The sixteen states that have passed asset protection trust law often compete with one another for business, each trying to woo individuals to use a trust company in that state to protect assets. An often-touted advantage of using one state over the others is that the “superior” state has the shorter statute of limitations
(the period that, once it runs its course, bars creditors from bringing any legal action against the trust assets). For example, Nevada’s and South Dakota’s 2-year statute of limitation periods compare favorably to Delaware’s 4-year period.
A 2016 case however has come down the pike that involved a debtor who was amid a bankruptcy filing. In more profitable times, the debtor was doing quite well (so well, that he engaged in some tax shelters to lower his IRS tax obligations). Times changed however, and the debtor ended up in bankruptcy. The bankruptcy trustee sought to recover transfers that the bankrupt debtor had made within the ten-year period to a “friendly-transferee” that began in 2005 when the IRS assessed over $1 million in income taxes against the debtor. The debtor argued however that the bankruptcy trustee could recover only the transfers that occurred during the four years that preceded the 2015 bankruptcy filing because Florida law allows a creditor to reach back only four years to claw back what are deemed to be fraudulent transfers.
It is true that normally, the bankruptcy trustee would have been able to reach back only 4 years from the date of the bankruptcy action to reclaim transfers as “fraudulent transfers” under Florida’s law. However, the Bankruptcy Court ruled that since the IRS was a creditor, and the fraudulent transfer claim was against the transferee of the transfers, this allowed the bankruptcy trustee to have authority to “recall” all transfers that occurred during the ten-year period that followed the 2005 IRS assessment.
The Bankruptcy Court, in allowing this ten-year period to claw back assets from the transferee, allows there to be more funds available to all of the creditors, not just the IRS.
The reasoning of the court was that the federal bankruptcy trustee can step into the shoes of the IRS with regard to the same remedies the IRS would have had in an IRS collection matter. The court determined that since the IRS could reach ten years of transfers that were made while the transferor-taxpayer owed taxes to the IRS, the bankruptcy trustee could use a similar ten-year period as a claw back opportunity.
The takeaway here is the reminder that when state laws are being relied upon as a shield from creditor risks, plaintiffs may successfully find a legal basis to pierce through that shield. Had the transferee been a properly designed offshore trust, recouping those transfers could have been much more problematic for the creditors. Even so, fraudulent transfers should never be made, even to an offshore trust.
Cite: In re Kipnis, 2016 WL 4543772 (Bk.S.D.Fla., Aug. 31, 2016)