Considering Personal Guarantees Of Beneficiaries In Estate Planning
When estate planning, it is important to take steps to protect your estate from personal guarantees provided by the beneficiaries of the estate.
“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.” Thus, the guarantee is essentially a contingent liability of the guarantor.
Guarantees are sometimes required by financial institutions when providing credit, which typically comes into play when an individual guarantors corporation borrows money.
When estate planning, it is important to consider these liabilities of the person making the will. “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.”
In order to manage the risk of a potential claim by a financial institution, it is possible for the beneficiary to negotiate a provision in the guarantee that protects “exempt assets” which are those that the beneficiary may come into as a result of a gift or inheritance.
If a beneficiary already has a guarantee that does not include this provision, it is possible that they could renegotiate the terms to include it. Ultimately, the person making the Will will decide, on the advice of their lawyer, whether to seek information of the existence of personal guarantees given by their beneficiaries.
See, Erin Bokshowan & Alain Gaucher, Q.C., Considering Personal Guarantees Of Beneficiaries In Estate Planning, MLT Aikins (Canada), August 10, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.