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Fraudulent Transfer to Private Charitable Foundation
Debtor inquired whether they can shelter money from a creditor by transferring the money to their private charitable foundation. The first question is whether the foundation qualifies and operates as a charitable entity for tax purposes, and if it does, the next question is whether a donation to a charity may be undone as a fraudulent transfer.
Private foundations are charitable entities set up privately by an individual or his family. The IRS has very strict guidelines about setting up private charities. Violations result in reversed charitable deductions and penalties. The charitable giver cannot have any self-dealing with the private foundation, and the foundation must have a true charitable purpose. The giver has a limited ability to be compensated to managing a private foundation. If the debtor in this case benefits from the private foundation beyond IRS limits the foundation may be disqualified for charitable deduction and the transfer of money will likely be reversed as a fraudulent transfer because of the giver’s retained benefits.
If the debtor gives to a qualified private foundation, the next question is whether the true charitable donation is reversible as a fraudulent conveyance where the giver retains no undue benefit. A debtor facing a judgment remains free to do what he wants with his money until such time as the creditor obtains a vested lien on the debtor’s property. The debtor may spend his money on frivolous endeavors such as travel, he may burn his dollars, or through money out the window of a tall building. In these examples, the money is gone, no longer identifiable, and is not recoverable. A charitable gift is traceable to the charity, identifiable, and theoretically returnable. The issue is whether the debtor had the intent to defraud his creditors in making a charitable gift so that the charity could be ordered to return the money.
I don’t know of any lawsuits against true charities for fraudulent conveyances. My impression is that a true charitable gift lacks most badges of fraudulent transfer. For example, the debtor retains no interest in the money, has no control over the money, and is making no attempt to hide the conveyance. Its possible the debtor could benefit through an income tax deduction not otherwise allowable if the same money is payable to his creditor, and in such event, a court may more likely to question the transfer. This will be an interesting legal issue if and when decided by a Florida court.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
February 6, 2007 in Fraudulent Conveyances | Permalink
Comments
My first thought when I read this case was, indeed, that the debtor could count it as a charitable deduction on his or her taxes and benefit from the charitable “gift” that way. This really will be an interesting decision to watch. The concept of creating your own private charitable foundation is also interesting, but I don’t believe someone could really set up a foundation and give their money to it as a way of avoiding creditors. It just seems like there are too many legal stipulations and regulations to allow something like that. However, I could see someone investing in a foundation that directly benefits a cause they are supportive of as a way of saving their money from creditors. In the long run, though, isn’t it just better to avoid going into debt altogether? Still, these are very interesting questions, and I’d like to know the answers to them.
Posted by: Baby Gifts | Jun 14, 2007 8:41:55 PM
I had not thought of the question posed in this blog, and although I do not reside in Florida, it is an interesting query in general. If someone knows that a creditor will be requesting a lien against their assets or looking for a means of retrieving said money, then choosing to turn it over to a charity rather than give it to the creditor could be a way of ensuring that you give your money over to something that you feel endeavors toward the benefit of people while at the same time keeping it from your creditors. However, as you pointed out, the money is traceable and could be requested to be returned for benefit of the creditor. I, too, will be interesting in finding out what the outcome of this legal question is when it is settled by the Florida court system.
Posted by: Baby Gifts | May 31, 2007 1:46:30 AM
