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Trusts can be an excellent estate planning tool in order for an individual to provide for their heirs, but when a trust is formed in a reactive effort to avoid judgements or creditors, it may be possible for the law to see a fraudulent transfer in play, and that has the potential to come with serious consequences. However, if an individual works closely with an attorney to proactively establish a trust under valid circumstances, it can be effective for the person forming the trust as well as their intended heirs.

To better understand this topic, we will define what a fraudulent transfer is, how it may happen in relation to a trust, and what it can mean for creditors.

What Is a Fraudulent Transfer?

When defining the legal term fraudulent transfer, there are two primary prongs to keep in mind:

1. Actual Intent: If a transferor transfers money or property to another person, entity, or a trust with the actual intent to delay, hinder, or defraud one or more of their creditors, then the law usually sees that as a fraudulent transfer. For this reason, it can be set aside by the creditors or a bankruptcy trustee.
2. Constructive: Without regard to what the transferor’s original intent was, if the transfer was made at a time when the transferor was insolvent or had insufficient capital to continue operating and the transfer does delay, hinder, or defraud one or more creditors, it can be considered a constructive fraudulent transfer. It too can be set aside with certain legal action by creditors or the bankruptcy trustee of the transferor.

As we move forward to discuss how fraudulent transfers come into play for trusts, it is recommended to keep this information in mind.

How Fraudulent Transfers Can Come into Play When There Is a Trust

People set up trusts for a number of different reasons and then transfer money and property to them. Trusts are usually formed to benefit a beneficiary after the person forming the trust has passed.

There are three main roles in the formation of a trust:

• a donor
• a trustee
• a beneficiary

In the eyes of the law, someone could be two of those three persons, but not all three because one person performing all of these roles could manipulate them for self-benefit.

To learn more about how a fraudulent transfer can come into play when there is a trust, let us consult the following examples:

• The Typical Trust: In this type of situation, it is common to see a grandparent put together a trust for their grandchild to eventually go to college. To do this, during the grandparent’s lifetime or as part of their will, they will set aside a fund of money or property (that can be sold at a later time to gain money) to be put into a trust so that money or income source can eventually pay for the grandchild’s education. The grandparent may even appoint their son or daughter to be the trustee in the event that they die before the grandchild becomes of college age.

Despite the grandparent appointing one of their children to be the trustee of the funds, it is typically not considered an asset to them. In the situation that the trustee was to experience financial problems such as judgements or bankruptcy, these are not considered the trustee’s funds. Although the trustee controls the funds for their child, the funds do not belong to them. The funds belong to the beneficiary or grandchild of the deceased party. Therefore, if there were to be a judgement against the mom, it would not allow creditors to garnish the funds in the trust account.

• A Fraudulent Trust: If there is an individual who believes they are about to get a judgement against them and they have some money they would like to keep creditors from getting to, they might decide to quickly establish a trust that they pour all of their assets into and say it is for the benefit of their heirs. In this case, the transferor established the trust with the primary intent to defraud their creditors. The transferor was likely also insolvent, which can make it harder for creditors.

Either under an actual intent or constructive prong of a fraudulent transfer, the creditors would be able to sue the trust or the trustee and force the trustee to pay the funds or property that was fraudulently transferred to the creditors to satisfy their judgement. If the transferor filed bankruptcy, the bankruptcy trustee can sue the trust and recover the money for the benefit of the creditors.

A Final Word to Creditors About Trusts and Fraudulent Transfers

Essentially, there are good trusts and bad trusts.

Making sure that money is transferred properly in a way that creditors of the trustee cannot get to it is important if you are doing estate planning.

It is also important to read the situation if you are a creditor and run across a situation where the debtor you are dealing with does not have any money, but somehow there is a trust around for the benefit of one of the debtor’s relatives or judgement creditor.

Just because there is a trust out there for a debtor, does not necessarily mean a creditor cannot recover it. This depends heavily on the facts and circumstances around the trust, such as how it was funded and how the transfers were made.

Know the waters that you are swimming in when forming trusts and transferring assets into them and dealing with the creditors who may want to grab those assets. Make a lawful trust part of your estate planning process today with a reputable attorney to better protect a portion of your assets and ensure they are set up to benefit your intended beneficiaries.

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Although fraudulent conveyance can have many applications in a variety of situations such as suicide or divorce, we will focus on if a divorce can be a fraudulent conveyance, and if the creditors of one spouse can go after the creditors of a now former spouse after a divorce. While this not necessarily a pleasant topic to discuss, it is something we have seen in my office and does require addressing.

What Is Fraudulent Conveyance or Fraudulent Transfer?

The first step in determining if a divorce can be a fraudulent conveyance is to properly define the term which is also commonly referred to as fraudulent transfer. A fraudulent conveyance or fraudulent transfer can take place when someone who is a debtor owes money because:

• They have defaulted on a loan
• They have a judgement against them
• They obtained money or property through wrongful means

This debtor then owes one or more creditors a specific amount of money because of one or more of the above situations.

What Might a Fraudulent Conveyance or Fraudulent Transfer Look Like?

In general, people that have defaulted on a loan, have a judgement against them, or have wrongfully obtained money or property, will try to hide this fact so that when they eventually file bankruptcy or a creditor tries to collect a debt, the individual will not appear to have anything.

The most common ways these individuals try to hide their assets can include:

• Hiding assets in Swiss bank accounts (although this does not work as well as it used to)
• Putting the assets in offshore bank accounts
• Giving the assets to their parents, wives, children, or grandchildren
• Burying physical gold in their backyard

What the Law Says About Fraudulent Conveyance in General and Regarding Divorce

In general terms, the law does provide some relief to creditors in the form of fraudulent conveyance or fraudulent transfer through either:

1. The Uniform Fraudulent Transfer Act
2. Chapter 5 Bankruptcy Code provisions that give a bankruptcy trustee the power to go after those individuals who have received a conveyance in connection with an effort to defraud a creditor or creditor population

In terms of divorce, one technique a married individual that is being chased by creditors or is trying to proactively hide assets from creditors may use is to get a divorce. In the formal divorce process a formal divorce decree may be issued allowing the individual’s soon to be ex-spouse get an unusually large share of the assets or property of the marital estate.

For the purposes of a trial, it is necessary to prove actual intent that a party gave property or money to a spouse in a divorce for the purposes of fraudulent conveyance. However, if unable to prove actual intent, both the Uniform Fraudulent Transfer Act and the bankruptcy code (which most states including Texas have adopted in one form or another) have provisions that say even if actual intent cannot be established, if the debtor’s actions show the circumstances were such that the individual had knowledge that a judgement was likely going to be rendered to him and there was liability that would lead to a judgement, it could lead also to intent.

If there was indeed a transfer via divorce (a divorce decree is going to transfer property which can prove a transfer) at the time the debtor was insolvent, meaning their debt or potential debt exceeded the value of their assets, or it delayed, hindered, or defrauded any creditor, then the transfer (i.e., the divorce or divorce decree) is subject to a fraudulent transfer action. This means that either a bankruptcy trustee or a creditor of the debtor can go after and seize the assets that were given to the spouse in the divorce, or they can obtain a judgement against the spouse and collect whatever other assets they may have.

When it comes to fraudulent conveyance or fraudulent transfer in a divorce, it is generally not an easy case to make, but under the right circumstances and when working with a reputable and seasoned attorney, it can work, and is a tool that creditors can use to avoid being defrauded. For further questions regarding fraudulent conveyance or transfer, reach out to our office today.

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Earnest money contracts to buy real estate are something every buyer and seller should be familiar with. Although most are familiar with a one to four-family residential contract, there are those that can also be put together for farms, ranches, commercial office buildings, commercial properties, and industrial properties. Regardless of the type of property, it can be advantageous to enlist the help of a reputable and knowledgeable real estate attorney to assist with the different components of earnest money contracts.

How Earnest Money Works

Earnest money is typically put down in the form of a check that is paid to the title company to hold on to until the transaction terminates or is fulfilled. However, it is worth noting that there are forfeiture provisions that can go into effect if certain things do not happen. If the property is not closed upon, the buyer is at risk of losing their earnest money. A real estate attorney may be helpful in dealing with a more complex escrow situation.

More recently, a termination option has become available in which a buyer will pay a fixed amount of money in markets that are considered a buyer’s market, in which there is a great deal of product available. These options are usually low numbers of approximately $100, $200, or $500 and allow the buyer the option to terminate if they see something they do not like or for no particular reason. In this case, the buyer forfeits their termination fee which the seller keeps, but the buyer typically wants the rest of their earnest money back.

However, at present, there is a much tighter market with not a lot of product, so some of these termination provisions are at a much higher number that buyers are putting up in order to more effectively attract a seller. It may even be possible for the buyer to waive their termination option entirely to make themselves more competitive in attracting a seller. A buyer’s higher termination option number or waiver may make them stand out from all the other bidders and make a seller more likely to accept their contract.

The Role the Title Company Plays in Earnest Money Contracts

Most of the time the title insurance company gets involved in the process. The purpose of a title insurance company is:

• To go through the process to make sure that the seller has a good title
• To ensure there are no liens
• To determine that the borders are properly defined
• To make certain there are no easements or judgments that affect the property

This process is in place so that a buyer knows that they actually are buying the property and there are not expected to be any legal problems that come up afterward. However, should there be legal problems that crop up afterward, there is an insurance policy that will help pay the cost of fixing that property or paying the damages caused by the title problem. The seller typically pays for the title policy, but it is an option for the buyer to pay for it.

The title company generally takes over the process of closing. They will get a title report out showing liens, easements, problems that exist, and whether or not they get eliminated or it is just something the buyer has to understand.

The title company will provide that report and work out whatever needs to be worked out regarding that and makes sure that any liens, taxes, or homeowners association dues that are outstanding are paid at closing.

Usually, the buyer’s money (or lender’s money) goes to the title company who will then pay the taxes and the former mortgage company and any other liens necessary to clean it up and then disperse the excess monies (if any) to the seller.

Surveys and Inspections as Related to Earnest Money Contracts

Typically, when buying a home, a survey is done. In cases where there are lots, blocks, and subdivisions, it is typically not that difficult to do. Farms, ranches, and places with larger acreages can be a different story.

There are also usually inspections where the buyer will send an inspector in to make sure of things such as whether the plumbing works and that the roof and foundation are good and that there are no mechanical or physical problems with the home.

There are survey reports and inspection reports. Generally speaking, the buyer has an opportunity to object to those things and either require an allowance to fix those things or require a seller to fix them before closing. Once those objections are resolved and the financing is set up, the title company can conduct a closing.

The Real Estate Closing Process

The buyer’s lender (usually a mortgage company, bank, or third-party lender) will want to have a valid first lien on the property. For this reason, the mortgage company will get involved and look at the survey and the title report to make sure they are getting a clean first lien on a property that is going to have value.

An appraisal is also typically done to make sure the property is worth enough to support the loan. Sometimes there can be problems with appraisals, although not as much recently because values have gone up. In tighter markets, you may have a contract for a $300,000 house that only appraises for $280,000, which means the borrower may not be able to close.

There are provisions and contracts that can give a buyer the option to get out of a contract if they do not meet the financial requirements. However, in the current market, some buyers are waiving that to be more attractive to sellers.

The closing date is a key provision in an earnest money contract.  It generally sets the date at which the buyer must either buy or be in default of the contract. Sometimes there may be extensions granted voluntarily if an inspection is taking too long or there is some other reason a closing is delayed, but everybody still wants to get the deal done. There are forms a realtor can distribute to the buyer and seller to extend that date.

Ultimately there is a date at which the transaction needs to take place or the buyer will be in default. Or, if the buyer shows up and the seller wants out, the seller could be in default. After the closing takes place, the seller will turn possession over to the buyer.  This basically means giving them the keys and having the seller move their stuff out if they have not already.

Are Earnest Money Contracts Enforceable?

When done properly, an earnest money contract is enforceable.

There can be lawsuits for defaults on earnest money contracts. However, be forewarned that it ties up the property and can be expensive. It is often difficult for a seller to enforce a contract against a buyer just because they can sue them for damages (generally what it costs the seller to find a new buyer, the difference in price, and the carrying cost of the property going forward).

Even if there ends up being a judgment against a potential buyer, that judgment may or may not be collectible. At times, these things can fall out because the buyer did not have enough money to do the deal, and maybe not enough money to pay the judgment of the lawsuit. There are situations where there may be a wealthy enough buyer willing to pay money to get out of the contract and would have some problems with having a lawsuit and getting a judgment against them that they would rather pay some sort of compensation to the seller for the seller’s loss in connection with a broken earnest money contract.

On the flip side, a buyer who wants to enforce a contract against a seller that wrongfully backs out of a contract may have a better choice of remedies. The seller has the property, a lawsuit can be filed, and a lis pendens can be filed in the real property record, which lets the world know that the title to that property is the subject matter of a lawsuit, and whoever buys the property from the seller is taking it subject to the rights of the lis pendens holder, or the potential buyer in this example.

One caveat to the notion that a buyer can sue the seller and recover something is that if the seller has a large mortgage on the property, then there may not be much the seller can do because the mortgage company would likely foreclose on the property, wiping out the interest the seller had, leaving little money for the buyer to collect from the seller. This type of situation is not good for the buyer.