Lately I have read two articles in bar journals discussing aspects of “estate planning” involving transferring property to relatives or into self-settled “special needs” trusts. Neither article mentions much less discusses the New Jersey Uniform Fraudulent Transfer Act. Yet the prospect of a transfer being unwound by a creditor or creditor representative (such as a bankruptcy trustee) is a real concern. Both those engaged in such planning activites and their lawyers need to keep this in mind.
Under both state and federal law (11 USC 548), a transfer can be “avoided” and the transferred property or its value recovered by creditors where the transfer was either with intent to “hinder delay or defraud” creditors, OR the transfer was made for less than “reasonably equivalent value” in exchange, at a time the person making the transfer was insolvent, rendered insolvent, or put into a position of not being able to meet current or reasonably anticipated future debts.
Stated in simpler terms, you cannot give away your property that creditors could seize to pay your debts, unless you get money or value in exchange that is roughly equivalent to what it is worth. Of course, if you pay off all your debts and stay debt free for a reasonable period of time afterwards, this may not be a problem.
Claiming that you intended to do estate planning rather than depriving your creditors is a defense that any good attorney can defeat, especially if the transfer was made to close family members, or creditors were starting to hound you. Intent to defraud can (and usually is) proven by looking to various “badges of fraud”. Not getting fair value in exchange is one of them.
Transferring your assets into a trust for your own benefit does not protect them from the claims of creditors. These “self-settled” trusts cannot, under New Jersey statutes, be used to insulate the property from creditors.
Most importantly, the creditors who can pursue fraudulent transfer claims include “future” creditors, not just those who were owed money when the transfer was made. While a 4 year statute of limitations applies to many such state law claims, even after the 4 years is up, a creditor can sue up to a year after he or she learns of the transfer. And federal agencies, such as the IRS (or a bankrutpcy trustee in a bankruptcy case where taxes are owed) has up to 6 years.
We often say that those who want to engage in “asset protection” need to do it at a time when they do not need it. Usually, the impetus to these efforts is some impending problem, legal, medical or otherwise. Like so much else, timely counselling by someone who knows this area and has both pursued and defended these types of claims is invaluable. With proper guidance and planning, the problems I have outlined here can be minimized or avoided.