Fraudulent Conversions

A fraudulent conversion is a transfer of assets from an unprotected state into a state of being an exempt asset.  Assets in an unprotected state can be attacked by creditors.  Exempt assets cannot be attacked by creditors.  While legal title to assets does not change when a fraudulent conversion occurs, the assets become exempt assets because of their changed nature.

An exempt asset is simply an asset that cannot be reached by creditors because of built-in asset protection features.  Exempt assets include things like homesteaded property and ERISA qualified retirement accounts.  An example of a fraudulent conversion would be to shift an unprotected asset like cash into a protected class with the “actual intention to hinder, delay or defraud” any creditor.  The end result of a fraudulent conversion is that creditors can eventually get their hands on the assets.

The lesson is simple for people seeking to protect their assets and pursue true wealth preservation strategies: You just cannot afford to be reactive!  The cost of leaving assets exposed to claims by potential creditors is just too great, especially since you never know who might be a potential creditor.  Anyone can file a frivolous lawsuit, and even a lawsuit with no merit counts as a claim for purposes of fraudulent conveyances.

With respect to asset protection planning, the transfer of assets into a trust, family limited partnership, or closely owned limited liability is a transaction that can be subject to scrutiny under the doctrine of fraudulent conveyance.  And there is simply no way around the laws that prohibit fraudulent conveyances, in either bankruptcy or state courts.  It is, therefore, very important that asset protection planning and wealth preservation strategies be pursued well in advance of any potential claims, because that is the only sure fire method of avoiding an adverse judicial decision from the courts.

By complying with the letter of the law before pursuing an asset protection plan, you can make sure that the assets you commit to a wealth preservation strategy are not subject to attack.  The Uniform Fraudulent Transfers Act has a four year statute of limitation.  While the statute of limitations varies from state to state, the point is that if a plan is created and funded four years before a claim arises, the assets within the plan are not vulnerable to attack.  Even more importantly, if  you are a client of Lodmell & Lodmell, your assets are beyond the grasp of the U.S. legal system and very safe from creditor claims.