Without proper consideration and safeguards, guarantees could put household wealth plans at risk
Planning for affluent and high-net-worth clients can be a very thorny undertaking, and estate planning is no exception. Without an awareness of each family member’s financial affairs, one can end up overlooking crucial pitfalls, resulting in massive loss of wealth.
That means aside from considering the liabilities and contingent liabilities of the person making a will, the team building the estate plan should also consider the liabilities carried by the beneficiaries – including personal guarantees.
In a recent article, Erin Bokshowan and Alain Gaucher of MLT Aikins LLP noted that financial institutions commonly require guarantees from third parties when providing credit. For instance, a corporation may borrow money from a bank, with the owner of the corporation providing a personal guarantee. Should the corporation be unable to repay the debt, the owner as guarantor would become personally responsible for it.
“If a beneficiary has given or will give a personal guarantee, in the absence of planning, the assets distributed to that beneficiary from the estate would be subject to a potential claim from the financial institution to which the guarantee was given,” Bokshowan and Gaucher said.
A personal guarantee given by a beneficiary on their corporation’s behalf, they said, could lead to estate-planning disaster in these trying times. If that corporation is struggling to pay back its debts, the guarantee could be enforced, and the creditor institution could collect on the obligation by taking assets received from the estate.
“To manage the risk of a potential claim … one might consider having the beneficiary negotiate a provision in the guarantee,” they said. With a provision to exempt assets that the beneficiary may acquire as a gift or inheritance, the rights of the financial institution to collect on their obligation would be limited, protecting those assets.
“In the case of an existing guarantee, the beneficiary may consider renegotiating the terms of the guarantee to include such a provision,” Bokshowan and Gaucher said, adding that the onus is on the person making the will, on advice of their lawyer, to ask their beneficiaries about personal guarantees they may have made.