Fraudulent Conveyance Print E-mail

Asset Protection Planning and The Texas Uniform Fraudulent Transfer Act

In order to obtain protection of your assets from potential creditors, you must do the necessary planning now before any litigation actions accrue. If an action has already matured to the extent that it is identifiable by you, then asset protection planning as to that creditor can not be completed. However, asset protection planning can still be completed as to other future creditors.

The assets already protected from creditors in Texas include your homestead, life insurance policies, annuities, and, to a large degree but not absolutely, assets held in and the money you can take as withdrawals from, any plan that qualifies under the Internal Revenue Code as: (1) a stock bonus, pension, profit-sharing or similar plan; (2) a 403(b) account; or (3) an IRA or SEP account.

With your business assets, if you are running your business in the form of a sole proprietorship, then such assets are definitely not protected from creditors, and you will be held personally liable for any judgments accruing in the business. If you run your business in the form of a corporation, then the assets in such a business are not protected from judgments against you personally as the shares in a corporation do not have the same level of protection provided to them under the Texas statues as are provided to the interests of a Limited Liability Company (LLC) or a Limited Partnership (LP).

If you run your business in the form of a LLC or LP, then such business assets are protected from your personal judgments being executed against them. The reason why such assets are protected from such judgments is because the Texas statues give a higher level of protection to the interests in an LLC and a LP. It basically poisons those interests against a creditor trying to take the assets in such an entity. However, if it came down to a choice between an LLC or an LP, I would choose the LP with an LLC general partner because the LP is not subject to franchise tax, unlike the LLC.

Personal judgments against you can accrue if, for example, you have a bad car accident or your pet dog "fluffy" attacks and kills a child. In such circumstances, all the assets you own, including your business interests, but excluding the exempt assets, can be executed upon for payment of the judgment. If you have protected your business assets and your non-exempt personal assets such as any non-homestead real property and non-retirement securities in separate LPs with an LLC general partner, then you will be in a strong position to bargain a settlement on the judgment, if you desire.

If you currently have a sole proprietorship, then it would be very easy for you to change your business form to an LLC or an LP. If you currently have a corporation, then it would be in your best interest to convert the corporation to a LP with an LLC general partner as you will receive the business asset protection along with the reduction in franchise tax.

Another asset protection technique involves the creation of an off-shore trust in the Cayman Islands or Cook Islands. Laws have been implemented in those jurisdictions that make it extremely difficult for creditors to reach any assets in such a trust. However, the creation of an off-shore trust is very complex, very expensive and subject to the laws of a foreign country. Therefore, it is not advisable to create such a trust unless there are no other viable asset protection alternatives available in Texas. As indicated, the creation of an LLC and LP are a viable, less costly, alternative to the creation of an off-shore trust.

Additional protections for your assets can be done by making sure your estate planning is up to date and spendthrift trusts are created for your spouse and your children to be held for their lives. As stated in previous articles, these types of trusts are protected from all kinds of creditors.

Under the Texas Fraudulent Conveyance Act, Section 24.005 provides that a transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or .....after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

  • with actual intent to hinder, delay, or defraud any creditor of the debtor; or
  • without receiving a reasonably equivalent value in exchange for the transfer or obligation, and 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 in relation to the business or transaction; or
    • intended to incur, or believed .....that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

The factors which a court will look at to determine if a debtor had the "intent" required under subsection (a) above include, but are not limited to, the following:

  • the transfer or obligation was to an insider
  • the debtor retained possession or control of the property transferred after the transfer;
  • the transfer or obligation was concealed;
  • before the transfer was made or obligation was incurred, the debtor had been sued or threatened with a lawsuit;
  • the transfer was of substantially all of the debtor’s assets;
  • the debtor absconded
  • the debtor removed or concealed assets;
  • the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred
  • the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
  • the transfer occurred shortly before or shortly after a substantial debt was incurred; and
  • the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

In conclusion, asset protection planning needs to be done before an action accrues with a creditor. If an action has already accrued with a creditor, then any planning done will not be effective as to that creditor. The Texas Fraudulent Conveyance Act will not allow that to happen. However, asset protection planning can still be implemented in regards to all future, potential creditors.

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