Do Your Estate Planning Before You Default

It happens all the time. Small business owners realize they are in jeopardy, staring at likely foreclosure, liquidation, total loss and annihilation, then they begin to think about protecting some assets like their home or other assets necessary to support ongoing survival during a major life transition. So, they then begin to move assets and, typically, do so incorrectly, resulting in fraudulent transfers.

There are a number of times in the downturn sequence when the ongoing transition changes the rules. For example, if you’re current then there is far more flexibility in moving assets as it is less convincing to argue you were doing it to defraud your creditors when you were still current with them and seemingly not in danger of defaulting. The claim of fraudulent movement at that point in time is likely to fail. This is when we advise a preemptive workout, when you know what’s coming but you’re not there yet. This is the best time to act, the most powerful and the most effective time.

Estate planning in this situation (wills, trusts, etc.) can be considered reasonable. A total estate plan, done while solvent and not in default or even in arrears, can be defensible. However, if it’s done after you’ve defaulted, you are treading on dangerous ground as it then appears far more likely that your motives are more fraudulent than honest, and that your intention is to default on creditors when you close your doors and they come calling on your personal guaranty.

Needless to say, after demand, after suit is commenced, or after judgements are acquired, any estate planning will be very suspect and is likely to be unraveled easily by the creditors who will call it fraudulent. The major reason such transfers are deemed fraudulent is because they benefit the immediate family and there is usually no consideration paid. If there were, the outcome might be altogether different. “Fraud” tends to disappear when consideration is adequate.

Timing and planning are everything. Be realistic. Plan in advance of problems; arrange your assets and net worth as if there will be problems and be assured that your critical assets will be preserved.