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Considering Personal Guarantees of Beneficiaries in Estate Planning

estate planning

Estate planning involves considering all the possible outcomes of your passing and ensuring that your wishes are met in every scenario. One factor that is rarely discussed in estate planning is beneficiaries’ personal guarantees.  If you want to ensure that your assets go where you intend for them to go, it’s essential to discuss personal guarantees with your beneficiaries and think about how their guarantees may affect your planning.

No matter where you are in the estate planning process, it’s the right time to talk to the team at John H. Ruby & Associates. We’re committed to helping you create an estate plan that honors your legacy and your final wishes. Call us at 502-373-8044 to set up a consultation now.

What is a Guarantee?

A personal guarantee is a legally binding commitment in which one person or party agrees to take care of another party’s financial obligations if the other party is unable to do so. They are commonly used when someone takes out a business loan and the lender is concerned about the ability of the business to repay the loan. This may be due to the company’s credit history, general financial stability, or age.

By requiring the person taking out the loan to agree to a personal guarantee, they ensure that they can then recover their money from the individual if the business defaults. Loans utilizing personal guarantees are known as recourse loans, while those without are called non-recourse loans.

The Role of Personal Guarantees in Estate Planning

What do personal guarantees have to do with estate planning? Think about how your assets may be used after your beneficiaries inherit them. You likely hope that your hard work will make your loved ones’ lives easier, more enjoyable, and less stressful. You probably don’t imagine that money immediately being seized by a creditor to fulfill the terms of a loan you were not involved in. If any of your beneficiaries have personal guarantees for loans and they are called on to fulfill that financial obligation, it is entirely possible that the money you pass down will be used for that purpose.

Why You Must Consider a Beneficiary’s Guarantees

When you plan your estate, it is common to think about the liabilities associated with your beneficiaries. You might think about an heir’s struggles with addiction, history of financial instability, or other issues that make you worry about how your assets will be used. A personal guarantee is simply another type of liability.

If a beneficiary has given a personal guarantee, the assets they receive from your estate could be claimed by the lender in order to fulfill their guarantee. The lender can choose to enforce the personal guarantee and seize the beneficiary’s assets. This means that the beneficiary’s entire inheritance—a massive part of your life’s work—could be swallowed up in a moment by a creditor. If that’s not how you intend your estate to be used, you’ll need to consider each beneficiary’s personal guarantees and other potential liabilities.

Mitigating the Risks of Personal Guarantees

There are ways to mitigate these risks and protect your hard-earned assets. First, you can simply have a conversation with your beneficiaries. You likely know who has an entrepreneurial spirit and who already has their own business. By starting a discussion with them, you can find out if they have given any personal guarantees and what the limitations are on those.

If they give a personal guarantee, they may negotiate a clause exempting assets that are acquired from an inheritance. This would shield your assets from seizure. If they have already given personal guarantees, they may be able to restructure the agreement to add this provision; this depends on the goodwill of the lending party, though, and may not be as easy.

Explore Your Estate Planning Issues with the Team at John H. Ruby & Associates

There are many considerations to keep in mind as you draft your estate plan. Our team will help you consider the specific issues relating to your estate and your beneficiaries, ensuring that your legacy lives on in a way that respects your wishes. Set up a consultation now by calling us at 502-373-8044 or filling out our online contact form.