Legal

Fraudulent Conveyance: What It Is and How to Avoid It

By
Dominion
Updated:
October 4, 2023
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8 min read
Contents

It’s natural to want to avoid losing all of your assets in the event of bankruptcy. Businesses fail, economies crash, and negative events might occur outside your control that can cause you to lose everything you’ve built up and saved over years or decades.

But if you aren’t careful, the actions you take to save your wealth and assets could cause you to be accused of fraudulent conveyance. If that accusation is successful, you could face serious financial penalties in addition to having to give up the assets you wanted to save in the first place. Let’s break down what fraudulent conveyance is and how you can avoid it in detail. 

What is Fraudulent Conveyance?

In a nutshell, fraudulent conveyance – also sometimes called fraudulent transfer – is any attempt to avoid a debt by transferring money to another party.

For example, say that you know you have a looming bankruptcy ahead. You’ll either have to declare bankruptcy in the near future, or you have already declared bankruptcy to the relevant parties. You have $10 million in the bank and owe $20 million.

If you try to transfer that $10 million to, say, your brother’s bank account, it will be trivially easy for a court – spurred by your creditors, no doubt – to say that you deliberately transferred that $10 million to avoid having to pay it to your creditors. You won’t be able to say, “But I can’t pay the $10 million! My brother has it now.”

As demonstrated in this example and others, fraudulent conveyance is a bit of a, "you know it when you see it," type of concept.

When Might You Be Hit with Fraudulent Conveyance?

Technically, there are two types of fraudulent conveyance.

  • The first type is the classic bankruptcy avoidance case. In this instance, an entrepreneur, business owner, doctor, or anyone with lots of money to protect intentionally transfers that money with the intent of protecting that money and not losing it to the bankruptcy proceedings.

Again, say that a business owner is sued for $10 million, and he only has $6 million. 

He’d rather keep that money, so he gives it to his friend. If the courts find out, he could be hit with accusations of fraudulent conveyance and be forced to pay the money anyway (or, rather, his friend could be forced to give up the money under penalty of further fees and legal action).

  • The second type is any type of fraudulent transaction or money transfer that occurs under a wider “area of concern.” For example, imagine that you know you are about to face a huge tax bill that will deplete your assets to the tune of $10 million. You don’t want to pay it. 

To escape the tax payment, you say that you don’t have the money and send the $10 million to your mother. Again, this won't work if the banks/creditors/courts can prove that you knew the tax bill was coming and transfered the funds specifically to avoid the tax bill.

In both of these examples and more, a successful fraudulent conveyance charge is contingent on the courts or creditors being able to prove two things:

  • You either faced imminent financial hardship or you knew you were about to face imminent financial hardship (e.g., a bankruptcy, a tax bill, a lawsuit, etc.)
  • You specifically transferred money to another party or account for the purposes of avoiding a payment or debt bill (e.g., you specifically transferred money you owe to a successful lawsuit plaintiff to a business partner and said you "don't have the money anymore")

If you think that these points are difficult to prove, you might be right in certain cases. But don’t assume that you can escape charges of fraudulent conveyance with ease. In fact, it’s easier than you think to be accused of fraudulent conveyance, and it’s easier to be found guilty of it, even if you didn’t actually intend to commit fraudulent conveyance in the first place!

Legitimate, honest entrepreneurs can sometimes be slapped with fraudulent conveyance charges just because of bad timing.

Avoiding Fraudulent Conveyance

Knowing how to avoid fraudulent conveyance is just as important as understanding what it is. On the upside, there are ways you can protect yourself from fraudulent conveyance charges.

Smart Strategies

Firstly, you can implement a couple of savvy strategies into your overall financial behaviors and activities. For example:

  • Always pay attention to timing (and we’ll dive more into this topic below). 

Proving fraudulent conveyance is dependent on it being a reasonable assumption that you performed a transaction for the purpose of avoiding a payment. For this reason, it’s best to, for example, set up an asset protection bank account early and well ahead of any financial trouble you may face.

  • Avoid insolvency at all costs

Risk is an inherent part of business, as you'll know as a high-net-worth entrepreneur, but avoiding insolvency will help you avoid potential fraudulent conveyance claims. If you transfer enough financial assets that you become insolvent and can't satisfy a creditor's claim (e.g., you transfer so much money out of your business bank account that you can't pay down your business loan for a few weeks), that transfer could be called fraudulent. It's usually good business sense to stay solvent whenever possible, anyway

  • Keep any intentions above board and be clear about why you make large monetary transfers or open new accounts

Having these intentions in writing or speaking aloud to several eyewitnesses, such as your legal team or your financial protection team, is a good way to prove that, even if a transfer might seem fraudulent, you didn’t intend for it to be

Building an Asset Protect Strategy Now is the Best Way to Avoid Fraudulent Conveyance Charges

However, you can reliably avoid fraudulent conveyance charges by building an asset protection strategy right now.

As a high-net-worth individual, the reality is this: there's always the chance that your assets could be compromised. Therefore, it’s smart to have a plan in place to protect those assets and ensure that beneficiaries can access them later down the road, particularly if those beneficiaries are business partners or your kids.

More importantly, when you create an asset protection strategy now, transfers you make for that asset protection strategy won’t be considered fraudulent.

For example:

  • You set up an offshore bank account for asset protection purposes
  • Six months later, you transfer $10 million into the offshore bank account
  • The next week, a business disaster causes significant financial strain and you face bankruptcy
  • However, even though it's financially convenient for your $10 million not to be available for repaying your creditors, the creditors will have a much tougher time proving that you acted fraudulently since you set up the offshore bank account six months in the past

If you set up a trust, nobody in the world can argue that it was set up fraudulently or to help you avoid bankruptcy. You can’t set up a trust instantly – there’s significant planning involved, particularly with an airtight, Dominion-style trust for asset protection.

Avoiding Fraudulent Conveyance Charges is About Timing

Put another way, you can avoid charges of fraudulent conveyance by considering timing carefully. Timing, more than any other aspect, affects whether a transaction will be viewed in a suspicious light.

You don’t build a wall to prevent a flood while it is currently flooding. By the same logic, you don’t reasonably stash money away for a proverbial rainy day when the rainy day has already arrived. 

If you try to tell the court that you moved money somewhere for a purpose other than avoiding debt payments or bankruptcy when those financial difficulties have already arrived at your front door, the court won’t believe you.

On the other hand, if you took steps to protect your assets well ahead of financial trouble, no one can reasonably assume that you took those steps to avoid a specific problem. 

There’s nothing illegal about preparing for general financial difficulties – something bad can happen at any time, after all. That’s part of life, and especially a part of business.

Let’s break down another example with bankruptcy. Say that you have $20 million, and you put $15 million in an asset protection trust three years before bankruptcy looms. 

If one of your creditors comes to you with a bill for $15 million, you can legitimately say you don’t have the money for that payment. The court won’t assume that you knew about the bankruptcy three years before it happened.

Dominion Helps You Plan for Long-Term Defense

Ultimately, staying ahead of fraudulent conveyance charges means planning and implementing an asset protection strategy right now. Dominion can help you do just that. Our comprehensive team of legal advisors, financial planners, and trust setup specialists will help you devise and enact the right asset protection plan for your needs.

With our help, the money you use to protect your financial future will be safe and secure, and your transactions won’t be scrutinized for possible fraud. Get in touch with our specialists today.

Dominion

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