What Happens If Assets Are Transferred into a Trust to Avoid Creditors
Imagine this scenario: You have somehow gotten into serious financial trouble. Creditors are calling on a regular basis and you decide that you’ll get them off your back by filing for bankruptcy. But, before you do, you decide to go to an attorney to create an asset protection plan by setting up an irrevocable trust. You “accidentally” fail to tell the attorney that you are going to file for bankruptcy. You put your assets into the trust, naming a family member as the beneficiary of the trust. Then, after avoiding creditors for several more months, you file for bankruptcy. You feel good thinking you have managed to avoid your creditors and keep your assets by putting them into a trust that creditors cannot touch. You’re feeling pleased and satisfied with yourself. And you might be sailing along nicely for a while. But that sense of having gotten away with pulling the wool over someone’s eyes will not last for long.
An Unworkable Tactic
Most people don’t do what I’ve just described above. But some people do attempt it. What those who try this route find out is that the court can render an irrevocable trust invalid if intent to defraud can be proved. Those who attempt this tactic think that proving fraud may be difficult, but it really isn’t. Creditors are not so easily fooled.
Don’t Even Think About Setting Up A Trust With Intent To Defraud
If you transfer your assets into a trust prior to filing bankruptcy, a bankruptcy trustee appointed to your case will first look to see what type of trust you have and next look to see if the transfer you made was a fraudulent transfer. If you have a revocable trust, then in essence, you still have control over an asset and can simply place the asset back into your personal name and therefore a trustee can step into your shoes and accomplish the same task. Therefore, a revocable trust will be of no value to you to protect your asset in a bankruptcy context.
If you have an irrevocable trust that you created prior to filing for bankruptcy, a bankruptcy trustee will look to see if the transfer you made was fraudulent based on state law and the bankruptcy code to avoid paying creditors. In general, if you gave away your assets and received no value in return, this may be legally considered a fraudulent transfer.
Under Georgia’s Uniform Voidable Transactions Act (the Act), a property transfer that a debtor makes with the intent to defraud, delay, or hinder a creditor may be deemed a fraudulent conveyance. The property transferred may be any of a debtor’s assets and include anything that is subject to ownership. The repercussions for actual and constructive fraud are the same. The transferee can be sued by a creditor or bankruptcy trustee. If fraud is proven, the court can render the transfer void and order a return of the transferred money or property. The court can also enter a money judgment against the transferee equal to the value of the asset transferred.
Keep in mind that a court is within its power to find a transfer of assets to a trust to be fraudulent if it is done with the intent to defraud creditors. Not only could such a finding expose the trust assets to liability, but also it could mean heavy legal penalties for the trustor.
Establish An Estate And Asset Protection Plan As A Proactive Measure
There is nothing wrong with filing bankruptcy when no other course is available. But there is something wrong with trying to hide assets in a trust to avoid paying creditors. While there are several good reasons to consider a revocable living trust and/or an irrevocable trust for your estate plan—avoiding probate, for example—a reactive strategy when you are in dire financial straits to hide your assets from creditors is not one of them. No one knows what the future holds but being prepared for worst case scenarios such as untimely death, debilitating illness, and frivolous lawsuits through an estate and asset protection plan is always a good idea. Give my office a call at 404-370-0696.