The Pitfalls of Insolvency and Gifting to Relatives when Estate Planning

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Gifting is a popular way of disposing of estates prior to death. But gifters (and their recipients) should be aware that sudden financial downturns can cause creditors to "claw back" gifts because of the curious rules defining "insolvency" in both state collections and federal bankruptcy law.

Beware of Insolvents Bearing Gifts

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” (fn 1) 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 story, such individuals don’t have much to give. Legally speaking, an insolvent is someone who owes more than he or she is worth. (fn 2) A stronger version of insolvency, and the one more commonly thought of, involves an individual who cannot make debt payments as they come due. (fn 3)

"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. The Uniform Fraudulent Transfer Act (adopted by a majority of U.S. jurisdictions) states that creditors of insolvent persons shall have the first "bite" at their money, and creditors can sue to recover any gifts that deprive them of that bite. Whom do they sue? The gift recipients.

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. (fn 4)


Bankruptcy law contains even harsher restrictions than fraudulent transfer rules. Say I 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 in medical bills.

In such circumstances, his misfortune can quickly become his daughter’s as well. Under bankruptcy law, if the client files a petition in bankruptcy court within a year of his gift to his daughter, the court can recover the entire $60,000. (fn 5)

Additionally, because of bankruptcy law’s ninety-day "lookback period," any gifts given within three months of bankruptcy can be recovered by the court. (fn 6) 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. (fn 7)

Conclusion: So What?

The rule to take away is that gifts as estate-planning devices – even for seemingly wealthy individuals – may be time-bombs for the recipient if the individual also has considerable debts. If, under the above-discussed law, the gifts deprive creditors of funds to collect, it may be time to discuss the gift first with legal counsel. A legally insolvent individual 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 is an estate planning and probate law firm that regularly assists clients in structuring gifts, wills, trusts, and other estate planning devices.


  1. Bible, King James Version, Mark 12:42-44 ("And he called unto him his disciples, and saith unto them, Verily I say unto you, That this poor widow hath cast more in, than all they which have cast into the treasury: For all they did cast in of their abundance; but she of her want did cast in all that she had, even all her living.")
  2. See, for example, Ga. Code Ann. § 18-2-72(a) (2002)
  3. Id. § 18-2-72(b).
  4. See Ga. Code Ann. § 18-2-70 et seq. (the “Uniform Fraudulent Transfers Act”)
  5. See U.S. Bankruptcy Code in 11 U.S.C.A. § 547(b)(4)(B) (2005).
  6. Id. § 547(b)(4)(A).
  7. C.f. the “Obama-Hatch Tithing Bill” (the “Religious Liberty and Charitable Donation Clarification Act of 2006” Pub. L. 109-439, Dec. 20, 2006, 120 Stat. 3285) amending the Bankruptcy Code in 11 U.S.C.A. § 1325(b)(2)(A)(ii) to exempt from gross income up to 15 percent of money given to a religious organization by a Chapter 13 debtor.