Illinois now has joined such states as Nevada by amending the Illinois Limited Liability Company Act (the “Act”) to provide further protection to members of an LLC, as well as to the assets of the LLC, from a member’s judgment creditor. The amendment provides that a charging order is the exclusive remedy of a judgment creditor seeking to enforce and satisfy a judgment against a membership interest of the judgment debtor. The amendment became effective on July 1, 2017. Prior to the amendment, the Act permitted judgment creditors to force partition of the assets of an LLC.
There still remains a drawback to the member/judgment debtor if a charging order is entered against the debtor’s membership interest. That is that the distribution payable under the charging order will be taxable income to the member even though the member does not receive it. In other words, the member will have to pay income taxes on a distribution that the member did not receive. One way to avoid this is to designate the member as a manager and pay the manager a salary, and to have the LLC create a defined benefit plan for the manager. As you may, know a wage deduction is limited to 15% of an employee’s salary, and employment income contributed to a defined benefit plan is exempt from creditors. Therefore, rather than losing the entire distribution to a creditor, a member can preserve and protect 85-100% of the “salary” paid in lieu of a distribution.
If you have any questions or would like to discuss further setting up asset protection devices, please do not hesitate to contact me.