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Estate planning defence possible for targets of fraudulent conveyance claims

An estate planning defence is a potentially viable option to defend a claim of fraudulent conveyance, Toronto estate litigator David M. Smith tells AdvocateDaily.com.

Where a transfer of property by an insolvent party is found to have been made with the intent of defeating the claim of a creditor, the transactions can be set aside under Ontario’s Fraudulent Conveyances Act, says Smith, partner with  Hull & Hull LLP.

He says such claims sometimes come up in his practice when a person dies having made allegedly fraudulent conveyances, and creditors make a claim for recovery against their estate or against the recipient of a jointly held property by right of survivorship.

“The estate planning defence properly focuses the enquiry on the intent of the debtor: if the conveyance was made in the context of an estate plan, the conventional wisdom that the intention of the transfer is to defeat creditors is up for debate,” Smith says.

And while the defence has been advanced unsuccessfully numerous times in Canadian courts, Smith remains confident it could succeed at some point, given the right factual matrix.

“Where I think it may work is if you can show that the estate plan was in place well before the debt arose. The evidence is compelling as to a rationale for the inconvenient timing of the transfer of property, and there is otherwise evidence that the deceased did not intend to defeat his or her creditors,” he says.

Even where the transfer was not executed until after the debt became known, Smith says defendants to a fraudulent conveyance claim may be able to mount an estate planning defence if they can demonstrate they had previously intended to make the same transaction.

“If the evidence shows that the intention to transfer significantly predated the debt being assumed, then it bolsters the case that it was made with intent to provide for beneficiaries, rather than to defeat the creditor,” he explains.

Still, Smith says defendants often face a tough task in these cases because the involved transactions frequently exhibit what the court calls “badges of fraud,” which make it easier for plaintiffs to meet their burden of proof.

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