What if you are still running your business at the time you suddenly die? Maybe you are the key element to the business success, whether it is a family business or not. What would be the impact on the business and your estate? The business could cease to function after your death. If the business goes under, the creditors will start looking for assets. If you are liable under a personal guarantee of a corporation, or as a director, or if you are operating an unincorporated business, the assets of your estate could be at risk.
Here are some options to consider and discuss with your professional advisors to minimize the risk of eroding your estate before you die, or having your business creditors make a claim on your estate after your death. Make sure you obtain advice from your lawyer and accountant in advance.
Incorporate Your Business
The problem with a partnership or proprietorship type of business is that, in law, you and your business are deemed to be one and the same. This means a creditor can go after your personal assets.
The alternative is to incorporate your business. In law, you and your incorporated business are deemed to be separate legal entities. To get maximum protection from your corporation, always sign all documents in the corporate name, as an “authorized signatory.”
Never Have Oral Agreements
Always make sure your business dealings are clear and put into writing to eliminate the risk of uncertainty. For example, if you died or were incapacitated, how would anyone know the details of the deal? Over time, people can innocently and honestly forget the details. Others could exploit the lack of paperwork for their own interests. If a lawsuit occurred, it is almost impossible to reconstruct and prove the facts, when there are differing and sometimes self-serving recollections of the bargain. This type of uncertainty puts your business in jeopardy and wastes a lot of time, energy and money.
Don’t Sign or Limit Personal Guarantees
There is no point in going to the effort of incorporating a company, if you nullify the personal protection by signing a personal guarantee of the corporate debts. Don’t sign personal guarantees at all, for example, to suppliers, trade creditors, landlords, etc. Alternatively, only do so for a bank if absolutely necessary, and then limit the amount of liability. Get legal advice before you sign any guarantee or other security to a lender. Remember that the marketplace is competitive. Use that knowledge as leverage when negotiating with one creditor over another.
Don’t Pledge Personal Security
Adopt a policy of not pledging any personal security, for example, your personal care, house or life insurance policy.
Transfer Property and Other Assets to Your Spouse
You can transfer the ownership of your home and other personal assets, such as your car, to your spouse. That way, assets are not in your personal name. In the event of a marital breakup, the matrimonial home is deemed to be owned 50/50 in most situations anyway. Also, under the family relations legislation of most provinces, family assets are combined for calculation purposes and then divided in half in most cases.
Be Aware of Director Liability
If you are a director of a corporation, you do have potential liability risk particularly under government legislation, e.g. workers’ compensation, employment standards, builder’s lien, GST, provincial sales tax, corporate income tax, employee deductions for EI/CPP, income tax, etc. Therefore, if you intend to be a director, re-think that option, or consider not owning any personal assets of consequence, in order to limit the personal risk.
Don’t Have Spouse as Guarantor or Director
To limit the family’s risk, you don’t want to ask your spouse to act as a director, officer, or personal guarantor of your company debt.
Don’t Have Joint Business Accounts
If you have a joint business account, and a creditor garnishees your bank account, they will seize all the funds in that account. By having separate accounts, you separate that risk.
Consider Spousal RRSPs
If your spouse is earning less than you are, you may wish to contribute to his or her RRSP, as a spousal RRSP. You get the RRSP tax deduction, but your spouse gets the money in his or her RRSP account. Therefore, if a creditor tries to collect on your RRSP with a court judgment, there will be less money available.
Consider RRSPs with Insurance Companies
If you have an RRSP, RRIF or non-registered investments with an insurance company, under certain circumstances, creditors are not able to collect on the RRSP. Check with your financial and legal advisor.
Consider Allocating CPP Primarily in Spouse’s Name
Another income splitting option, which also has the effect of putting more money in your spouse’s hands, is to ask the CPP to do a 50/50 split of your CPP pension with your spouse. You are entitled to start taking out your CPP at age 60, at a reduced amount. This approach means there is less money available for creditors from your personal income.
Lend Money to Your Corporation and Become a Secured Creditor
You could lend money as a creditor to the company, e.g. shareholder’s loan, and take back security, like any other creditor could, such as a mortgage on the company property or General Security Agreement on the assets of the business.
Shareholder’s Agreement with Buy/Sell Clause Covered by Insurance
Basically, this means that the company has insurance on your life. In the event of your death, the company has the financial resources to pay your estate the value of your shares, based on a formula set out in the shareholder’s agreement.
Designate Beneficiaries of Your Insurance Policies
By designating beneficiaries of your insurance policies, the money bypasses the will completely and is therefore not part of your estate. It goes directly to your designated beneficiaries tax-free. Your personal or business creditors can only claim from assets in your estate.
Designate Beneficiaries of Your Investments
By designating a beneficiary for your RRSPs, RRIFs and other registered retirement plans, you bypass your will and your estate. The money goes directly to the beneficiary and is unavailable to creditors.
Consider the Use of Trusts
If you set up a living trust while you are alive (inter vivos trust), it bypasses your will and therefore your estate on your death. However, this technique will not work as a means of avoiding debts that you already owe. In such cases, the provincial “fraudulent preferences” or federal bankruptcy legislation would likely come into play, and allow the courts to reverse your attempt to divert assets that would otherwise be used to pay off your creditors.
In summary, creditors can only make a claim to the assets that are in your estate at the time of your death. By utilizing strategic legal and tax planning, you can minimize the value of the assets in the estate available to creditors. It is critical that you obtain strategic legal advice in advance regarding the unique features of your business.
