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The impact of personal guarantees on your estate plan

August 5, 2022

You should always take the time to weigh up the risks to your financial situation before signing a personal guarantee. Taking on responsibility for someone else’s debt if they fail to repay it is no small matter. What many people don’t realise is that this responsibility can extend beyond the end of your own life and impact your estate plan.

What is a personal guarantee?

If you have been asked to provide a personal guarantee, this is an agreement between you and a financier (usually a bank) that makes you personally liable for the debt of another party (the borrower).

Financiers often require a personal guarantee as secondary security. The primary security is often security over the borrower’s assets (like a mortgage over land they own). This is to ensure that if the primary security is insufficient to cover the full amount of the debt owing to the financier, the financier has other recourse by way of personal guarantee from another party who is not the borrower. If the borrower defaults in payment or other obligations, the guarantor would be liable to make good the default which could involve all amounts owed by the borrower to the financer and substantial arrears of interest and costs (including enforcement costs).

Importantly, the financier does not need to try and recover the debt from the borrower first before demanding the funds be repaid by the guarantor. This is one of the many reasons why signing a personal guarantee involves considerable risk and you should be proactive in ensuring the borrower can meet its obligations under the loan terms before signing any guarantee.

What is the impact on my Will?

Generally, a personal guarantee does not end on your death (subject to the terms of the guarantee agreement). Your estate will continue to be liable for the guarantee until your executors obtain a written confirmation that your obligations under the personal guarantee have been released by the financier. This means that if the borrower defaults in payment or other obligations, your estate could be called upon to meet the debt. As all estate liabilities must be paid in full before any assets are distributed to beneficiaries, this could have a significant impact on your overall estate plan because your estate could be heavily depleted of funds resulting in less being left for the benefit of your beneficiaries.

Imagine a situation where you have structured your Will so as to provide equally for each of your children but at the time you pass away one of them is experiencing financial difficulties – and you have given a personal guarantee to secure that child’s loan. A financier may use the personal guarantee to require repayment of the loan from your estate before the distributions are made to your beneficiaries.

The result could be that your estate pays off one child’s debt and the remainder of your estate is still split equally between all of them. While that may be good news for the child experiencing financial difficulty, it may not be what you would have wanted and may leave your other child disappointed.

This is why you should review your Will to ensure that it adequately deals with any personal guarantee you have given.

A financier will usually require you to give a mortgage over your property to secure the guarantee.. So you should also consider how this might impact any gift of that property in your Will.

In this case a situation could arise where land intended to be gifted to one child under your Will is claimed by the financier to settle the debt of another child. Without taking into account any personal guarantee you have given, your Will may result in a very unfair and unintended distribution of your assets.

What is the impact on my EPOA?

Generally, a personal guarantee does not end on your incapacity (subject to the terms of the guarantee agreement). Therefore, you should also review and consider updating your Enduring Power of Attorney documents (EPOA) to include specific powers for your financial attorneys to deal with your rights and obligations under any personal guarantee you have given as well as more detailed powers in relation to your borrowings more generally.

For more information

If you need advice on a personal guarantee, please contact a member of our Commercial team.

If you have given a personal guarantee and need estate planning advice, please contact a member of our Estate Planning team.

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