It seems that all of us want protection from creditors, whether we need it or not. Trusts are one form of legal vehicle that can be used to protect assets, and there are a number of variations of these, both domestic and foreign. But there are laws relating to asset transfers a person makes for creditor protection purposes. In fact, a great and very complicated body of law has developed around the issue of whether an individual is or should be permitted to transfer his assets for the purpose of placing them beyond the reach of a creditor. Many such transfers may be attacked by the creditor as fraudulent.

A fraudulent transfer (or conveyance) is not fraudulent in the criminal sense of the law, but rather refers to a transfer that is unfair to creditors and in violation of the concept of good-faith dealings with the rest of society. This is not to say that planning for creditor protection is automatically fraudulent. When properly done, it is quite legal and can positively protect assets. On the other hand, there are fraudulent transfer rules. Whether they have been violated is usually decided by a court (when the creditor sues for his money or claim) based on the facts and circumstances of each individual case.

Furthermore, efforts made by creditors to rescind or reach transfers based on the fraudulent transfer rules are "actions within actions." That is, a creditor must take a separate legal proceeding during which the court conducts a separate hearing to determine whether a transfer was fraudulent. Such proceedings themselves can be drawn out and expensive.

In addition, there are time periods (called a statute of limitations) within which a creditor must act; otherwise his right to attack the transfer is lost. Typically, the limitations period for attacking a fraudulent transfer in the United States is four years after the transfer.

As a general rule, if you make a transfer that falls into any of the following categories, it is likely that the transfer will be considered fraudulent:

• Transfer made with the actual intent to hinder, delay, or defraud a creditor
• Incurrence of a debt beyond your ability to pay
• Transfers that actually leave you insolvent
• Transfers for less than fair value when you are engaging or about to engage in business (the under-capitalization rule).
• Transfer to an insider to pay a preexisting debt, where the insider had reasonable cause to believe you were insolvent

Thus, there are the following potential outcomes where a fraudulent transfer is deemed by a court to have been made:

• Your creditors can reach assets or benefits that you can reach
• Your creditors can receive what you have a right to receive
• Your creditors can reverse a fraudulent transfer
• Your creditors can have your assets placed in the hands of a court-appointed receiver
• Your creditors can attach, freeze, and/or force a sale of your assets, in certain cases
• Your creditors can force you into bankruptcy

Of course, the other side of this coin is that if none of the above rules applies to you, or if the transfers were made some time ago, outside the period of limitations, then the assets will likely be protected and unreachable by your creditors. But that is only part of the answer. There are several ways where you can continue to enjoy your assets while still keeping them beyond the reach of your creditors, such as the corporation or the limited partnership.

Generally, an asset protection trust is one allowing the settlor (the creator of the trust) to continue to enjoy benefits from assets she has transferred to the trust while placing those assets beyond the reach of her creditors. This type of trust is called a self-settled trust. In addition, the asset protection trust must be at the same time designed to take advantage of appropriate tax benefits. Whether the assets in such a trust can be reached by creditors depends on two essential factors: (1) Did the transfer of assets to the trust constitute a fraudulent conveyance? And (2) What rights does a creditor have against the trust assets under the law of the jurisdiction governing the trust?