The need

Business owners often conduct their businesses through limited liability entities such as companies and close corporations so as to create a separation between business activities and personal financial affairs. In
personal estate planning, trusts play a corresponding role in this regard.

Raising finance within these entities becomes problematic, precisely because of this separation. Credit providers often require the persons behind these entities to provide a personal suretyship and this effectively removes the benefit of separation. As a result, personal assets intended for the benefit of dependants could be at risk of being used to settle these debts. This leaves dependants with only the possibility of a restitution claim against the business and it invariably affects personal estate planning negatively. There is also the risk that if the surety dies or becomes disabled, the creditor may want to call up the loan even though the principal debtor is still making repayments.

A Suretyship Protection Plan restores the separation between entity and owner or trustee. The surety’s personal financial plan for dependants avoids the detrimental impact personal guarantees cause.

The solution

Should a surety die, a Suretyship Protection Plan provides peace of mind that the business can settle business debts immediately and without the personal estate being held liable. The plan may also cover the
event of permanent disability of the surety.

The Suretyship Protection Plan offers the following specific benefits:

  • The debt covered by the suretyship agreement is settled in full.
  • The credit provider would not require a substitute surety, because the debt is settled in full.
  • The business’ liquidity is not affected and the continuity of the business is ensured.
  • The death or permanent disability of the surety does not adversely affect the general functioning and creditworthiness of the business.
  • The suretyship unduly burdens the personal estate of the surety and this concept restores the previous unburdened state of affairs:
  • The surety’s deceased estate may be wound up without unnecessary delays.
  • The surety’s personal estate is not affected due to standing in for business debts, because it is not at risk of being applied to settle business debts.
  • There is no risk that dependants may have to sell assets or borrow funds at great expense to maintain their standard of living.

Structure and implementation

A Suretyship Protection Plan is a life insurance policy that a principal debtor takes out on the life of an individual who has provided personal security for the debts of the principal debtor. The principal debtor
owns the policy and pays the premiums. At the death of the surety, the policy provides cash to the extent of the cover amount. Those funds are applied to settle the debt, thereby releasing the surety’s estate from liability for the principal debt.

The cover amount on the policy should cover the full debt, but other circumstances may dictate a lesser amount and therefore a partial settlement only. In such instances, the risks detailed above partly remain.

The principal debtor and the surety should enter into a separate agreement stating that the furnishing of the suretyship is subject to the existence of the policy and that the policy proceeds will be applied only for the purpose of settling the debt.

Under no circumstances should there be a beneficiary nomination or outright cession on the policy, especially not to the insured life. This may have an adverse effect on the income tax and estate duty status of the policy.

In a properly constructed Suretyship Protection Plan:

  • The concept is formalised by way of a clear resolution that reveals its purpose.
  • The underlying product is a non-conforming policy.
  • The cover amount provides for estate duty.