It has been said that becoming wealthy is like playing Monopoly—the person who accumulates the most parcels wins the game. However, in today’s uncertain and volatile economic climate, accumulating the most real estate will not always ensure it is safe. Now, more than ever, it is equally important to ensure that real property is protected from the claims of would-be creditors.
Unfortunately, many individuals fail to take the appropriate measures to adequately protect their assets. They could be at risk of a future creditor obtaining a judgment against them and seizing and selling nearly everything they own. The likelihood of losing property can be greatly diminished by understanding and utilizing various asset protection strategies.
The most valuable asset owned by most individuals is their home. Many married couples hold title to their home either in one spouse’s name or as joint tenants in common. Both of these ownership options leave the home vulnerable to attachment by a creditor. In order to adequately protect the property, married couples should hold their home by titling it in a manner known as tenancy by the entirety. Illinois law recognizes “tenancy by the entirety” as an ownership interest in real property which prevents a creditor of only one spouse from seizing and selling a couple’s primary residence in order to satisfy a judgment. Owning a home in tenancy by the entirety affords married couples the peace of mind in knowing that their primary residence is protected even if a judgment is rendered against one of the spouses. Take caution, however, not to overuse this tool. In Illinois, it applies only to the primary residential real estate of a married couple.
Investment property is another popular asset which, if adequately protected, can sometimes be shielded from the claims of creditors. There are a variety of methods available for protecting investment property. One such method is to have title to the property transferred into a limited liability company, an s-corporation or a trust. First, establishing a limited liability company or s-corporation as owner of the property offers various layers of protection. It can protect your personal assets from a creditor’s claims against the company. In Illinois, a member of a limited liability company or shareholder of an s-corporation is generally entitled to corporate veil protection. This means that if a creditor obtains a judgment against the entity, it likely will be unable to attach its judgment to any personal assets that are held individually and not owned by the company.
The reverse can also be true. Establishing a limited liability company or s-corporation as owner of the property should protect the property in the event a creditor obtains a judgment against an individual member or shareholder. Moreover, with respect to a limited liability company, Illinois law currently appears to prohibit a creditor from attaching its judgment to anything beyond a member’s distributional interest in the company. Thus, a creditor cannot attach to a member’s underlying membership interest. Therefore, even if a judgment is entered against an individual member, the creditor cannot satisfy that judgment by selling property owned by the company. The creditor’s only remedy, if it even has one, would be to garnish the member’s cash distributions if and when they are made. This option is not attractive to creditors, as cash distributions to members can oftentimes be avoided.
A limited liability company’s operating agreement or s-corporation’s shareholder agreement can also frustrate a creditor’s collection attempts. Such an agreement may provide that a member or shareholder forfeits the right to receive distributions or dividends in the event a creditor attaches to the member’s or shareholder’s distributional interest. This too could leave the creditor with no distributions to garnish.
A trust can be another important asset protection device. Trusts, namely irrevocable trusts, have become fairly common tools utilized in most comprehensive asset protection strategies. Under Illinois law, a court cannot typically order a judgment against a trust beneficiary to be satisfied with property from an irrevocable trust that was created in good faith by someone other than the judgment debtor. A properly drafted trust may preclude a creditor of a trust beneficiary from seizing and selling assets and property owned by the trust. Illinois law recognizes numerous types of trusts which likely can be tailored to accommodate an individual’s specific goals. An in-depth analysis of the different types of trusts, and the protections offered by each type of trust, is beyond the scope of this article, and an experienced attorney should be consulted.
Finally, no matter what type of asset protection strategy is employed, it is crucial that the strategy be implemented early in the game. Prolonging the asset protection process until after a claim has arisen is likely too late. In Illinois, creditors are protected by the Uniform Fraudulent Transfer Act (“Fraudulent Transfer Act”). Under some circumstances, the Fraudulent Transfer Act can allow a creditor to unwind a transfer of property that is deemed fraudulent by the courts. In other words, once a creditor has a claim, if that claim arose during the requisite time period, any assets not previously protected may be at risk. A “claim” includes not just a judgment, but also “a right to payment.” As a result, once a creditor has a right to payment, even if that right has not been reduced to judgment, it already may be too late to begin protecting your assets.
Employing a comprehensive asset protection strategy is essential for protecting and preserving your real estate. If an asset protection strategy is utilized early in the game, your assets can remain in your control even if a judgment is entered against you. However, if a creditor’s claim arises before your assets are adequately protected, you may feel like you have been sent directly to jail, without passing go, and without collecting your $200. iBi