Proving That A Transfer To A Spendthrift Trust Was Fraudulent
When the creator of a trust transfers an asset into that trust, the asset may sometimes benefit from protection from creditors. One example is where the trust is created as a spendthrift trust. Spendthrift trusts are designed to prevent the creditors of the trust’s beneficiaries from reaching the assets of the trust. This may be a valuable tool when a beneficiary is involved in a bankruptcy, divorce, or lawsuit. Spendthrift trusts are not bullet proof, however. Creditors can still attack the transfer and attempt to reach the assets. One such avenue of attack is to argue that the transfer was fraudulent.
Proving a Fraudulent Transfer to a Spendthrift Trust
Under certain circumstances, a creditor can attack the transfer of assets to a spendthrift trust as being fraudulent and may potentially succeed in the resulting lawsuit brought in a San Diego court. For the assets to be reachable, the creditor must show one or all of the following:
- The transfer was made with the actual intent of hindering, delaying, or defrauding any creditor or debtor.
- The transfer was made without receiving a reasonably equivalent value in exchange for the transfer.
- The debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small.
- The debtor intended to incur debts that were beyond his or her ability to pay back as they became due. If there was no express intention, the debtor believed or reasonably should have believed that this would occur.
These requirements apply to present or future creditors.
When a trust is irrevocable and designed to protect assets from creditors, there are other factors to consider to determine whether the trust is subject to attack. Our article, “Five Questions to Consider During a California Irrevocable Trust Lawsuit,” provides a helpful overview for anyone involved in or considering such a lawsuit.
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