for the future by transferring the properties into an irrevocable trust. Since there is no value to the properties, you probably are safe from an attack based upon a fraudulent conveyance.

Let’s not stop there though, let’s really pulverize the hell out of the value of the property. Sure, it’s already upside down, but since we are planning ahead, let’s plan for it to never really get out of the red. Instead of transferring 100% of the property into an irrevocable trust, why not split it up, and convert your single family residence into a tenants in common (TIC) property?

What is the benefit to you? You’ve probably devalued the property even more.

Example: You have a property, that has a fair market value of $200K, with a lien of $220K against it. You set up 2 irrevocable trusts and transfer a 50% undivided interest into each trust. Due to the stringent language in the TIC agreements for the properties, instead of the undivided interests being worth $100K each ($200K X 50%), at the most, the fair market value of the separate pieces is $70K each. That means the value of the 2 separate pieces is $140,000 and yet at the same time you have a lien of $220,000 against the properties. The market is really going to have to climb for you to have any equity and thus any asset a judgment creditor can take away from you.

If you really wanted to enter into the double bonus round, you could have a lot of fun, and leverage, with options on the TIC interests.

By the way, think of this in the context of estate planning as well as asset protection.

Sure, it is easy to bitch and moan about how awful the economy is right now, but at the risk of sounding like some sort of motivational coach, what you do now, in today’s economic environment is going to have ramifications for years to come. Just make sure those are positive ramifications.

Feel free to email us at info@trustmakers.com or call to discuss your options.

If you would like to discuss the use of trust for you, your family, or even as a marketing tool for your business, give us a call we would love to talk with you about it. Please contact us at info@trustmakers.com

By Tim Berry, JD
TrustMakers.com

 

 

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