CAN A DISCLAIMER BE A FRAUDULENT TRANSFER?

December 12, 2011

Clients frequently seek advice as to whether they can disclaim an inheritance in order to avoid the inherited property being reached by their creditors. The issue faced by the asset protection planner is whether a disclaimer, made with the intent to hinder, delay or defraud creditors, can be viewed as a fraudulent transfer.

Drafters of the Uniform Disclaimer of Property Interests Act specifically decided to remain neutral on the subject and not address the issue of creditors' rights in the context of the disclaimer statute. While Michigan has not adopted the Uniform Law, its disclaimer of property interests law, being part of the Estates and Protected Individuals Code, likewise fails to directly address the issue of whether a disclaimer may constitute a fraudulent transfer. However, the Michigan statute states that "A disclaimer acts as a nonacceptance of the disclaimed interest, rather than as a transfer of the disclaimed interest." Many asset protection planners have concluded that in order to have a fraudulent transfer there must be a "transfer." In light of the disclaimer statute language, it would thus be legally impossible to have a disclaimer treated as a fraudulent transfer. However, a recent case brings this conclusion into question.

The recent case of State Treasurer v. Wayne Snyder concludes that a disclaimer can be found to be a fraudulent transfer under certain unique factual circumstances. Snyder was incarcerated by the State of Michigan and the State sought reimbursement of the costs under the State Correctional Facility Reimbursement Act ("SCRFA"). When Snyder stood to inherit the proceeds of a life insurance policy on his mother's life he disclaimed the interest seeking to avoid receiving funds which would then go to the State as partial reimbursement of his prison costs. The SCRFA broadly defines "assets" of a prisoner for purposes of reimbursement to include any form of property, belonging or due a prisoner from any source whatsoever (italics added). The court found that life insurance proceeds are considered an asset for purposes of the SCRFA.

The Court cited MCLA Section 2910(2) in finding that the right to disclaim is not absolute ..... "the right to disclaim is barred by other applicable law." It points out that it is the Legislature's intent to recover the cost of prisoner incarceration by any legal means necessary. Because of (i) the broad definition of "assets" in SCRFA, (ii) there being no recognition of the right to disclaim in the statute, (iii) the Legislature's intent being frustrated if a prisoner could disclaim away assets and (iv) case precedent finding a prisoner cannot prefer another creditor over a SCRFA claim, the Court determined that SCRFA bars a prisoner from disclaiming a "disclaimable interest" under the disclaimer statute.

Once again, the asset protection planner must carefully evaluate all of the facts of each individual situation before advising a client on the preferred course of action.