With the current estate tax regime of a high gift and estate tax exemption amount and low estate tax rates, transferring wealth is becoming the focus of estate planning rather than reducing estate tax liability. And with asset values still relatively low, it’s an ideal time to transfer your wealth to loved ones.

Before taking action, however, it’s important to be familiar with fraudulent transfer laws. Simply put, your creditor can challenge your gifts, trusts and retitled property as fraudulent transfers.

Understanding UFTA

Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). The act allows creditors to challenge transfers involving two types of fraud that you should be mindful of as you weigh your estate planning options.

Actual fraud occurs when making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors. That doesn’t mean the fraudulent transfer laws protect anyone who could conceivably become a creditor some day. If that were the case, asset protection planning would be futile.

But suppose a real estate investor discovers that one of his properties is contaminated with hazardous waste and immediately transfers all of his assets to an offshore trust. Clearly, that would be a fraudulent transfer even though no one has actually filed a lawsuit against the investor yet.

Just because you harbor no intent to defraud creditors doesn’t mean you’re safe from an actual fraud challenge. Because a court can’t read your mind, it will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So before you make gifts or place assets in a trust, consider how a court might view the transfer.

Constructive fraud is a more significant risk for most people because it doesn’t involve intent to defraud. Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.

“Insolvent” means that the sum of your debts is greater than all of your assets, at a fair valuation. You’re presumed to be insolvent if you’re not paying your debts as they become due.

Generally, the constructive fraud rules protect only present creditors — that is, creditors whose claims arose before the transfer was made or the obligation was incurred. In some cases, however, a future creditor may challenge a transaction if it leaves you with assets that are unreasonably small or if you intend or believe (or reasonably should believe) that you’ll be unable to pay your debts as they become due.

Factoring in insolvency and net worth

Most estate planning strategies have an asset protection component. You may make gifts to your children or set up trusts to minimize taxes or to control how and when your beneficiaries receive your wealth. But, as an added benefit, the assets are removed from your estate and protected from your creditors.

By definition, when you make a gift — either outright or in trust — you don’t receive reasonably equivalent value in exchange. So if you’re insolvent at the time, or the gift renders you insolvent, you’ve made a constructively fraudulent transfer, which means a creditor could potentially undo the transfer.

To avoid this risk, analyze your net worth before making substantial gifts. Even if you’re not having trouble paying your debts, it’s possible to meet the technical definition of insolvency.

Consult your advisor

Before taking action to transfer your wealth, discuss fraudulent transfer laws with your estate planning advisor. The laws vary from state to state, so it’s important to understand how they may affect your estate plan.