A client in financial distress is often searching for any possible opportunity for protecting assets from her creditors. Having been advised of the applicability of the Fraudulent Transfer Act, the client understands that gifts to family members or sales at below market prices are likely to be challenged as fraudulent transfers. In general, a fraudulent transfer is one made with the intent to hinder, delay or defraud a creditor. However, intent can be also be found where the debtor transfers assets without receiving reasonably equivalent value and intends to incur debts beyond her ability to pay. In addition, a transfer is fraudulent if the debtor transfers assets without receiving reasonably equivalent value and is insolvent at the time or becomes insolvent as a result of the transfer. If a transfer is found to be fraudulent, the creditor has a number of remedies including avoidance of the transfer or attaching the transferred property.
Many traditional asset protection planning opportunities available to persons not in financial distress cannot be used by distressed debtors because of the Fraudulent Transfer Act. Sometimes, however, a family's unique situation can justify a transfer that otherwise might have been considered fraudulent. We occasionally encounter distressed debtors with children or are suffering from chronic physical or mental disabilities...autism, cystic fibrosis, muscular dystrophy and so forth. It is not unusual for a parent or grandparent, as part of his or her estate planning, to set up a Special Needs Trust for such child. This type of trust can be funded at death or inter vivos (during life). This author submits that if a distressed debtor funds a Special Needs Trust with the intent to further the interests of the child and to insure adequate funds exist for such child's needs beyond those provided by governmental benefits, and not with the intent to hinder, delay or defraud creditors, such transfer may be permissible.
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