March 29, 2017
As another example for our Asset Protection Strategies Put to the Test series, here is an example of a plan that does not work. A taxpayer named Gary in Arkansas created a trust that he believed would avoid any need to pay any taxes on the income from the assets he placed into the trust. He eventually discovered that the trust did not provide the tax shield the he desired. He found himself owing the IRS over $160,000.
To act as a buffer against the IRS taking $160,000 from him (and possibly losing his Florida home) he transferred the home to himself and his wife in what is known as a “tenants by the entirety’ arrangement, which under Florida law, can protect the home from creditor attachment.
The IRS cried foul and said that this home transfer was a fraudulent transfer and should be ignored. Gary, in response, filed for Chapter 7 bankruptcy protection, seeking to have the bankruptcy court dismiss his liability to the IRS. This was to no avail for Gary because the IRS was able to show that Gary rendered himself insolvent when he retitled the home into a tenancy by the entirety (not to mention the fact that IRS claims are made pursuant to federal law, which can override state protective laws in any number of situations). Finding the transfer to be fraudulent allowed the transfer to be unwound, meaning the house could be forced to be sold in order to pay the IRS.
The takeaway here is (as is shown time and time again) do not engage in fraudulent transfers. Plan asset protection well in advance of any anticipated creditor claims.
Cite: U.S. v. Major, 551 B.R. 531 (M.D. Fla. 2016)
By: Edward D. Brown Esq., CPA, LLM