Asset protection planning generally involves transferring and/or re-titling some or all of your assets in order to better protect those assets from claims of creditors. Not surprisingly, however, there are statutory prohibitions against transferring your assets with the intent of avoiding your legal obligations. Whenever any assets are transferred or re-titled for protection purposes, it is critical to focus on applicable “fraudulent conveyance” laws, which give creditors the ability to void certain asset transfers in order to satisfy a judgment. Asset protection planners must have a thorough understanding of fraudulent conveyance laws.
The Ohio Uniform Fraudulent Transfer Act (Chapter 1336 of the Ohio Revised Code) is fairly typical of the statutes found in most other states. An examination the statute reveals how broadly a fraudulent conveyance is defined. Whether a conveyance is “fraudulent” under Ohio Revised Code Section 1336.04 depends on a variety of factors, including the following:
- Was the conveyance intended to hinder, delay, or defraud any creditor of the debtor?
- If the transfer was as sale, did the debtor receive a reasonably equivalent value in exchange for the asset that was transferred?
- Did the debtor know (or reasonably should have believed) that due to the transfer he would have debts beyond his ability to pay as they became due?
Whether a conveyance is “fraudulent” depends heavily on the “intent” of the person making the conveyance. Ohio Revised Code Section 1336.04 (B) says that in order to help determine that intent, consideration should be given to many different factors, including but not limited to:
- Whether the transfer was to an insider (like a family member or partner);
- Whether the debtor retained possession or control of the property transferred after the transfer;
- Whether there was a lawsuit pending or threatened;
- Whether the transfer made the debtor insolvent.
Whether or not a transfer is “fraudulent” is often a complicated issue that depends on a wide variety of factors. Other terms in the Ohio statute also frequently raise complicated questions. Debtors and creditors frequently argue about whether an asset was “transferred” at all. The term “transfer” is defined very broadly in Ohio Revised Code Section 1336.01(L) to include a direct or indirect, absolute or conditional, voluntary or involuntary method of disposing of an asset or an interest in an asset. The term “transfer” includes the payment of money, a release, a lease, creation of lien or other encumbrance. Exactly when a transfer occurs can be very important and may determine whether or not a creditor can reach a particular asset.
Each state has its own fraudulent conveyance statutes. The Ohio statute discussed here is typical, but each applicable state law must be reviewed separately.
Fraudulent conveyance statutes do not make asset protection planning impossible. They are intended only to prevent improper transfers.
In addition to the specific provisions of Ohio Revise Code Section 1336.04 (and/or any other applicable statute), debtors must also consider how certain transfers may be perceived by a judge who may try to “do justice” notwithstanding the words of the statute.