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Saturday, February 27, 2016

Uniform Voidable Transactions Act (UVTA) Threatens Asset Protection Planning

The UVTA has been enacted in several states. The Act is a reworking of fraudulent conveyance law, which allows a creditor to avoid transfers made that attempt to put property beyond the reach of a creditor. A number of attorneys and others are beginning to realize that the UVTA is a threat to debtor protections that might exist outside of the UVTA.

For example, Section 10(b) of the Act reads "[a] claim for relief in the nature of the claim for relief under this Act is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred.” Thus, if a resident of a state without domestic asset protection trust provisions settles such a trust in another state, the settlor may not be able to rely on the law of that other state to protect himself or herself against a voidable transaction claim - Section 10(b), if applicable, would arguably require that the law of the home state of the debtor would instead apply. If that home state fraudulent conveyance or voidable transaction law was not as favorable as the law in the state of the asset protection trust, the assets of the asset protection trust may be exposed by reason of the UVTA. Likewise, a debtor that moves to a state with favorable exemption laws (e.g., Florida as to its homestead protections) may be unable to use those favorable exemption laws against claims of creditors for debts incurred before the debtor moved. This may push asset protection trust planning offshore.

Other concerns are being raised about how the UVTA may interfere with other business and tax planning, such as its potential application to swap powers in grantor trusts (which may be used to obtain a step up in basis at death) and transfer of property to business entities by debtors.

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