Uniform Fraudulent Transfer Act (UFTA)
In 1984, this Uniform Fraudulent Conveyances Act was revised and renamed the Uniform Fraudulent Transfer Act (UFTA). Under state and federal fraudulent transfer laws, a person who owes a debt cannot transfer or convey assets if the intent is to hinder, delay or defraud his creditors. The UFTA creates a right of action for any creditor against any debtor and any other person who has received property from the debtor in a fraudulent transfer. The UFTA has been adopted in many states, and others have enacted similar laws prohibiting a debtor from transferring assets in order to keep creditors from being paid.
Because it is difficult to prove intent to defraud, laws prohibiting fraudulent transfers are often assumed to be violated if a "badge of fraud" is present. Thus, the debtor is assumed to have made the transfer to defraud creditors in violation of the UFTA or other state fraudulent transfer laws if she:
- makes the transfer directly after being sued or threatened with litigation (suspicious timing);
- transfers property to a business partner, friend or relative (an insider);
- actually controls the property although it is no longer in her name;
- sells the asset for a price below its value; and/or
- transfers everything she owns, leaving no assets for herself.
SIDEBAR: Conveying assets is more than transferring the title to a car or handing over a sum of cash. A conveyance, for purposes of determining fraud, is "every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or encumbrance."
I am involved in a lawsuit with my builder about payments I may owe him. Am I completely unable to transfer or convey any property or assets?
No. However, the transfers or sales you make cannot have a "badge of fraud." For example, you cannot sell your truck to your brother as he is a relative. You may be able to sell the truck to a stranger who answered an ad in the paper, but even then the timing is suspicious because you are in the middle of litigation. You will have to prove to a court that you sold the truck without any intention to defraud a potential creditor.
TIP: Transferring a small percentage of your assets, such as vehicle, tends to indicate there was no fraud. If the truck is the only thing you own in the world, the sale was probably fraudulent because you now have zero assets.
SIDEBAR: Property that is exempt from seizure by a creditor, such as a homestead, can be transferred at any time. Fraudulent conveyances do not include exempt property because a creditor could not get to them anyway.
I owe my parents some money; however, I have been sued and will probably have a judgment entered against me. Can I go ahead and give my car to my parents to repay them before the judgment is entered?
No. If you transfer the car to your parents, you are making a fraudulent transfer. You cannot pay off one debt in preference of another that will possibly arise in the future, such as a judgment.
The state wants to garnish my bank account for failure to pay child support to my ex-wife. Can my present wife and I enter into a postnuptial agreement, giving my earnings to her as her separate property?
No. Any transfer of your earnings to a friend or relative is a conveyance to an insider and a "badge of fraud."
TIP: Community property cannot be used to satisfy a debt one of the spouses incurred before marriage, such as an order to pay child support. In a community property state, the husband’s earnings may be safe because income earned by spouses is community property.
SIDEBAR: Future earnings are property under the UFTA even though there is no present ownership in the money. For example, telling your employer to make out your paychecks to a friend is a fraudulent transfer even though the money has not yet been earned.
I know my pension is safe from my creditors. However, in order to protect my monthly cash pension payments, can I have them directly deposited into an IRA instead of my checking account?
No. You are simply moving the funds to another account that you control. In essence, you are making a transfer to an insider—yourself, which violates the UFTA.
TIP: If there are no outstanding debts that creditors are currently trying to collect, placing funds in an IRA is not fraudulent. A fraudulent transfer is always a transfer that is suspiciously timed.
My house is my only asset and I am delinquent on the taxes. Can I sell it to my son at a discounted price?
No. Because you are selling the home to a family member and the transfer leaves you with no assets, the transfer looks fraudulent from the outset. However, the sale would not violate the UFTA if he paid you fair market value for the house.
SIDEBAR: The house scenario could still be fraudulent (even if the son paid market price) if the selling parent continued to live in the home because this parent would be benefiting from and controlling a former asset.
My former business partner has a large money judgment against me. Can I continue to make mortgage payments on my home?
Yes. There is no "badge of fraud" in paying the mortgage because you have always made the payments, they are not suspiciously timed, the money is being paid to a third party and you are not attempting to hide the payments.
TIP: Making extra mortgage payments or increasing the amount would be a fraudulent transfer.
My wife and I owe the IRS a large amount of back taxes and cannot afford to keep our home. If my parents assume our house note and we deed the property to them, will the IRS be able to prove the transfer was fraudulent?
Maybe not in the following circumstances: if the taxes are owed, but no tax lien has been filed; if your parents are unaware of the owed taxes; or if you and your wife no longer live on the property and the house’s value is near the amount of the note. In each of these cases, the transfer may not be fraudulent and the IRS could not put a lien on the property.
Can I sell my stocks and buy a house without violating the UFTA?
Yes. Because a homestead is exempt, the purchase (even if the money came from the sale of nonexempt property) is valid. Creditors cannot "reverse" your purchase even though you may have intended to hinder their ability to collect by buying a home.
I owe my ex-business partner some money after he won a lawsuit against me. If I disclaim an inheritance under my parents’ will, am I making a fraudulent transfer?
No. Unless the law in your state makes disclaiming inheritances fraudulent, your refusal to accept your inheritance, with the intent that your ex-business partner will not be paid, does not violate the UFTA.
My ex-wife owes back taxes on some property that she sold to her brother to avoid a forced sale of the land. Now our children will not inherit the property. Can I bring a lawsuit against her based on her fraudulent transfer?
No. Only creditors can bring lawsuits based on fraudulent transfer laws. Because neither you nor the children are creditors of your ex-wife, you cannot sue her on this basis.
The last revision date for this article was November 1, 2011.