September 2011 / Volume 9, No. 2


While many individuals place substantial emphasis on maximizing their earnings and accumulating wealth, far fewer individuals focus their attention on protecting their assets from creditors.  Because of our increasingly litigious society, greater emphasis should be given to utilizing the available strategies to protect assets from creditors.  While few, if any, asset protection strategies are ironclad, proper planning can make it more difficult for a creditor to attach assets of an individual.  Some of the basic asset protection strategies are described below.

1.      Home Ownership.  Illinois law allows the principal residence of a husband and wife to be owned in a form of ownership known as tenancy-by-the-entirety.  When a married couple living in Illinois owns their home as tenants-by-the-entirety, the creditor of one spouse cannot force the sale of the residence, based on the legal premise that the tenancy can be ended only by the actions of both parties.  If one spouse has an uninsured liability, for example, the creditor cannot force the sale of the house; but at best could place a lien on the house, thereby permitting the couple to continue to reside in the residence.  Married couples who own their principal residences in Illinois in a form of ownership other than tenants-by-the entirety should strongly consider retitling their homes.

2.      Retirement Assets.  Qualified retirement plan assets are generally exempt from creditors under the federal law known as the Employee Retirement Income Security Act (“ERISA”).  Workers who are covered by employer-sponsored retirement plans will benefit by maximizing the amount of contributions to company 401(k) plans, profit sharing plans and other types of qualified plans.  One noteworthy exception is that ERISA does not protect from creditors assets held in a plan maintained only for the business owner, so a one-participant plan may not have the same shield from creditors enjoyed by participants in other qualified plans.  While not all state laws are the same, Illinois law protects assets which are held in such owner-maintained plans.  Illinois law also protects assets held in individual retirement accounts.  For non-Illinois residents, other strategies may need to be employed to shield assets from creditors that are not protected by ERISA.

3.      Cash and Other Liquid Assets.  An obvious target of creditors is cash and other liquid assets held in the name of a debtor.  An opportunity to protect these assets is available by contributing these assets to an entity such as a limited liability company owned by more than one person.  A husband and wife, for example, can contribute assets to a limited liability company and make it difficult for the creditor to reach the contributed assets if the entity is properly structured. 

4.      Trusts.  Trusts are a cornerstone of asset protection planning, primarily for those who are recipients of assets from others.  Properly created, a trust can hold assets for beneficiaries which are not subject to attachment by creditors of the trust beneficiaries.  Trust beneficiaries generally must forego holding the right to vest trust assets in themselves.  For maximum asset protection, a third party should serve as a trustee of the trust.  Beneficiaries can nevertheless indirectly control the trust funds by holding the power to change the trustee, and, through other creatively designed features, maintain the opportunity to access the funds as necessary.

5.      Life Insurance.  Life insurance policies are generally exempt from the insured’s creditors in Illinois if the proceeds are payable to a spouse, child, parent or certain other relatives.  Such is the case even if the insured maintains the right to change the policy beneficiary.  The exemption may be lost, however, if policy proceeds are payable to a trust.  However, if the ownership of an insurance policy is transferred to a third party, including a trust in which the owner has no further ownership rights in the policy, then the creditors of the owner transferring the policy may not be able to attach the policy or its proceeds. 

Conclusion.  The foregoing are just some of the asset protection techniques which are available.  Asset protection planning can provide significant rewards.  For those who wait too long before undergoing the necessary planning, transfers may be set aside as violating state fraudulent conveyance laws.  For those who take steps to protect their assets from creditors before the events occur which give rise to creditor claims, continued, uninterrupted enjoyment and ownership of assets may be realized.

By Bruce E. Bell


When is an independent contractor really an independent contractor and not really an employee?  Employers sometimes think the answer is a simple one – we treat the person as an independent contractor, therefore the person is an independent contractor.  The real answer is far from simple.  To make matters worse, the answer can depend on the body of law at issue.  An individual's status as an independent contractor or an employee has tax law, employee benefits, employment discrimination, workers' compensation, and unemployment compensation benefits ramifications.  It's no wonder that companies would prefer that all of their staff be treated as independent contractors.

There are various tests for determining whether a person providing services to a company is an employee or an independent contractor.  The Internal Revenue Service has traditionally used a twenty-factor test, which it has recently reorganized into a three-factor test.  The following substantive factors are a basic guide:

Control:  Employers have the right to control the activities of their employees.  They can tell them when to start work, what to do, how to do it, where to do it, who to do it with, and when to stop.  Independent contractors are free to determine how and when to get the job done.  Employees generally use the facilities and tools provided by their employers.

Permanency:  The employment relationship is ongoing and indefinite in duration.  Moreover, employees provide services that are fundamental to the employer's regular business.  Independent contractors more typically provide project-specific services of limited duration that are not a fundamental part of the company's business.  They also typically offer the same services to multiple companies.

The Ability to Lose Money: Independent contractors may or may not make a profit from their activities.  They often maintain their own facilities and use their own tools and equipment to perform services, and they have ongoing costs whether or not they are performing services.  As a result, they can lose money.  Employees do not lose money by providing their services.

Companies often face the issue of worker classification only after a dispute has arisen with respect to a relationship that has existed for some period of time.  There is potential for significant exposure to damages, fines, and penalties if the dispute is not resolved favorably to the company.  With a little planning, however, companies can significantly reduce their risk.

The place to start is with a written agreement that provides that the individual is an independent contractor and not an employee.  The agreement should state each party's rights and responsibilities.  The agreement can give the company the right to control the outcome of the services to be provided, but not the right to control how that outcome is achieved by the individual performing the services. 

A written agreement, however, will never be dispositive.  Courts and government agencies will scrutinize the actual relationship as it exists in practice.  Thus, the parties are not free to say one thing but do another; actions really do speak louder than words. 

The Internal Revenue Service regards worker misclassification as a major area of taxpayer non-compliance, and has stepped-up its enforcement in an effort to collect what it estimates as billions of dollars of lost tax revenue.

By far, the best protection is to understand the risks and to avoid situations that are likely to be challenged.  With an understanding of the issues, together with some proper planning and documentation, the risks of worker misclassification can be lessened.

By Leonard J. Gambino

Schoenberg Finkel Newman & Rosenberg, LLC (312) 648-2300

This newsletter is not intended to be legal or tax advice and is not a substitute for obtaining legal or tax advice. This Newsletter is deemed to be advertising material by the Illinois Supreme Court.