Whether they’re established entrepreneurs or just starting out, it’s important that your business-owner clients regularly review their creditor protection strategies. Most business owners, officers and directors don’t realize their personal assets are at risk of creditor claims in the event something goes wrong with the business.
Here are 10 tips to convey to your business-owner clients:
- Consider incorporating your business if it is either large or at risk of litigation. Professional practices should carefully consider this option.
- Not all debt is created equal. Always pay your statutory debt (e.g., wages, vacation pay) on time; directors and officers can be personally liable for these debts.
- Ensure sufficient personal liability coverage (e.g. director’s home and auto coverage). In the event of a serious accident, your personal assets (e.g. home, care, boat) could be seized to pay any shortfall in insurance.
- Ensure that your spouse is outside the reach of creditors in the event anything goes wrong in the business. Directors and officers can carry liability for debts. If your spouse is an employee, or not involved in the business, you will have much more flexibility in your creditor protection plan.
- Make use of spousal RRSPs to transfer wealth to a spouse – and away from creditor risk.
- Consider moving your personal assets, such as your house and savings, to your spouse’s name. You can transfer home ownership to your spouse tax free. If your spouse is involved in the business, consider setting up a family trust.
- Hold life insurance contracts personally (not corporately). Name a “family class” beneficiary (see sidebar ) on life insurance contracts and list yourself as both the owner and the annuitant/insured. Doing so may prevent creditors from seizing the assets, as well as ensuring the assets transfer immediately to your beneficiary at the time of your death. Remember that if the death benefit is payable to your estate, your assets can get tied up in probate and may be subject to fees and seizure by creditors of your estate.
- Place your savings into investment products sold by insurance companies. A segregated fund contract or a Guaranteed Interest Contract (GIC) product purchased through an insurance company offers potential creditor protection when you name a “family class” or irrevocable beneficiary.
- Get professional tax and legal advice on a creditor protection plan. This is not a do-it-yourself plan.
- Make a plan now. Once your business is in trouble, it is almost impossible to establish a creditor protection plan. It must be done while the business is healthy or new.
Be cautious about naming an irrevocable beneficiary. Your rights as an owner become limited. Without the consent of the person you’ve named as irrevocable beneficiary, you can’t:
- change the beneficiary;
- change the ownership;
- cash in the policy; or
- assign the policy as collateral for a loan.
Naming a child as irrevocable beneficiary on an insurance contract, including an investment contract, means that the contract is effectively frozen until the child becomes an adult because children cannot legally give consent until they’ve reached the age of majority. Manulife generally recommends against naming irrevocable beneficiaries based on the limitations this designation can impose on the owner.
A note on liability
Business owners, officers and directors can be personally liable for:
- any debts they have given a personal guarantee;
- any statutory debts, such as wages and vacation pay;
- any source deductions and commodity taxes; and/or
- health and safety violations including environmental damage