Creditor protection by csgirla


									             Creditor protection
                                                               For Small Business Owners
             If you have clients that are established business                 In fact, a study has confirmed that three-out-of-
             owners or who are entrepreneurs just starting                     four Canadian small business owners have not
             out, it’s important to advise them on the                         taken the adequate steps to protect their
             importance of developing a creditor protection                    personal assets. Financial advisors can provide
             strategy. Most business owners, officers and                      tremendous value to these business owners who
             directors don’t realize that their personal assets                are missing out on one of the easiest ways to
             are at risk for creditor claims in the event that                 protect personal assets: investments with
             something goes wrong with their business.                         insurance benefits.

             TYPES OF LIABILITY                                                THE BENEFIT OF INSURANCE
             Business owners, officers and directors can be                    Because certain investment products issued by
             personally liable for:                                            Manulife Investments are regulated under the
                Any debts for which the business owner, officer or             Insurance Act, they have the potential to protect
             director has given a personal guarantee                           personal assets from creditors in case of personal or
                                                                               professional liability, or a business failure. Creditor
                Any statutory debts such as wages and vacation
                                                                               protection is one of the valuable benefits of investing
             pay (directors are personally liable for wages to a
                                                                               through a life insurance company, and in 1996 the
             maximum six months wages for each employee owed)
                                                                               Supreme Court of Canada upheld the creditor
                Any source deductions owed to the Canada
                                                                               protection afforded to insurance
             Revenue Agency
                                                                               investments under provincial legislation.
                Goods and Services Tax and or Provincial Sales Tax
                Health and safety violations
                Environmental damage

                                    • BUSINESS CO
                       NG SUPPLIES                                 • PRINTERS
PHARMAC  ISTS • BUILDI                                RS • WRITERS
                             UTIVE COAC  HES • CATERE
              SELORS • EXEC                                    AN OFFICERS
CAREER COUN                                     HIATRISTS • LO
                           OFESSI ONALS • PSYC                                  USE
             ORS • GOLF PR                                       TRICIANS • HO
 CHIROPRACT                                          CTORS • ELEC
                            ATE TRAINE  RS • CONTRA
                RS • CORPOR                                  E ARCHITECTS
 EVENT PLANNE                                  S • LANDSCAP
                            RATO RS • JEWELER                                    ST •
               TERIOR DECO                                        • PSYCHOLOGI
  BUILDERS • IN                                      AL TRAINERS
                             NATUROPA   THS • PERSON
                NSULTANTS •                                     NICS • PRINTE
  MARRIAGE CO                                     • AUTO MECHA
                         MANAGER   S • REALTORS
         RS • PROPERTY                                           OACHES
This type of added protection is of particular interest     You can contribute to your spouse’s RSP or place
for individuals who fit the following profile:            non-registered investments in a spouse’s name to
  Business owners of any size business                    protect assets from creditor claims. If, however, there
  Professionals such as accountants, chiropractors,       is a subsequent financial difficulty, this could be
doctors, dentists, etc. These professionals could be      identified as a fraudulent conveyance (i.e. a shelter)
exposed to lawsuits against their practices               and assets could be seized

  Company directors are exposed to financial risk on      BUSINESS LIABILITY INSURANCE
behalf of the companies they represent                      Does not protect in the case of business failure:
                                                          the most common risk to personal investments
                                                          INVEST IN SEGREGATED FUNDS OR GICs
Your clients will gain comfort knowing that as long as
                                                          ISSUED BY AN INSURANCE COMPANY
their investments are made in good faith, and a
                                                            The best risk-management tool for investments.
proper beneficiary is named, they can protect their
                                                          Always invest in products that offer the potential for
hard-earned personal savings from professional
                                                          creditor protection
liability. In fact, insurance-based investments provide
an inexpensive means for your clients to protect their      Only one per cent of small businesses take
family’s wealth and provide potential growth from the     advantage of segregated funds as a risk management
underlying investment.                                    tool (63 per cent are invested directly in mutual funds)

PERSONAL ASSETS FROM                                      CLIENTS MANAGE RISK
CREDITORS                                                 1. Not all debt is created equal. Business owners
                                                          should pay statutory debt on time; directors and
INCORPORATION                                             officers can be personally liable for these debts.
  A good option if the business is larger or if the
                                                          2. Ensure your client has sufficient liability coverage,
nature of the business is at risk of litigation
                                                          e.g. director’s home and auto coverage. In the event
  A less than adequate option if personal                 of a serious accident, your clients’ personal assets
guarantees or personal collateral have been used          could be seized to pay the shortfall in insurance.
for business loans
                                                          3. Suggest your client consider moving their personal
  Professional corporations often do not offer any        assets – like their house and personal savings – to
liability protection                                      their spouse’s name. You can transfer home
SPOUSE’S NAME                                             ownership to the spouse tax-free. If the spouse is
  Only one spouse should be a director or officer. The    involved in the business, have your client consider
other can be a shareholder or employee. This will         setting up a family trust.
minimize the joint risk, and allow for more creditor
protection options for the couple
4. Ensure that your client holds their life insurance      A SPECIAL NOTE ON TAX
contracts personally (not corporately). They can name      Canada Revenue Agency (CRA) is empowered to
a “family class” beneficiary on their life insurance       collect tax debts owed to them.
contracts and list themselves as both the owner and        Case example:
the annuitant. Doing this can prevent creditors from         If a policyholder owes taxes to the CRA, then the
seizing their assets, as well as ensuring their assets     agency can issue a Requirement to Pay notice which
transfer immediately to their beneficiaries in case of     requires a life insurance company to provide money
death. It is important to remember that if a death         that would otherwise be payable to the policyholder.
benefit is left payable to your client’s estate, their     It is not a simple undertaking for the CRA to seize the
assets can get tied up in probate and may be subject       assets in an insurance contract, but it is possible and
to fees and seizure by creditors.                          does happen occasionally
5. Ensure that they receive professional tax and legal
advice on the creditor protection plan that you            NAMING A BENEFICIARY – WHAT
recommend. A creditor protection plan requires the         YOUR CLIENT NEEDS TO KNOW
expertise of several professional disciplines to ensure    Provincial legislation may prevent creditors from
the best possible results.                                 seizing the proceeds of an insurance contract, as long
6. Ensure that your client understands why it is           as either an irrevocable or “family class” beneficiary is
important to start a plan now. Once a business is in       named. In life, or after the death of the annuitant (the
trouble, it is almost impossible to establish a creditor   insured person), the assets are considered the property
protection plan. It must be done while the business is     of the beneficiary. It is therefore necessary to select a
healthy or new.                                            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.
                                        IRREVOCABLE BENEFICIARY                                            FAMILY CLASS BENEFICIARY*

  SUMMARY                             With an irrevocable beneficiary the owner may                      A family class beneficiary allows your client to
                                      not make changes to the contract without the                       retain full control over the contract.
                                      consent of the irrevocable beneficiary.

  WHO IS ELIGIBLE                     Any person can be named as an irrevocable                          In all provinces except Quebec,
                                      beneficiary – except the policyholder or                           the annuitant’s:
                                      equivalent (his/her estate or personal                             Spouse, Child, Parent, Grandchild can be
                                      representative).                                                   named as a family class beneficiary.

  WHAT IT MEANS                       If your client names an irrevocable beneficiary                    When your client names a family class
                                      on his/her investment, there is the potential for                  beneficiary, creditor protection generally
                                      creditor protection. However, changes to the                       applies. Your client is able to maintain greater
                                      contract cannot be made without the consent                        control over the policy, and may, for example,
                                      of the irrevocable beneficiary. These changes                      change the beneficiary to another family class,
                                      include: withdrawals; cashing in the contract;                     or non-family class beneficiary at any time
                                      changing beneficiary designations, or changing                     (including changing an irrevocable beneficiary
                                      ownership. Your client should also keep in mind                    or naming a trustee for minor children).
                                      that a child named as an irrevocable beneficiary                   The definition of “spouse” in some provinces
                                      is not legally able to offer consent until they                    may include common law partners. Any child
                                      reach the age of majority. If a spouse is named,                   of a common law union, however, is eligible.
                                      divorce will not revoke the designation.

INSURED INVESTMENTS                                                                           1/2 year rate bonuses and rate guarantees
AVAILABLE FROM MANULIFE                                                                       Bypass probate and estate fees

MANULIFE SEGREGATED FUNDS                                                                  TAKE ACTION
   Potential creditor protection                                                              Review Manulife Investments small business owner
   75 or 100 per cent maturity guarantee                                                   kit in its entirety
   Minimum 100 per cent death benefit guarantee                                               Familiarize yourself with products that feature
   Bypass probate and estate fees                                                          creditor protection
   Broad range of funds to choose from                                                        Order relevant marketing support materials by
                                                                                           visiting our website or by contacting your Manulife
                                                                                           Investments wholesaler
   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 more information contact your
                                                                                           Manulife Investments wholesaler or
                                                                                           visit us on the web at:
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.
MK1792E 02/06

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