The transfer of assets for the specific purpose of hindering or preventing existing creditors from reaching those assets may be deemed by a court to be a fraudulent conveyance.
In such event, the court may void the fraudulent transfer, returning the assets to their status before that transfer.
The assets would then be vulnerable to attachment and seizure by a judgment creditor.
For this reason, clients should establish their asset protection plan before any claims arise against them.
If it is too late to do this, clients should at least have another valid purpose, apart from asset protection, as the reason for the establishment of family limited partnerships, trusts or other structures.
Other valid purpose for a transfer of assets will usually serve as an effective defense against a claim of fraudulent conveyance.
Estate planning and income tax minimization are such other valid purposes.
Thus, it is important to implement an asset protection plan in the context of complete estate and tax planning, including the execution of a will and the establishment of appropriate trusts.
If the protective entities are created principally for the purpose of estate and tax planning (with asset protection being an incidental by-product of the estate and tax plan), creditors will have far less likelihood of successfully arguing fraudulent conveyance.