I GUARANTEED MY BUSINESS’S DEBT – WHAT IMPACT WILL THIS HAVE ON MY ESTATE PLAN?
It is both common and frequently appropriate for business owners to be asked to guarantee the debt of their business. When the business has multiple owners, it is not unusual for all of the owners to be asked to guarantee the debt. But what happens to the business or the owner’s estate when one of the guarantors dies?
Frequently, the death of a guarantor is event of default under standard loan documents. This means that the bank could exercise its right to call an otherwise performing loan upon the death of any guarantor irrespective of the financial importance of that guarantor to the overall credit structure. To use an extreme example, suppose a 10% owner of a business dies who guaranteed that business’s debt. The bank could, if the documents so provide as they usually do, use that death as a basis to call the loan. This will undoubtedly affect the operations of the business, as well as the personal financial situation of all the other guarantors. This type of default provision is usually buried in the language of standard platform documents that most lenders are using today. Business owners should be aware of the inclusion of this provision and have a contingency plan in place for addressing it if a lender should choose to exit a credit based on the death of one of the owners.
But let’s assume for a moment that the lender does not exercise a right to call the loan. Is there any other negative consequence for the estate of the deceased guarantor? Well, in fact, there may be. Assuming that the lender will file a claim against the estate for the contingent liability represented by the guaranty, and they frequently do, the estate cannot be fully and finally administered until that guaranty has been dealt with. This may require paying the lender a certain amount of money for release of the claim, for heirs to agree to assume some responsibility for the claim, or simply keeping the estate open until the debt is paid in full through its natural amortization. Any of these consequences will be at least very inconvenient for the estate and could result in additional expense and delay. Even if the bulk of the owner’s assets have been transferred to a trust to attempt to avoid probate, the existence of a guaranty may force the opening of a probate estate. This would undercut many of the benefits sought by using a trust arrangement to simplify and streamline estate administration.
It is not my purpose to suggest that it is inappropriate to sign guaranties for these reasons. However, these consequences should be kept in mind and provided for in your business and personal planning before that guaranty is signed.