Considering Personal Guarantees Of Beneficiaries In Estate Planning

Managing risk and protecting your assets from erosion may be of greater concern due to the uncertainties raised by COVID-19.

In the estate planning context, it may be prudent to consider how to protect your estate from the reach of personal guarantees provided by beneficiaries of the estate.

What is a guarantee?

A guarantee is contractual obligation undertaken by a person, called the guarantor. Under a guarantee, the guarantor promises that a second person will fulfill some other obligation and if they do not, then the guarantor promises to fulfill that obligation. As such, a guarantee is considered a contingent liability of the guarantor.

Guarantees from third parties are commonly required by financial institutions when providing credit. An individual guarantor may provide a personal guarantee to a financial institution when their corporation borrows money. If the corporation is unable to repay the debt, the guarantor assumes personal responsibility for repayment.

How can personal guarantees of beneficiaries be considered in estate planning?

In estate planning, it is common to consider the liabilities and contingent liabilities, including guarantees, of the person making the will. When the person dies and the estate is administered, the executor of the estate must negotiate the release of guarantees to avoid personal liability to creditors.

The liabilities and contingent liabilities of an estate’s beneficiaries, including personal guarantees given by beneficiaries are less commonly considered. 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. If a beneficiary has given a personal guarantee on behalf of their corporation and that corporation is struggling to repay its debts in these trying times, the personal guarantee may be enforced and the assets received from the estate could be used to satisfy the obligation.

To manage the risk of a potential claim of a financial institution to which the beneficiary has given or will give a personal guarantee, one might consider having the beneficiary negotiate a provision in the guarantee exempting assets that the beneficiary may acquire as a result of a gift or inheritance (the “exempt assets”). The language of the provision would explicitly restrict the rights of the financial institution under the guarantee to satisfy the guarantor’s obligations with respect to the exempt assets.

When a beneficiary gives a guarantee to a financial institution, this type of provision could be negotiated. In the case of an existing guarantee, the beneficiary may consider renegotiating the terms of the guarantee to include such a provision. It is up to the person making their will, on advice of their lawyer, to inquire into the existence of personal guarantees given by their beneficiaries.

The MLT Aikins Estate Planning and Administration group have significant experience in this area and are available to provide advice and assistance during these uncertain times.