Legal Note – Transfers in Contemplation of Bankruptcy

The U.S. Bankruptcy Code contains provisions similar to the various state fraudulent transfer acts. The bankruptcy court may disregard any property transfer made within two years of bankruptcy, if the transfer was made to defraud creditors. Generally, the bankruptcy code finds voidable fraudulent transfers made (i) with the intent to defraud, hinder and delay creditors, or (ii) for less than reasonably equivalent value, while the debtor was insolvent. Therefore, any transfer within the two year window made with the intent to avoid any present or future creditor may be reversed by the bankruptcy court.

The 2005 Bankruptcy Abuse, Prevention and Protection Act imposes an additional ten year look-back on transfers made for asset protection purposes. The ten year rule generally permits the bankruptcy trustee to void any transfer made within a decade of bankruptcy, if made (i) to a “self-settled trust” (for which the debtor is the grantor and beneficiary) and (ii) with the intent to avoid a present or future creditor. The rule therefore creates an almost indefinite period during which assets used to fund a trust (benefiting the grantor) may be pursued. Any U.S. grantor to an asset protection trust (foreign or domestic) must therefore make absolutely certain that funding a trust for his own benefit does not result in insolvency or bring into question the grantor’s ability to pay existing (and reasonably expected future) debts. The trust should, of course, be prepared by a seasoned attorney.

Gary Forster is a Florida native practicing in all areas of business transactions, personal planning and tax matters, both domestic and international. Gary handles a variety of corporate, personal and tax planning matters, ranging from wealth protection and corporate structuring to complex business reorganizations. Mr. Forster has designed and drafted hundreds of asset protection plans involving domestic and foreign corporate and trust structures. Gary is a member of both the Florida Bar (admitted October 8, 1993) and District of Columbia Bars (admitted February 6, 1995), including bar sections for international and tax law. Gary is also a member of the U.S. Tax Court. Gary earned an undergraduate degree from Tufts University in 1990, graduating cum laude, with majors in Spanish Literature and Economics. Gary graduated from law school at the University of Florida in 1993 with honors. Gary earned the Masters in Taxation degree in 1994 from the University of Florida where he was a graduate fellow. Mr. Forster writes and lectures frequently on international tax, corporate law and asset protection issues. Gary speaks Spanish fluently.

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