Constructive Fraud and Asset Transfers

April 13, 2006

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When seeking to avoid challenges to asset transfers--whether in an overall asset exemption plan or in your strategic funding plan for the business--you must be careful of constructive fraud under the Uniform Fraudulent Transfers Act (UFTA).

In a constructive fraud case, your motive or intent is irrelevant. To establish that the transfer was fraudulent, the creditor must only prove two things:

The debtor was insolvent when the transfer was made.
The debtor did not receive adequate consideration (that is, something of equal or greater value) in return for the transfer.

The strategies advocated here will, in most cases, ensure that you don't meet the second criterion, and thus eliminate any claim based on constructive fraud.

This is true for asset exemption transfers and for transfers by the business. In addition, is a transaction really a transfer if there is no change in ownership of the asset? This is another consideration.