When Transferring Assets to Family Backfires

It’s like a never ending what-if scenario during many of my consultations, but when clients want asset protection, or at least what they think is asset protection, many ask about transferring assets to family as a form of pre-litigation planning.  Obvious fraudulent transfer issues aside, let’s see how this worked out for Mohammad from California:

At Mohtasham’s suggestion, for asset protection purposes, Mohammad quitclaimed his house in Moreno Valley to Mohtasham’s wife. He never got it back.

Well, that can happen sometimes.  Perhaps this asset protection strategy worked out just fine, i.e. his creditors didn’t get the house, but ultimately Mohammad never did either.

Or let’s see how transferring assets to family worked out for Alex from Kentucky, who after engaging in a series of self-admitted “asset protection maneuvers” by transferring his brokerage accounts and car to his wife, soon found himself divorced and pleading with the court for the return of his assets, to which the court replied:

A person who conveys property or titles it in another’s name to avoid the reach of creditors is generally at his grantee’s mercy as to whether he will ever get his property back.

In other words, the court said go ask your ex-wife, because as the maxim goes, he who seeks equity must do equity:

The rationale behind this rule was most succinctly explained in Justice v. Justice, a divorce action which, as here, involved a husband who sought judicial assistance in compelling his former wife to return assets he had previously conveyed to her for the purpose of keeping the assets out of the reach of his creditors:

It has long been a rule of equity in divorce actions that notwithstanding the statutory provisions requiring that the property rights of the parties upon the granting of a divorce should be restored, such restoration could not and would not be enforced if the party had, during the marriage relation, conveyed the property to his or her husband or wife for fraudulent or immoral purposes

To permit the courts to thus be made tools for the perpetration of such frauds would bring into disrepute the whole administration of justice. They are not constructed for the purpose of aiding unconscionable persons to consummate the frauds which they may concoct; on the contrary it is the rule that courts will not permit themselves to be made the instruments by which such fraudulent schemes are carried out.

Or finally, among the more instructive cases on transferring assets to family, is the case about James from Florida, who transferred six million to his wife via a postnuptial agreement in order to protect against a two million dollar lawsuit.  Three months after receiving the last transfer, his wife, a pin-up model and now millionaire, filed for divorce.  As noted by an American Bar Association journal entry, aptly titled Client who lost $6M to pin-up ex-wife sues lawyer for advising him to put money in wife’s name:

Although [James] tried to invalidate the postnuptial agreement, claiming it was a sham, a divorce court in Florida upheld it in 2012, the article recounts. He is now reportedly penniless and living with his mother.

Ouch.

This is not to say that spousal agreements do not have their place in asset protection; to the contrary, proper family planning can be a crucial component to your overall asset protection plan, as long as you are properly advised.  Making reckless or poorly timed transfers to your relatives, especially when waters are turbulent, will surely backfire and crumble in court. On the one hand, as the above cases reveal, you may never get your property back.  On the other hand, your transfer will most likely result in a proceedings supplementary and fraudulent transfer action directly against your relative, effectively bringing them into the case, all of which would make your problems their problems.

And that’s when they get you (think: settlement in their favor, not yours).