These cases confirm a perhaps obvious intuition—that fraudulent transfers can prove counter-productive at best, and disastrous at worst.

 Sometimes when people get into financial trouble, they look for an easy way out. Whether out of sheer desperation or an attempt at trickery, some resort to making what the law considers a fraudulent transfer. Fraudulent transfers have a tendency of coming back to bite you and several recent cases serve to demonstrate that fact, as in one of Lewis Saret’s recent posts on Forbes (and the much longer list in the Wealth Strategies Journal.)

One case is that of re Quaid, (2011 WL 285645, Bkrtcy.M.D.Fla., Jan. 26, 2011,) where a Florida man sought to use a self-settled trust to shield his assets from his creditors. According to his account, even though the trust was self-settled (he, the beneficiary of the trust, set it up) the assets were still exempt because of a spendthrift provision. Unfortunately the Orlando Division of the US Bankruptcy court ruled that a spendthrift provision does not apply to a self-settled trust when the beneficiary contributed assets, and that wrecked the plan. The assets amounted to $400,000 and were added to his estate, well within reach of his creditors.

Also consider the case of Struyk v. Meltzer (2011 WL 1019916, Cal.App. 4 Dist, Unpublished, Mar. 23, 2011), and the far more common case of inter-spousal transfers deemed to be fraudulent. A California man, with $500,000 debt, tried to shield assets by transferring them to his spouse, who was debt-free. He tried to quit-claim his interest in their residence and allow her to claim it as sole property, effectively transferring the asset. Instead of shielding the residence, the jury found that the husband intentionally transferred the property to the wife in order to defraud his creditor, which ultimately led to a jury verdict well in excess of the value of the assets transferred.

The bottom-line is that fraudulent transfers can prove counter-productive at best, and disastrous at worst. These cases remind us of the importance of using knowledgeable professionals in the estate planning and bankruptcy process to avoid the disastrous results that potentially accompany fraudulent transfers.

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Reference: Forbes – Lewis Saret. (June 7, 2011) “Fraudulent Transfers and Estate Planning: Recent Cases, Important Caveats”