Asset protection strategies require keen attention to detail and an understanding of the complex laws that govern these strategies. One critical strategy employed by savvy business owners and individuals is transferring assets into trusts, LLCs, or to other people and entities in order to avoid certain liabilities against them. However, these transfers must be legitimate and structured properly to avoid penalties under the law.
One specific law that Californians must be aware of when transferring assets is the UVTA (UVTA). This law acts to prevent individuals and businesses from moving around assets for the sole purpose of avoiding creditors.
Understanding California’s Uniform Voidable Transactions Act (UVTA)
California Civil Code 3439, otherwise known as the Uniform Voidable Transactions Act, went into effect on January 1, 2016. It establishes the circumstances necessary for creditors to ask the courts to reverse or reject the transfer or sale of assets when an insolvent debtor completes the transfers for the sole intention of avoiding payment to creditors.
The law specifically states that a transaction is voidable to a creditor regardless of whether or not the transaction occurred before or after an actual claim arose if the following circumstances are present:
- There is evidence the transaction was made to intentionally “hinder, delay, or defraud any creditor of the debtor”
- Without receiving reasonably equivalent value in exchange for the transfer or sale and the debtor either:
- Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction
- Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they become due
This means that even if you sell an asset, you must have received full value in order for the transactions to be considered legitimate. If you have real estate in Southern California valued at $1.2 million but sell it for significantly less than this amount, the creditor is able to claim the transaction was fraudulent and structured to avoid full payment to a creditor.
What Circumstances Are Considered in a Potentially Fraudulent Transaction?
The state looks at several factors to determine whether or not a transaction was intentionally fraudulent. First of all, transferring or selling assets to a known person or entity is a telltale sign. Additionally, if the debtor retains control of the asset even after the transaction, conceals the transaction from creditors and/or the state, or if the debtor already knew about upcoming litigation related to their debts at the time of the transaction then a fraudulent transaction is likely to be investigated. Other factors include:
- Whether all or most assets are transferred or sold
- Concealing assets
- The timing of the transaction with respect to the incurred debt
Ultimately, the UVTA is a legal mechanism intended to insure that creditors get what they’re owed by individuals and entities that have the capability of paying those debts. Intentionally selling or transferring assets to avoid debts may seem like a savvy move, but it ultimately could cost you significantly more time and money than you were already obligated to pay.
At Dahl Law Group, we take into account all of these circumstances to ensure our clients are making the right decisions to manage and protect their assets, even if there is a significant debt owed to creditors. There are more effective and legal pathways to limiting your liabilities while still enjoying the full breadth of your hard work. Contact our team at our offices in Northern or Southern California to ensure you’re making the right decisions when managing, selling, or transferring your assets.
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