Determining Insolvency With Fraudulent Transfers to Trusts
When a person, known as a debtor, transfers assets to a trust seeking protection from creditors, there are certain circumstances in which the creditor can challenge that transfer. One such circumstance is where the creditor can prove that the transfer was fraudulent. A transfer is fraudulent when it was made with an intent to hinder, delay, or defraud a creditor, or, when it was made for less than fair market value and the debtor was insolvent at the time. How do the courts determine whether a debtor was insolvent? The following is an overview.
Determining Insolvency: Three Questions to Consider
The test for insolvency imposed by the courts involves an assessment of the facts and circumstances surrounding the transfer. Generally, to determine whether insolvency exists in your potential trust litigation matter, you must consider the following questions:
- First of all, was the transfer to the trust made in exchange for consideration of little to no value?
- Furthermore, Was the sum of the debtor’s assets—using a fair valuation—less than the total of the debtor’s debts at the time of the transfer?
- Lastly, was the debtor failing to pay his debts as they become due, at or around the period of the transfer?
If the answers to these questions are “yes,” a court may decide that the debtor was insolvent and deem the transfer to the trust fraudulent. In these cases, the creditor can make a case to have the transfer of the assets to the trust reversed. The creditor can also seek an attachment or an execution levy in an attempt to gain access to the assets. There are strict statutes of limitation rules that apply, however. Creditors and trustees alike should pay close attention to these timelines.
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