Estate Planning Transfers Can Affect Asset Protection

In a Bankruptcy Court case issued early in 2012,¹ the court held that an estate planning purpose may justify a transfer that might otherwise be viewed as fraudulent, so long as the facts support the estate planning need.

Facts.  Within four years before declaring bankruptcy, Debtor transferred two entities to Wife. The bankruptcy Trustee sought to void the transfers as fraudulent and petitioned the court for summary judgment. Debtor denied the fraud allegation and said that the transfers were made for estate planning purposes at the direction of Debtor's attorney. Debtor referred to his attorney's cover letter which indicates that such transfers were recommended to balance the ownership of assets between Debtor and Wife. The Trustee argued that there was evidence of eight of the eleven "badges of fraud" when the transfers were made and that, even if directed by counsel to make the transfers, the purpose was asset protection, not estate planning.

Issue.  Was there sufficient evidence of fraud for the court to grant summary judgment to the bankruptcy Trustee?

Holding.  The court held that a genuine issue of material fact existed as to whether Debtor transferred entities to Wife with intent to defraud a creditor. Therefore, the motion for summary judgment was denied.

Analysis.  The Bankruptcy Court explained: "The published caselaw (sic) is replete with cases where a transferor cries 'estate planning' when accused of transferring an asset with the intent to hinder, delay or defraud a creditor." The court said that in determining if an estate planning defense is successful in deflecting an accusation of fraud, "it is always a factually intense analysis." The court continued: "The innocent explanation of estate planning does not necessarily carry the day for a transferor. It is certainly not unheard of that while such an explanation might appear valid on its face, it may actually be intended as a sophisticated subterfuge. Whether asset balancing is a true and valid motivation may depend, in part, upon whether an experienced attorney specializing in estate planning would have recommended that the transfers be made, given the assets owned by each spouse prior to the transfers."

• Where asset protection is a key objective in a client's estate plan, the advisor should inform the client that certain transfers may be construed as showing intent or having the effect of defrauding current or potential creditors.
  
  
• Often, as in the Grube case, the Debtor is in financial trouble before any transfer is made. In such cases, it is difficult, if not impossible, to convince a court that the transfer was made for a reason other than to put the transferred property beyond the reach of the Debtor's creditors. In past times, it may have been easier to assert that a transfer was done "for estate planning purposes" and avoid fraudulent transfer treatment. However, in the current era of asset protection planning, careful attention must be given to the facts and circumstances surrounding the transfer. The Grube case points out the need for clients and their advisors to document each step of the estate planning process, so that their intentions, plans, and actions are clearly discernible from the record.
  
  
• The badges of fraud referred to in the Grube case do not necessarily prove fraud but are evidence that fraud may exist. These "badges" vary from state to state and among courts and include: failure to keep adequate records; diverting corporate assets for personal use; transfers to an insider, such as a relative, creditor, or business associate; Debtor retains access or control after transfer; Debtor was sued or threatened with a law suit before the transfer; material facts about the transfer or obligation were not disclosed; transfer involved substantially all the Debtors property; Debtor hides or flees; property is removed or hidden; significant disparity in value of property transferred in exchange for what was received; Debtor's insolvency; transfer occurred shortly before or after a large debt was incurred; or Debtor transferred key business assets directly or indirectly to an insider.

This material is for informational purposes only. New York Life Insurance Company as well as its agents and employees do not provide tax, legal or accounting advice. For advice on such matters, everyone should consult their own professional counsel. This material includes a discussion of one or more tax-related topics. This tax-related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals. 473719 12/31/2012