It is very likely that if you move assets during a lawsuit, you could get slapped with fraudulent conveyance, which could cost you dearly. The timing of your transfer has to be planned so that you don’t appear to be doing something underhanded.
Transferring assets during a lawsuit may on the surface appear to be a calculated maneuver to preserve wealth, but it comes with many legal pitfalls. You should know what moving your assets could cost if you don’t do it correctly.
In this article we will take a closer look at how assets move when lawsuits are filed, defining terminology and effects along the way as well as discuss some of the protective steps you can take.
Understanding Asset Movement in a Lawsuit
If you’re facing legal action, you might think that it’s a good time to move assets around, especially if you’re worried about losing the lawsuit. But take a minute to consider the costs of moving assets during a lawsuit. It could be a dangerous move to make.
Definition of Asset Movement
Asset movement is the manipulation, sheltering or otherwise disposition/transfer of your estate. But in this context, we’re referring to asset movement when you’re at risk of being sued.
These assets could be anything that has value for you from tangible assets (real estate, vehicles, property) to intangible assets (investments and intellectual property). Assets are usually moved in order to protect them from potential claims or judgments that might arise out of a legal conflict.
But the bottom line is that the legality of asset transfer depends a lot on the context, so it's hard to make a definitive statement about whether it’s legal or not to move assets during a lawsuit. When such movements have the intention to defraud creditors or evade proper claims, it might be referred to as fraudulent conveyance.
Reasons People Transfer Assets in a Lawsuit
People may choose to relocate assets for any of the following reasons:
Protecting Wealth:
You might wish to protect the wealth you control, and a lawsuit threatens to take that away from you.
Avoiding Seizure:
People seek to shield their property from creditors by relocating them to jurisdictions where they are unlikely to be caught.
Reducing Liability:
Others may think that they will reduce their legal risks or tax burdens if they can just get rid of their assets.
While these are natural ambitions, they also open you up to new risks from the courts. Movements of this nature could lead to very serious future legal problems, further fines, or even liens.
Asset transfers in connection with litigation, particularly dubious ones, are put under a microscope by courts. This intense scrutiny might result in you having to reverse the asset transfer. If so, your assets are once again open for claims against them. In some cases, the state can file criminal charges against you.
In addition, the consequences of asset movement can go beyond the usual legal implications. You might lose business, harm your reputation, and damage the trust of clients or stakeholders. The legal ramifications can be harsh, but you can deal with those. A damaged reputation or relationship is harder to mend.
Consequences of Asset Movement
What happens if you decide to move assets during a lawsuit? You must be prepared to face some repercussions. Here’s what that could look like.
Fraudulent Conveyance Laws
Fraudulent conveyance law allows lawsuits to challenge the transfer of an asset when that transfer was made with actual intent to impede, hinder or defraud creditors. The purpose of these laws is to prevent individuals from resorting to fraudulent and deceptive means so as not to fulfill their financial obligations.
But the courts have a few factors that they take into account to establish if there was any fraudulent intent.
- When the transfer was made compared with the lawsuit timing.
- What type of assets are being transferred
- The value of the assets in the fair market at the time you transferred them.
- The mover's financial status before and after the move.
If the Court were to determine that an asset had been fraudulently moved, then it can claw back the transaction and make available those assets for any potential judgements. Other times, the creditor has the burden of proving that the transfer was fraudulent in nature. It also can require a great deal of documentation which makes the process very complex and time-consuming.
Penalties For Illegal Asset Movement
The cost of moving assets around illegally can be tremendous and multi-faceted. They may include:
Restitution:
Where assets have been wrongly transferred, the courts can require the return of these assets to their original owner. Then, the assets are liable to any other asset recovery claims.
Monetary Damages:
If the asset movement was fraudulent, then there might be additional financial penalties on top of the original judgment from the courts.
Criminal Charges:
In the most serious cases, asset hiding can result in criminal charges for fraud. This could even result in jail time, depending on the severity of the charge.
Fraud also carries a stigma that can drive potential partners, investors and even customers away to the point of long-term financial instability. Additionally, asset concealment convictions can result in further penalties or prohibitions from regulatory bodies that may affect their capacity to work within their field.
This leads to a snowball effect. The initial act of moving assets is punishable in court, but in the long run, you run the risk of jeopardizing your friendships or business relationships, ultimately affecting your whole life.
How Courts Act When Assets Are Moved
If the court suspects that you’ve moved assets during a lawsuit in an attempt to hide them, they have a few courses of action they will take. Here are a few of the court’s responses to illegal asset movement.
Freezing Orders and Search Warrants
When a lawsuit is filed, courts may issue orders freezing assets. Security must often be provided to keep the assets secure for what could become a judgment against them. Courts can also take steps to ensure that one party does not attempt to hide or transport assets out of the jurisdiction.
These are known as asset-freezing orders. They defend against fraudulent conveyance and also protect the sanctity of the judicial process as a whole. These orders are enforceable by contempt of court charges such as fines, and imprisonment to parties who do not comply.
The consequences of non-compliance are severe, as courts consider it a critical issue and demand full disclosure in legal processes. On some occasions, the mere fact of an asset freeze has been sufficient for parties to engage in settlement discussions due to the risk of losing access to their own assets.
Judicial Authority to Trace Assets
The court can be extremely efficient in tracking down your assets. This might involve getting both parties in the lawsuit to make financial disclosures. If they do not, the court may take punitive measures against the party for withholding information.
Courts can often use third-party forensic accountants or asset recovery specialists to uncover assets that the parties have hidden. Professionals in this field normally try to pay attention to asset flows. They know the normal way that assets move, and they watch for gaps in the information and normal flow. That shows that there is wealth that has most likely been hidden from the courts.
Their skillset lets them review difficult-to-understand financial transactions, including bank statements, tax returns and business transactions. Using complex methods such as forensic analysis and digital tracking, these experts can track patterns of money that most people would not even be aware are happening.
How to Legally Protect Your Assets
Unfortunately, if you’re in a lawsuit, it might be too late to move your assets. But, there are some preventative steps you can take to protect your assets before you ever get slapped with a suit.
Legal Asset Protection Methods
Moving assets during a lawsuit is risky and usually illegal. But you can speak with an attorney about any of these possible asset transfer options that are completely legal for anyone who wants to safeguard their wealth.
- Asset Structuring:
This would consist of transferring assets into other ownership vehicles, such as trusts or LLCs (Limited Liability Companies) to create a further separation. Once you have your assets in a structure like a trust, it’s no longer considered part of your estate, and not liable for any lawsuits. - Insurance:
You should open up insurance policies that protect any of your assets that might be exposed to a liability or lawsuit. It’s not a legal shield against a lawsuit, but it does cover the financial loss if you face a judgment from the courts. - Retirement Accounts:
Some retirement accounts are protected from creditors in most jurisdictions, so they can be an ideal place to keep assets. In some cases, retirement accounts are even exempted from bankruptcy.
Your best bet is to talk to an asset protection lawyer who can guide you through these various plans. You should also check your asset protection plans regularly and amend them as laws change.
Consulting a Legal Expert
It is advised to consult with a legal expert prior to taking any action towards asset protection or movement. You need the attorney’s opinion and expertise in asset protection to help you determine what to move and when. They can also help you learn and navigate local laws.
Legal experts can also navigate the labyrinth of litigation and counsel you on how to respond to an emergency in a compliant manner. In addition, they will help you to prepare all important legal papers.
So if you decide to set up a trust or an LLC, you have a legal professional on your side who can create rock-solid documents that stand up in court and resist all attacks from creditors. Having a lawyer involved early in the process can help save you time, money and aggravation in the long run.
Establishing an Asset Protection Plan
Before you make a decision about how to protect your asset from lawsuits, you should decide what your goals are. Ask yourself if you’re just looking for protection, or if you want something more like estate plans or succession plans.
If you simply want to protect your assets because you work in a job with high risks for litigation (lawyers, doctors…etc), then you’d likely want something like an irrevocable trust. These trusts let you move assets into the trust and assign a trustee to manage them.
Now that your trust is the legal owner of the assets, any lawsuit thrown against you has no power to touch your assets. You’ve created a barrier, a veil that shields your assets from your personal creditors.
The only downside is that with an irrevocable trust, you lose some flexibility and control. The trust is pretty much permanent and can’t be undone, except under very specific circumstances. But it’s the most popular choice for asset protection for good reason.
Moving Assets During a Lawsuit: Last Thoughts
It never really makes sense to move assets during a lawsuit. And you might not even have that option if the court issues an asset freezing order. But even if you know that a lawsuit is pending, and you try to preemptively move assets in an attempt to hide your wealth, you could still face heavy consequences.
But on the other hand, if you’re not in a lawsuit right now, you could take some steps to safeguard your wealth, both now and for future generations. You can create some distance between you and your assets so that you’re never at risk of losing them in a frivolous suit.
If that sounds interesting and you’d like to know more, fill out the form below. We’ll reach out and talk to you about your options to create an asset protection plan. We can advise on some of the best trusts to safeguard your assets, and we’ll guide you to the right trust for your situation.
Fill out the form today and let’s move your assets before it’s too late.
