One of the main dangers I try to advise my clients against is trying to do too much. In the estate planning realm, sometimes this means not setting up overly complicated structures when the amounts of money involved get to be too small. In the asset protection planning realm, sometimes this means that too much action can be worse than no action at all, as it can create a presumption of fraud.
One area where this comes into play involves exempt assets. Exempt assets are assets of a debtor which are protected from creditors by statute. When a debtor has exempt assets, sometimes he starts to worry that his statutory exemption isn't enough, and he transfers them out of his name. This doesn't make much sense, since the assets weren't attachable by creditors even before the panicked transfer. However many practitioners historically had the belief that while such transfers were not necessary, they couldn't hurt. The thought was that the transfer couldn't be fraudulent under UFTA if the asset transferred had no value to a creditor in the first place. [For an explanation of UFTA, click here.]
In New Jersey, that belief is contradicted by Gilchinsky v. Nat'l Westminster Bank, 159 N.J. 463 (1999). In Gilchinsky, a Rodgers and Hammerstein employee had stolen a sum of money from her employer, and had a judgment entered against her in New York. One of her assets was a 401(k) in New York. This 401(k) (a type of "ERISA plan") was an exempt asset under federal law. Gilchinsky got nervous, however, and in an attempt to hide her 401(k) funds from her New York creditor transferred them into an IRA in New Jersey. Under N.J.S.A. 25:2-1, IRAs are also exempt assets in New Jersey. Gilchinsky's creditors learned of her transfer, and brought an action to attach the exempt funds.
Surprisingly, even though the assets were exempt both before and after the transfer, the New Jersey Supreme Court found that Gilchinsky's motivation for the rollover was to conceal assets from her New York creditors, and as such it found fraudulent intent on her part. The court then used this finding of fraudulent intent to convert the exempt assets into available assets for Gilchinsky's creditors. The Court's reasoning was as follows:
We also disagree with defendant's assertion that the funds are protected because they were moved from one trust account to another. Missing from that analysis is consideration of the benefit defendant reaped by transferring the funds out of New York into New Jersey. It is true that R & H could not have reached the money while it remained in the ERISA plan. Guidry, supra, 493 U.S. at 376, 110 S.Ct. at 687, 107 L.Ed.2d at 795. That, however, is where the inquiry begins, not ends. Defendant never would have been able to use the money in that account. Withdrawals would have been subject to attachment pursuant to the New York restraining order. National Bank of N. Am. v. International Bhd. of Elec. Workers Local # 3, 93Misc.2d 590, 400 N.Y.S.2d 482 (N.Y.Sup.Ct.1977), aff'd, 69 A.D.2d 679, 419 N.Y.S.2d 127,appeal dismissed, 48 N.Y.2d 752, 422 N.Y.S.2d 666, 397 N.E.2d 1333 (1979). See also Pulasty, supra, 136 N.J. at 356, 642 A.2d 1392 (holding ERISA anti-alienation provision does not apply to funds in pensioner's possession); Hawxhurst, supra, 318 N.J.Super. at 86, 723A.2d 58; Velis v. Kardanis, 949 F.2d 78 (3d Cir.1991) (concluding pension benefits were includable asset of bankruptcy estate once distributed); In re Houck, 181 B.R. 187, 189 (Bankr.E.D.Pa.1995) (concluding that ERISA's anti-alienability provision does not protect pension funds once they are distributed); NCNB Fin. Servs., Inc. v. Shumate, 829 F.Supp. 178, 180 (W.D.Va.1993)(stating funds no longer protected from alienation once in pensioner's possession), aff'd, 45 F.3d 427 (4th Cir.1994), cert. denied, 515 U.S. 1161, 115 S.Ct. 2616, 132 L.Ed.2d 859 (1995). By transferring the money to an account in New Jersey, defendant bypassed the New York judgment and evaded her creditor...
The moral of the story is that Gilchinsky did too much and got burned for it. This approach is not limited to New Jersey state courts; recently the Eighth Circuit Bankruptcy Appellate Panel reached a similar conclusion in interpreting 11 U.S.C. 548, which is the federal version of UFTA. See In re Lumbar, 457 B.R. 748 (8th Cir.BAP 2011).
As always, if you have any questions, feel free to contact me.
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