Creditor protection
For Small Business Owners
If you have clients that are established business owners or who are entrepreneurs just starting out, it’s important to advise them on the importance of developing a creditor protection strategy. Most business owners, officers and directors don’t realize that their personal assets are at risk for creditor claims in the event that something goes wrong with their business. In fact, a study has confirmed that three-out-offour Canadian small business owners have not taken the adequate steps to protect their personal assets. Financial advisors can provide tremendous value to these business owners who are missing out on one of the easiest ways to protect personal assets: investments with insurance benefits.
TYPES OF LIABILITY
Business owners, officers and directors can be personally liable for: Any debts for which the business owner, officer or director has given a personal guarantee Any statutory debts such as wages and vacation pay (directors are personally liable for wages to a maximum six months wages for each employee owed) Any source deductions owed to the Canada Revenue Agency Goods and Services Tax and or Provincial Sales Tax Health and safety violations Environmental damage
THE BENEFIT OF INSURANCE
Because certain investment products issued by Manulife Investments are regulated under the Insurance Act, they have the potential to protect personal assets from creditors in case of personal or professional liability, or a business failure. Creditor protection is one of the valuable benefits of investing through a life insurance company, and in 1996 the Supreme Court of Canada upheld the creditor protection afforded to insurance investments under provincial legislation.
A • BUSINESS CO NG SUPPLIES • PRINTERS ISTS • BUILDI PHARMAC RS • WRITERS HES • CATERE UTIVE COAC •• SELORS • EXEC AN OFFICERS CAREER COUN HIATRISTS • LO ONALS • PSYC OFESSI USE ORS • GOLF PR TRICIANS • HO CHIROPRACT CTORS • ELEC RS • CONTRA ATE TRAINE • RS • CORPOR E ARCHITECTS EVENT PLANNE S • LANDSCAP RS • JEWELER RATO ST • TERIOR DECO • PSYCHOLOGI BUILDERS • IN AL TRAINERS THS • PERSON NATUROPA R NSULTANTS • NICS • PRINTE MARRIAGE CO • AUTO MECHA S • REALTORS MANAGER OACHES RS • PROPERTY
This type of added protection is of particular interest for individuals who fit the following profile: Business owners of any size business Professionals such as accountants, chiropractors, doctors, dentists, etc. These professionals could be exposed to lawsuits against their practices Company directors are exposed to financial risk on behalf of the companies they represent
You can contribute to your spouse’s RSP or place non-registered investments in a spouse’s name to protect assets from creditor claims. If, however, there is a subsequent financial difficulty, this could be identified as a fraudulent conveyance (i.e. a shelter) and assets could be seized
BUSINESS LIABILITY INSURANCE
Does not protect in the case of business failure: the most common risk to personal investments
HOW YOUR CLIENTS WILL BENEFIT
Your clients will gain comfort knowing that as long as their investments are made in good faith, and a proper beneficiary is named, they can protect their hard-earned personal savings from professional liability. In fact, insurance-based investments provide an inexpensive means for your clients to protect their family’s wealth and provide potential growth from the underlying investment.
INVEST IN SEGREGATED FUNDS OR GICs ISSUED BY AN INSURANCE COMPANY
The best risk-management tool for investments. Always invest in products that offer the potential for creditor protection Only one per cent of small businesses take advantage of segregated funds as a risk management tool (63 per cent are invested directly in mutual funds)
STRATEGIES FOR PROTECTING PERSONAL ASSETS FROM CREDITORS
INCORPORATION
A good option if the business is larger or if the nature of the business is at risk of litigation A less than adequate option if personal guarantees or personal collateral have been used for business loans Professional corporations often do not offer any liability protection
TIPS THAT CAN HELP YOUR CLIENTS MANAGE RISK 1. Not all debt is created equal. Business owners
should pay statutory debt on time; directors and officers can be personally liable for these debts.
2. Ensure your client has sufficient liability coverage,
e.g. director’s home and auto coverage. In the event of a serious accident, your clients’ personal assets could be seized to pay the shortfall in insurance.
3. Suggest your client consider moving their personal
assets – like their house and personal savings – to their spouse’s name. You can transfer home ownership to the spouse tax-free. If the spouse is involved in the business, have your client consider setting up a family trust.
SPOUSE’S NAME
Only one spouse should be a director or officer. The other can be a shareholder or employee. This will minimize the joint risk, and allow for more creditor protection options for the couple
4. Ensure that your client holds their life insurance
contracts personally (not corporately). They can name a “family class” beneficiary on their life insurance contracts and list themselves as both the owner and the annuitant. Doing this can prevent creditors from seizing their assets, as well as ensuring their assets transfer immediately to their beneficiaries in case of death. It is important to remember that if a death benefit is left payable to your client’s estate, their assets can get tied up in probate and may be subject to fees and seizure by creditors.
A SPECIAL NOTE ON TAX
Canada Revenue Agency (CRA) is empowered to collect tax debts owed to them. Case example: If a policyholder owes taxes to the CRA, then the agency can issue a Requirement to Pay notice which requires a life insurance company to provide money that would otherwise be payable to the policyholder. It is not a simple undertaking for the CRA to seize the assets in an insurance contract, but it is possible and does happen occasionally
5. Ensure that they receive professional tax and legal
advice on the creditor protection plan that you recommend. A creditor protection plan requires the expertise of several professional disciplines to ensure the best possible results.
NAMING A BENEFICIARY – WHAT YOUR CLIENT NEEDS TO KNOW
Provincial legislation may prevent creditors from seizing the proceeds of an insurance contract, as long as either an irrevocable or “family class” beneficiary is named. In life, or after the death of the annuitant (the insured person), the assets are considered the property of the beneficiary. It is therefore necessary to select a beneficiary who is risk-free from creditor claims. Here is a quick synopsis of the pros and cons of choosing irrevocable and family class. Your business owner clients should be made aware of these details to make an informed beneficiary decision.
6. Ensure that your client understands why it is
important to start a plan now. Once a 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.
IRREVOCABLE BENEFICIARY
SUMMARY With an irrevocable beneficiary the owner may not make changes to the contract without the consent of the irrevocable beneficiary. WHO IS ELIGIBLE Any person can be named as an irrevocable beneficiary – except the policyholder or equivalent (his/her estate or personal representative). WHAT IT MEANS If your client names an irrevocable beneficiary on his/her investment, there is the potential for creditor protection. However, changes to the contract cannot be made without the consent of the irrevocable beneficiary. These changes include: withdrawals; cashing in the contract; changing beneficiary designations, or changing ownership. Your client should also keep in mind that a child named as an irrevocable beneficiary is not legally able to offer consent until they reach the age of majority. If a spouse is named, divorce will not revoke the designation.
FAMILY CLASS BENEFICIARY*
A family class beneficiary allows your client to retain full control over the contract.
In all provinces except Quebec, the annuitant’s: Spouse, Child, Parent, Grandchild can be named as a family class beneficiary. When your client names a family class beneficiary, creditor protection generally applies. Your client is able to maintain greater control over the policy, and may, for example, change the beneficiary to another family class, or non-family class beneficiary at any time (including changing an irrevocable beneficiary or naming a trustee for minor children). The definition of “spouse” in some provinces may include common law partners. Any child of a common law union, however, is eligible.
INSURED INVESTMENTS AVAILABLE FROM MANULIFE
MANULIFE SEGREGATED FUNDS
Potential creditor protection 75 or 100 per cent maturity guarantee Minimum 100 per cent death benefit guarantee Bypass probate and estate fees Broad range of funds to choose from
1/2 year rate bonuses and rate guarantees Bypass probate and estate fees
TAKE ACTION
Review Manulife Investments small business owner kit in its entirety Familiarize yourself with products that feature creditor protection Order relevant marketing support materials by visiting our website or by contacting your Manulife Investments wholesaler
MANULIFE INVESTMENT GICS
Potential creditor protection Competitive rates
*The Supreme Court of Canada decision in the case of BNS and Thibault may have a significant impact on creditor protection in Quebec. At the time of printing, the full impact of this court decision had yet to be determined. FOR BROKER / DEALER USE ONLY
The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. The Manufacturers Life Insurance Company (Manulife Financial) is the issuer and guarantor of contracts containing Manulife segregated funds and the Manulife Investments Guaranteed Interest Contract (GIC). Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial and its subsidiaries in Canada. Manulife and the block design, and MIX are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation.
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For more information contact your Manulife Investments wholesaler or visit us on the web at: www.manulifeinvestments.ca