Lenders seeking to bolster the odds of repayment from business borrowers will often seek a personal guaranty of payment from the business borrower’s stockholders or members. These guaranties expose the guarantor’s personal assets to the long arm of the debt collector in the event the borrower fails to pay their debt. When obtaining a personal guaranty, due diligence dictates that the lender should evaluate how the potential guarantor holds his or her assets. Are those assets held in the guarantor’s name alone, jointly with another such that the asset may not be collectable absent a guaranty from the joint owner, or are they titled in a trust established by the guarantor or of which the guarantor may be a beneficiary?
In the event the guarantor’s assets are titled in the guarantor’s individual name, the lender very simply obtains a guaranty from the individual guarantor. Included in that guaranty, among other provisions intended to preserve the guarantor’s assets for the benefit of the Lender, is typically a prohibition on making the assets joint with another, at least absent written approval from the lender. If the guarantor would like to preserve the ability to transfer his or her assets to a revocable trust, or if at the time the guaranty is sought the guarantor’s assets are already in the guarantor’s revocable trust, then a guaranty can be reasonably accommodated. In the first instance, the guaranty can permit the guarantor to transfer his or her assets to a revocable trust settled by the guarantor. In the second instance, the guaranty should be given by the guarantor individually, and as trustee of his or her revocable trust.
Revocable trusts settled by the guarantor are not insulated from the lender’s collection. A common misconception is that a trust protects an individual’s assets from his or her creditors. Michigan law makes it clear that during the lifetime of the settlor, the property held in the settlor’s revocable trust is subject to the claims of the settlor’s creditors; such property remains so exposed to the settlor’s creditors as long as the trust was revocable as of the date of the settlor’s death.
Unlike revocable trusts, lenders must be careful when they encounter irrevocable trusts—trusts that are not revocable or modifiable by the settlor during the settlor’s life and over which the settlor may have little to no administrative control or ability to demand a distribution. If your guarantor is the settlor of such an irrevocable trust, or is simply a beneficiary of such a trust, it is more likely than not that the assets in such an irrevocable trust will not be available to you pursuant to a guaranty from the individual alone. A guaranty from the trust will be needed to reach its assets—if the terms of the trust even permit its trustee to provide a guaranty.
New under Michigan law are creditor protection trusts established pursuant to Michigan’s Qualified Dispositions in Trust Act (the “Act”). These irrevocable trusts have the ability to absolutely insulate assets held within them from a settlor’s creditors, an obvious issue for lenders. To facilitate a lender’s willingness to make a loan, which might otherwise be denied if the lender is unable to reach a guarantor’s assets, creditors are permitted to impose certain conditions on the transfer of assets to such asset protection trusts. Those conditions, which may include requirements (i) that the settlor disclose to the lender any transfer of assets to the trust; (ii) that no transfer to the trust may be made without lender approval, or such other lender terms, must be set forth in a written agreement between the settlor and lender. Violations of such conditions can result in a loss of protection against a potential lender claim for the assets wrongfully transferred. The wrongfully transferred assets may still be protected from other of the guarantor’s creditors.
If you are a lender evaluating your security in anticipation of making a loan, or available options in the case of a problem loan ahead of making a claim on a guaranty, or if you are a potential guarantor who wishes to provide security for a lender to encourage its lending to your borrower while protecting your assets as to other creditors, please don’t hesitate to contact the banking and creditor’s rights attorneys at Kreis Enderle to discuss financing security structures which can meet your needs.
 Lenders must be mindful not to simply demand the guaranty of a spouse who has no direct ownership in the business borrower—doing so could trigger a violation of the Equal Credit Opportunity Act.
 A revocable trust is one that is subject to revocation or modification/revision by the settlor (the person who creates a trust).
 Such trusts have been available for some time under the laws of other states including Alaska and Delaware. Recent bankruptcy decisions have called into question whether a resident of a state not permitting such asset protection trusts can obtain the benefits of another state’s asset protection laws simply by establishing a trust under that jurisdiction.
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