Can you legally shield your assets by pretending to transfer them to someone else?

Question

Consider the following hypothetical:

Let's say Bob is worried his personal assets might be put at legal risk in the near future. Maybe someone's about to sue him for breach of contract, maybe he feels the IRS has a reason to come after him, etc.

So Bob goes to Alice, and they sign a document in which Bob transfers legal ownership of some of his assets (real estate, cars, stocks, money, etc.) to Alice, in exchange for having access to them for some period of time.

Now, we have two possible scenarios:

1. The risk vanishes -- perhaps Bob wins his case. In this case, they scrap the document as if nothing happened.

2. The risk materializes, and Bob's assets are ordered to be seized. In this case, Bob goes to court and presents the document proving that he in fact is not the owner of those assets. Let's say the authenticity & timestamp of the document are incontrovertibly provable -- perhaps with, say, cryptography.

Let's say for the sake of question that no other party is aware of what's going on. Only Alice and Bob are aware of the document, and they both agree on its contents.

The first question is: In what circumstances will a court deem the agreement valid?

And the follow-up question is:

• If the answer is "always": then isn't this a really easy way to dodge the legal system?

• If the answer is "sometimes": is there a source explaining when/what actions render different types of agreement valid?

• If the answer is "never": why, and what would it take to make it valid?

Answer 1

united-states

Every U.S. jurisdiction has some version of the Uniform Fraudulent Transfers Act which provides a variety of remedies when this is attempted, although different versions of it have been enacted in different states since not every U.S. state has updated its statutes to the latest version.

Some U.S. jurisdictions have, in addition to some version of the Uniform Fraudulent Transfers Act, a separate statute or common law doctrine that self-settled trusts (i.e. those funded by someone who is later a debtor in which the debtor has some possibility of benefitting from the trust assets) are void ab initio with respect to claims of the debtor's creditors, no matter how much time elapses from the funding of the trust. This is subject to a statutory exemption from creditors for legally allowed contributions to tax favored retirement accounts like a 401(k), pension, or IRA.

If Bob is in bankruptcy, Title 11 of the United States Code (the bankruptcy code) also contains its own fraudulent transfer statute applicable to bankruptcy cases only, in addition to continuing to make the relevant state law remedy still available to a bankruptcy estate trying to claw back assets for general creditors. Furthermore, if a debtor in bankruptcy has engaged in a generally fraudulent course of conduct rather than just isolated instances of fraudulent conduct, a bankruptcy discharged can be completely denied to the debtor.

While not all fraudulent transfers that can be clawed back have to be made with an intent to defraud creditors, when that intent is present, common law fraud claim and criminal fraud charges are also available as remedies.

If such a transfer has been made and it has the effect of harming a spouse in a divorce, this is covered by the "economic waste" doctrine, which can be used to adjust property divisions or make alimony awards to balance the harm caused by the fraudulent transfer. Alimony awards, moreover, can't be discharged in bankruptcy.

If a transfer is made in an arrangement which the debtors claims that the debtor can't control, but the court issuing the judgment doesn't believe that the debtor is being truthful, the court can order that the debtor be incarcerated indefinitely until the asset in question is paid over, for contempt of court.

If property is subject to a lien (e.g. a tax lien, or a mechanic's lien, or a Uniform Commercial Code security interest, or a mortgage) before it is transferred, the lien remains in effect against collateral for the debt it secured, even if the collateral is transferred to someone (pretty much, no matter who receives the transferred property). The rules for determining whether the lien was in effect and valid before a transfer is made are often quite technical and tricky in practice.

In what circumstances will a court deem the agreement valid?

If the statute of limitations for seeking a particular remedy for a fraudulent transfer expires before legal action is taken.

Under the Uniform Act, the statute of limitations is usually four years, although there is some state to state variation. In the case of transfers that are fraudulent as a matter of law (usually because they involve a transfer of property without a substantially equivalent exchange of value while the debtor is insolvent), this statute of limitations usually runs from the date that the transfer becomes possible to discover from publicly available information. In the case of transfers that are made with an actual intent to defraud a creditor (including a particular foreseen future creditor), then the statute of limitations usually runs from the date that the fraudulent transfer is discovered by the creditor.

In bankruptcy, the deadline for seeking a clawback is governed by within the case deadlines for completing various steps of the bankruptcy process and usually has to be raised no later that the Federal Rule of Civil Procedure 60(b) deadline for setting aside a civil judgment due to newly discovered evidence, that begins to run after the case is close and discharge is granted.

The deadlines are similar in divorce cases (involving divorce case deadlines and deadlines for setting aside divorce judgments based upon new evidence under the relevant state rules of civil procedure).

The deadline for suing for common law fraud varies considerably from state to state and tends to usually begins to run on the date that the fraud is discovered or should have been discovered with reasonable diligence.

The death of the debtor also established additional jurisdictional deadlines for seeking non-criminal remedies from the debtor. But, even if, for example, Bob died and the deadline for bringing civil claims against him expired before the defrauded creditor took action against Bob, relief could still be sought from Alice.

The deadline for bringing criminal prosecutions for fraud varies greatly between jurisdictions. The death of the debtor prevents criminal prosecutions from being brought and terminates any pending criminal cases.

Footnote regarding foreign asset protection trusts

Most non-U.S. jurisdictions that are popular places to locate asset protection trusts allow fraudulent transfer actions to be brought, but have short statutes of limitations to do so, high procedural barriers to bringing lawsuits of this kind, and crabbed interpretations of the substantive grounds for awarding relief when a fraudulent transfer lawsuit is commenced in a timely fashion and the procedural barriers are overcome.

But if a foreign asset protection trust is invested in assets that are subject to the jurisdiction of a U.S. court, the U.S. court will often disregard the laws of the jurisdiction where the foreign asset protection trust is formed or administered and instead may treat the assets in the name of the foreign asset protection trust as if they were owned by the debtor who contributed those assets to the trust instead.

Contempt of court sanctions are frequently imposed on debtors who transfer assets to a foreign asset protection trust, when the debtor claims that the debtor is unable to control the assets of the trust and the current assets of the trust are beyond the jurisdiction of the court.

Answer 2

To offer some historical perspective, this is one of those things in human behavior that appear to not change through millennia.

In the Law Code of Gortyn (Ancient Crete around 450 B.C.), we read

If anyone owing money or being the loser in a suit or while a suit is being tried should give anything away, the gift shall be invalid, if the rest of the property should not be equal to the obligation.

If lawmakers of the era felt the need to include that in the code, most likely the behavior had already been observed.

The Code has been published in Willetts, R. F. (Ed.). (1967). The Law Code of Gortyn. de Gruyter, from where I took the translation.

Answer 3

england-and-wales

I'm not entirely clear what you mean by "in exchange for having access to them for some period of time". I'll therefore offer two answers based on two different interpretations of what you have written.

Bob has the right to take back the assets

In this case, although Bob doesn't own the assets directly, he owns something of equal value; the right to take them back. The court can simply assign that right to the claimant. Or, if the contract prevents assignment, it can order Bob to exercise the right himself and then pay the claimant.

Bob has no right to take back the assets

In this case, the contract with Alice is a "transaction at an undervalue" for the purposes of Section 339(3)(c) of the Insolvency Act 1986 which provides:

For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if [...] he enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual.

This provision is triggered because Bob transfers his assets to Alice without receiving back something of similar value.

If the claimant then applies to make Bob bankrupt (because he lacks the means to pay the claimant), various other provisions of the Act will take effect.

Section 339(1):

[...] where an individual is made bankrupt and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt’s estate may apply to the court for an order under this section.

Section 339(2):

The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction.

Sections 341(1) - (3) provide that the "relevant time" is 2 years prior to the date of the bankruptcy application. This can be extended to 5 years where Bob was insolvent either immediately before or after the transaction. Insolvent means that Bob is either unable to pay his debts as they fall due (income insolvency), or has liabilities which exceed his assets (capital insolvency).

The effect of all of the above is that within 2 years of Bob entering into the contract with Alice (in any event) or within 5 years (if Bob was insolvent), the claimant can apply to make Bob bankrupt and then ask the court to order Alice to repay Bob's assets.

If the answer is "always": then isn't this a really easy way to dodge the legal system?

In either scenario, there is nothing to prevent the contract between Bob and Alice being "legally effective". The parties are free to enter into such a contract if they wish and, if they correctly follow the formalities of contract formation, it will be a legally binding contract between them. This means that Bob can be potentially at risk of being sued by Alice for breach of contract if the claimant recovers the assets (since she no longer has the assets which Bob promised to give her). However, given that in this scenario Bob has been made bankrupt and Alice's assets were required to pay his debts, it's unlikely Alice would recover anything.

So the answer is no, this isn't an easy way for Bob to dodge his obligations.