Estates and Guarantees

Can cause difficult legal issues

Guarantees entered into by a person during their lifetime can create some difficult legal issues for their executor after they die.

Limiting a guarantee

The terms of most guarantees allow a guarantor to give notice; this stops further liabilities accruing. In an estate situation, this will not alter the liabilities accrued to date, however the executor who is aware that an estate is liable under a guarantee may need to issue a stop notice to protect the estate’s position to maximise the value of the estate.

This can be a difficult decision for an executor, particularly where (for example) a guarantee is important for the ongoing viability of, say, a family member’s business.  However, where the estate does not have an interest in that business, the executor may need to do this anyway as the estate’s position is the executor’s responsibility, and the interests of all beneficiaries must be prioritised, even if the decision causes dissatisfaction for one

Calling up a guarantee

Where a guarantor has died, and the guarantee is called up after their death, the estate is liable to the lender in the usual way.

In the situation where the estate is only one of several co-guarantors, the executor may need to decide whether to seek contributions from the co-guarantors. The executor may also need to take legal action to enforce payment by co-guarantors.

Where any of the co-guarantors are also beneficiaries of the estate, it may also be necessary for the executor to take advice about the extent to which any liability for contribution to the guarantee can be met by funds that the beneficiary is to receive under the terms of the will. 

Rights of contribution between co-guarantors

The default position is that co-guarantors share an equal liability to meet a common debt. Where one guarantor pays more than their fair share of the debt to the lender, they are entitled at equity to seek an equal contribution from their co-guarantors. 

Complications can arise, however, where a co-guarantor is insolvent. In that situation, the other solvent co-guarantors may have to contribute proportionally to meet the shared debt. This means that an estate might be held liable for more than its ‘fair’ share of the debt.

Co-guarantors who are also beneficiaries

The situation becomes more complex when a co-guarantor is also a beneficiary of the estate that has paid the debt. Can the executor claim contributions towards the debt paid by withholding the beneficiary’s share of that debt from their entitlement under the will? Although the court has confirmed that a beneficiary owing money to an estate cannot claim a share of their interest without first settling the debt, an executor should not automatically deduct a debt from a beneficiary’s entitlement. 

Rather, the first step will usually be for the executor to approach the relevant beneficiary first by letter and then a formal demand. If a beneficiary persistently refuses to fulfil their debt, an executor can then retain that beneficiary’s share or interest to recover their relevant contribution. The executor should then seek the approval of the High Court to deduct the beneficiary’s share of the debt from their estate entitlement.

Interests of beneficiaries take priority

Personal guarantees can create tricky issues for an executor to deal with, particularly in family situations. The estate’s position is the executor’s responsibility, and the interests of the beneficiaries of the estate must be the executor’s priority – even if it means one beneficiary is unhappy because they are affected by the executor’s decision.

While it does not commonly arise, the right of contribution is also something the executor may need to explore for the benefit of the estate as a whole and seek some advice. In some circumstances the executor may also need to go to the High Court for assistance where one beneficiary will not cooperate.

DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.