If you are in the process of planning your estate, you may at times find it necessary to transfer your property or assets to another individual or entity to achieve your objectives. For instance, you might transfer property to your spouse, or to your Trust for the future benefit of your children. Throughout this process, it is your responsibility to be aware of the relevant laws and ensure that transactions are done legally. While a Trust is designed in estate planning to protect your assets, they are unfortunately sometimes the subject of illegal transfers.
An illegal Trust conveyance can happen when someone transfers assets or property to another person and entity, but as a result, avoids paying taxes or their creditors. As someone planning your estate, you'll want to make sure you don't commit an illegal transfer of property or be on the receiving end of it. In this comprehensive guide, we'll unravel the complexities of illegal Trust conveyance with the goal of empowering you with knowledge to prevent, detect, and defend against this white-collar crime.
What is Illegal Trust Conveyance and Why Does it Matter?
Illegal Trust conveyance, often classified as a fraudulent transfer or fraudulent conveyance, occurs when a debtor moves assets into a Trust as a means to evade creditors or other legal obligations such as taxes. While it initially may be thought of as a smooth move to preserve the value of an estate, it will ultimately lead to penalties that will hurt not just the Trustor but also their Beneficiaries.
It can also happen when the property owner is also a victim of the fraud. For example, an individual with Power of Attorney could abuse their authority and transfer the owner's property interest to another individual or to a Trust without their knowledge.
It's important to note that fraudulent conveyance is not a criminal offense. Someone charged with an illegal conveyance typically will not go to jail. However, they can get sued over the matter and if found guilty, they will typically be required by the civil court to hand over the assets or property in question to the rightful owner or creditor.
If you own property and/or in the process of planning your estate, then it is critical to understand this issue. Legal missteps can not only jeopardize your wealth and reputation, it can also adversely impact your legacy that you would have otherwise protected for your loved ones. This also drives home the importance of choosing your legal proxies wisely.
Understanding the Mechanics of Illegal Trust Conveyance
Fraudulent Trust conveyance doesn't operate in plain sight. It can be committed intentionally using complex strategies, or it can also occur by the passive, uninformed complicity of others involved.
There are several tactics that can be used to illegally transfer property. Here are some examples:
Abusing Power of Attorney: Estate planners often grant Power of Attorney to family or friends, which may be misused if the proxy acts inappropriately.
Misrepresenting facts: A transfer takes place by concealing or misrepresenting facts, where someone falsely represents themselves as the property owner before Registering Authorities and signs papers for property transfers.
Forging documents: This involves creating false documents such as Wills, gift deeds, sale deeds, etc., or falsifying signatures on documents to effect transfers. Then, these counterfeit documents are used to establish ownership and transfer property.
Utilizing a Trust to hide assets: When a debtor transfers assets into a Trust to hide assets from a rightful claimant, such as a spouse in divorce proceedings, other type of settlement payout, a current creditor, or even a future creditor (i.e. making the transfer before the liability is incurred.)
Types of Illegal Trust Conveyances
There are two types of fraudulent transfers: actual fraud and constructive fraud.
Actual fraud involves the deliberate intent to defraud a creditor. Typically, this occurs when a debtor transfers assets to a close associate, like a friend or family member, leaving nothing to settle debts. The court considers various factors to determine fraudulent intent, such as whether the transfer was disclosed or hidden, if it involved most of the debtor's assets, and whether the debtor was facing legal action before the transfer.
Constructive fraud, on the other hand, does not require proving an intent to hinder a creditor's rights. It focuses on the economic aspects of the transaction to assess whether a fraudulent transfer occurred. For instance, if an insolvent debtor did not receive fair value for the property transferred, the transfer may be considered fraudulent.
Risks & Liabilities of a Fraudulent Transfer
Participating in fraudulent transfers can subject an individual or entity to a variety of risks including both civil and criminal aspects. Notably among these are:
1. Civil Litigation: Victims of fraudulent transfers often pursue civil litigation to recover assets. This can result in costly legal battles and potentially significant financial judgments against the perpetrator.
2. Fraudulent Transfer Penalties: Jurisdictions may impose specific penalties for those found guilty of fraudulent transfers, which could include fines or the forced reversal of the transfer.
3. Loss of Credibility: Personal or business credibility is crucial in most financial dealings. Being associated with a fraudulent transfer can severely damage an individual's or entity’s reputation, hindering future business opportunities or financial arrangements.
4. Criminal Charges: In cases where fraudulent transfers are part of broader illegal activities, such as bankruptcy fraud, tax evasion, or money laundering, perpetrators may face criminal charges, leading to potential imprisonment.
5. Professional Disciplinary Actions: Professionals found involved in fraudulent transfers might face disciplinary actions from their governing bodies, which can include suspension or revocation of professional licenses.
6. Compromised Asset Protection Strategies: For those employing asset protection strategies, involvement in fraudulent transfers can undermine these efforts, making other assets vulnerable to claims.
7. Bankruptcy Disqualification: If a fraudulent transfer is discovered during bankruptcy proceedings, it can lead to denial of discharge, leaving the debtor liable for all debts.
As you can see, the possible punishments that are associated with being found guilty of illegal conveyances is serious. While you likely wouldn't face criminal charges, even an inadvertent transfer that is deemed illegal could result in some devastating blows.
Asset Protection Trust or Illegal Conveyance?
Asset protection trusts are a legally recognized tool in estate planning to safeguard assets from unforeseen future claims of creditors. Nevertheless, these Trusts can sometimes be used in a way that is a legal and ethical gray area. In some cases, a Trust could actually be masquerading as an illegal trust conveyance. We'll explore how to differentiate between legitimate asset protection strategies and fraudulent conveyances.
Intent: When established with genuine intent and adherence to legal standards, asset protection Trusts are a great strategy for comprehensive financial planning. They preclude the possibility of losing assets in the wake of unforeseen financial misfortune or legal challenges.
Identifying Misrepresentation: The line blurs when an asset protection strategy conceals the true intent of an illegal transfer. Common signs include an abnormally hasty establishment of the Trust, attempts to keep the Trust a secret, or extraction of assets that leads to financial insolvency.
Protecting Yourself Against Illegal Trust Conveyance
The business of owning and transferring property comes with a complex web of laws, and because of this, it's not unheard of for innocent individuals to get caught up in an illegal conveyance. That's why you should be informed about illegal Trust conveyance, how to recognize it, and how to protect yourself. Without a proper protection plan, you could be putting your assets at risk.
First, let's address how to protect yourself from committing an illegal Trust conveyance.
The most common scenario in which a creditor could seize your assets is through proving an illegal transfer. They must sue you and prove that you did all three of the following activities:
Transferred your property, such as to a Trust
Received less than fair market value for the property
The act led you to insolvency
In other words, to avoid being accused of an illegal conveyance, never take actions that lead you to meet all three criteria.
Next, let's explore what to do if you are affected by an illegal conveyance (you're a victim):
1. Freeze Assets: If you suspect you are a victim of an illegal Trust conveyance, your best option is to quickly protect your assets. Freeze the asset(s) in question.
2. Gather evidence & documents: Proving fraud can be tricky, but your best chance of winning is to be meticulous as possible when gathering evidence and documents. This includes testimonies, financial records, and any other paper trail you can identify to help your case.
3. Seek counsel: Know that there is legal recourse for victims of illegal conveyances. Seek legal counsel to explore how to reclaim your assets.
Last but not least, we cannot stress the importance of documentation. As a property owner, as well as an individual with an estate plan, keeping a meticulous, up-to-date portfolio of your legal documents and ownership records are paramount to maintaining transparency as to all your financial and legal transactions.
Accused, Not Guilty? Proving You Didn't Conduct a Fraudulent Trust Conveyance
As you might imagine, transferring property into a Trust or into the name of another individual is a normal, routine activity.
However, what if you get sued for an action that you took? What if you are accused of a fraudulent conveyance?
Here are some tips on how to prove your innocence:
There are situations where a legitimate trust conveyance is mistakenly seen as fraudulent. If assets were moved as part of standard estate planning, it's crucial to explain the context and reasons for the transfer.
Building a solid defense against false allegations of fraudulent conveyance involves gathering supporting evidence, refuting the creditor's claims, and demonstrating that the Trust was created for genuine estate-planning purposes.
When facing accusations of illegal Trust conveyance, having legal representation is not just recommended—it's critical. An experienced attorney can lead you through the process, advocate for you in court, and develop a defense based on your truth.
Partner with Trust & Will to Mitigate your Risk
Have you ever been fined for a traffic law that you didn't even know existed? You may have felt that it was entirely unfair, but the response from the judge or officer would be the same: "not knowing the law doesn't excuse you from it."
Admittedly, the realms of property ownership, estate planning, and the transfer of assets are complicated ones. There is a lot to know, and that's why having an expert by your side can be so crucial.
This guide was written with the goal of arming you with information about illegal Trust conveyance so that you can protect yourself. That is, either from inadvertently committing fraud, being accused of it even though your intentions were pure, or becoming a victim of fraud.
By understanding the different types of fraud often committed and knowing the warning signs, you can have a stronger asset protection strategy in place.
At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement options today!
Is there a question here we didn’t answer? Browse more topics in our learn center or chat with a live member support representative!
Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.
Share this article