ESTATE PLANNING UPDATE: GIFT-GIVING AND INSOLVENCY
You may recall the Bible story in which Jesus spoke of a woman who gave two mites (a
small sum of money) to the ministry, saying, in effect, “this woman gave more” than some
who had given far greater amounts. The moral of the story is that true gift-giving is a function
of one’s means, not the amount given.
Some would-be gift givers might do well to remember the story, and so would their financial
advisors. The reason is that individuals can actually have large income and savings but
legally be considered “insolvent.” The law presumes that, like the nameless woman in the
Bible story, such individuals don’t have much to give. Legally speaking, an insolvent is
someone who owes more than he or she is worth. A stronger version of insolvency, and the
one more commonly thought of, involves an individual who cannot make debt payments as
they come due.
“Fraudulent” transfers
Insolvency has important implications for clients making gifts to those close to them. First,
such gifts may be considered “fraudulent” as to the giver’s creditors. Georgia law states that
creditors of insolvent persons shall have the first “bite” at their money, and creditors can sue
to recover any gifts that violate this rule.
Though the law states that an insolvent generally must “intend” to defraud creditors by the
gift, courts will find such “intent” based upon objective circumstances. For example, if an
insolvent gives most of his assets to his daughter and then buys an expensive car the next
day, the courts will ordinarily recover the transfer to the daughter if the car dealer files a
complaint.
Bankruptcy
Bankruptcy law contains even harsher restrictions than Georgia’s fraudulent transfer rules.
Say you have a middle-aged client with assets worth of $500,000, who is perfectly solvent
and makes a gift of $60,000 to his daughter. The client then loses his job and medical
insurance. Shortly thereafter he needs expensive surgery and racks up hundreds of
thousands of medical bills.
In such circumstances, his misfortune can quickly become his daughter’s as well. Under
bankruptcy law, if the client files a petition within a year of his gift to his daughter, the court
can recover the entire $60,000.
Additionally, because of bankruptcy law’s ninety-day “lookback period,” any gifts given within
three months of bankruptcy can be recovered by the court. This has historically been a nasty
surprise for, e.g., churches that find a bankruptcy trustee asking for a return of that $5,000
donation from the suddenly generous parishioner.
So what?
The rule to take away is to be on the lookout when structuring gifts for clients – even
seemingly wealthy ones – who may have considerable debts. If it appears that the client is
trying to shelter money from creditors, it may be time to refer him or her to legal counsel. A
legally insolvent client may need to resign him/herself to the idea of giving only a small gift
and referring the beneficiary to the twelfth chapter of the Gospel of Mark to show what a
generous person he/she actually is.
You may recall the Bible story in which Jesus spoke of a woman who gave two mites (a
small sum of money) to the ministry, saying, in effect, “this woman gave more” than some
who had given far greater amounts. The moral of the story is that true gift-giving is a function
of one’s means, not the amount given.
Some would-be gift givers might do well to remember the story, and so would their financial
advisors. The reason is that individuals can actually have large income and savings but
legally be considered “insolvent.” The law presumes that, like the nameless woman in the
Bible story, such individuals don’t have much to give. Legally speaking, an insolvent is
someone who owes more than he or she is worth. A stronger version of insolvency, and the
one more commonly thought of, involves an individual who cannot make debt payments as
they come due.
“Fraudulent” transfers
Insolvency has important implications for clients making gifts to those close to them. First,
such gifts may be considered “fraudulent” as to the giver’s creditors. Georgia law states that
creditors of insolvent persons shall have the first “bite” at their money, and creditors can sue
to recover any gifts that violate this rule.
Though the law states that an insolvent generally must “intend” to defraud creditors by the
gift, courts will find such “intent” based upon objective circumstances. For example, if an
insolvent gives most of his assets to his daughter and then buys an expensive car the next
day, the courts will ordinarily recover the transfer to the daughter if the car dealer files a
complaint.
Bankruptcy
Bankruptcy law contains even harsher restrictions than Georgia’s fraudulent transfer rules.
Say you have a middle-aged client with assets worth of $500,000, who is perfectly solvent
and makes a gift of $60,000 to his daughter. The client then loses his job and medical
insurance. Shortly thereafter he needs expensive surgery and racks up hundreds of
thousands of medical bills.
In such circumstances, his misfortune can quickly become his daughter’s as well. Under
bankruptcy law, if the client files a petition within a year of his gift to his daughter, the court
can recover the entire $60,000.
Additionally, because of bankruptcy law’s ninety-day “lookback period,” any gifts given within
three months of bankruptcy can be recovered by the court. This has historically been a nasty
surprise for, e.g., churches that find a bankruptcy trustee asking for a return of that $5,000
donation from the suddenly generous parishioner.
So what?
The rule to take away is to be on the lookout when structuring gifts for clients – even
seemingly wealthy ones – who may have considerable debts. If it appears that the client is
trying to shelter money from creditors, it may be time to refer him or her to legal counsel. A
legally insolvent client may need to resign him/herself to the idea of giving only a small gift
and referring the beneficiary to the twelfth chapter of the Gospel of Mark to show what a
generous person he/she actually is.
TANNER PITTMAN, LLC
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