Many of our clients who have high incomes or substantial assets are keenly interested in asset protection planning. We often recommend a family limited partnership or a limited liability company (“LLC”) as part of the client’s asset protection and estate plan. Since we have written extensively on the benefits of family limited partnerships in prior issues of A Potpourri, we will limit our discussion here to LLCs.
The asset protection afforded by an LLC derives from the provisions of the limited liability company laws, which generally provide that a creditor of a member of an LLC may have a court “charge” the interest of the member to satisfy the judgment. The charging order constitutes a lien on the member’s interest in the LLC, and the court may order a foreclosure and sale of the member’s interest, which is subject to the lien.
Under the Illinois LLC Act, the purchaser of the foreclosed lien has the rights of a transferee, which means the purchaser may become a member of the LLC. Further, the Illinois LLC Act provides that a transferee has the same right as a member to seek judicial dissolution of the LLC, even if the other members have not voted to permit the transferee to become a member of the LLC.
Delaware law provides the purchaser at the foreclosure sale – presumably, the creditor – will have only the rights of an assignee. Under the Delaware LLC Act, the creditor/assignee cannot seek a judicial dissolution of the LLC and a subsequent sale of the LLC’s assets. The sole remedy of the creditor/assignee will be to receive its prorata share of the distributions the LLC makes, if any.
Other reasons we suggest Delaware as the situs for an asset protection LLC are that, under Delaware LLC Act, a creditor/assignee may not: • Receive title to any property owned by the LLC.
• Inspect the books and records of the LLC.
• Vote on LLC matters or control its affairs.
• Remove the manager or appoint a new manager.
The fact that a debtor’s assets are owned by an LLC may by itself deter a judgment creditor from attempting to collect its judgment. A further deterrent might be that the creditor would be required to sue the LLC in Delaware in order to seek a charging order, even if the judgment was obtained in Illinois.
Delaware has a long history of a pro-business attitude and a well-developed body of business law, business-savvy courts, and a legislature that stays abreast of developments in the law and is willing to amend its business laws to maintain the state’s business-friendly atmosphere. To the extent that LLC case law is as yet uncertain in many respects – due to the relative newness of LLCs – Delaware will likely be on the cutting edge as the case law develops.
Asset protection should be done in conjunction with estate planning, and not in isolation. Please telephone us if you desire to discuss asset protection – including the use of LLCs – as part of your financial and estate plan. In addition, we have presented seminars to various groups on this issue and are available with reasonable notice to your group should you so desire.