by Thomas D. Begley, Jr., CELA
This is the final article in a series devoted to protecting assets from claims of creditors. (The other articles in the series are here: Part 1 and Part 2.) The main issue in this type of planning is the Fraudulent Transfer Act. Previous articles have discussed insurance, titling of assets, retirement plans, assets used in a profession or business, Domestic Asset Protection Trusts (DAPTs), and Off-Shore Trusts. This article will discuss the Elective Share, the Fraudulent Transfer Act, and whether you are a good candidate for asset protection strategies.
DIVORCE
Divorce often subjects assets of a professional or business person to claims of the divorcing spouse. It appears clear that the spouse of a Delaware decedent is unable to reach assets in a Delaware DAPT by asserting rights to an elective share. Delaware law does not defer to the decedent’s domicile to determine the surviving spouse’s elective share rights, so it is likely that the Delaware DAPT would offer protection against elective share rights even if the grantor of the trust was a resident of New Jersey or Pennsylvania. Even better insurance against a claim for an elective share is a valid prenuptial agreement. If an individual enters a marriage with significant assets and never commingles them with marital assets and never uses the income or those assets to fund the marital lifestyle, courts may find that these assets should be excluded from consideration as martial assets. Inherited assets, including stock portfolios, vacation homes, etc., may also be protected so long as they are not commingled with other marital assets. If assets that have never been marital assets are placed in an irrevocable discretionary trust with a third party trustee, this would reduce the chances that assets will be considered to have supported the marital lifestyle and, thus, classified as marital property. If the parent leaving the inheritance establishes the trust, the protection is significantly greater.
TIMING/FRAUDULENT TRANSFER ACT
Timing is the key to implementation of an effective asset protection planning strategy. New Jersey follows the Uniform Fraudulent Transfer Act. This Act essentially provides that with respect to present or future creditors a transfer by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made, if the debtor made the transfer:
There is a statute of limitation for bring fraudulent transfer claims. Generally, a cause of action for actual fraud is extinguished unless an action is brought within four years after the transfer was made or, if later, within one year after the transfer was, or could reasonably have been discovered, by the claimant. This means that implementation of asset protection strategies are governed by this rule. Many, if not most, individuals want to implement asset protection strategies after a claim has already arisen or an incident has occurred that appears likely to give rise to a claim. At that point, the Fraudulent Transfer Act applies and it is too late to implement these strategies.
In transferring assets to a DAPT, an individual is required to execute an Affidavit of Solvency to the effect that the individual has sufficient assets remaining after transfer to the trust to take care of all foreseen expenses.
ARE YOU A GOOD CANDIDATE FOR ASSET PROTECTION STRATEGIES?
There are a number of factors to be considered in answering this question:
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