Family trusts are common estate and tax planning devices. There is often the mistaken assumption that a spouse’s interest in the capital from a trust set up by his or her parents or family member is not a family asset that will be shared with the other spouse although the income from that trust can be considered in determining spousal and child support. This is false. A spouse’s interest in a trust may in fact be a family asset providing it can be established that there is a common intention between both parties that the trust would provide for the family’s future financial security.
Bauman J. succinctly summarized the pertinent principles in this area of law in the recent case of M. (H.R.) [H.R.M.] v. B.(D.M.)[D.M.B.] 2004 BCSC 147 at paragraph 146 of his reasons as follows:
• A contingent interest in a discretionary trust can be a family asset”;
• in determining whether the trust was ordinarily used for a family purpose, that is in the customary mode of life of the family concerned,” the fact that it is income that is used, not capital, is a factor to be considered, but it is not determinative;
‚Ä¢ presently holding assets, or an interest therein (whether contingent or vested), to secure the family’s future, to provide financial security for the family, is a family purpose provided there is evidence to support such a conclusion beyond merely talk or thought about such a possibility.
The first of these principles is significant as a contingent interest is not a definite’ interest in the way that a vested interest. A vested interest is one where the interest will become the beneficiaries at a certain defined time, such as upon reaching a certain age. A contingent interest is one that depends upon the happening of certain events which may or may not occur at an unspecified time in the future before the interest belongs to the beneficiary. Similarly a discretionary trust is one where the trustees, as the name implies, have a large degree of discretion about how the pay out income to income beneficiaries and how to manage the capital. Therefore, a contingent interest in a discretionary trust can be described as very uncertain and it is therefore conceptually difficult to determine how it can be a family asset, that is used for an ordinary family purpose’ if the spouses don’t even know how much it is or what its worth. However, the contingent interest in a discretionary trust in M. (H.R.) [H.R.M.] v. B.(D.M.)[D.M.B.] was found to be a family asset as it was found that the parties relied upon the trust. They received a significant amount of income from it each year and the husband, who was the beneficiary to the trust set up by his parents, pursued relatively unremunerative employment in light of the fact that the parties relied on the trust for their future security and not upon his employment.
The second factor is important as in many cases a trust has found to be a family asset in light of the fact that there has been a draw upon the capital as opposed to simply receiving and using income from dividends. There was never a draw upon the capital from the trust in M. (H.R.) [H.R.M.] v. B.(D.M.)[D.M.B.], rather the parties’ only used income received from dividends to meet their expenses and the expenses of their daughter. In fact, the wife had little knowledge of the workings of the trust before the separation but the court found that was not determinative. The simple fact that the husband stressed that the couple had no worries and indicated that when mom and dad pass I will be millionaire” coupled with the fact that they agreed that the husband would pursue unremunerative ventures and employment and the wife would not work outside showed a strong reliance on the trust for their financial security. This was found to be enough to make it a family asset.
The third of these principles indicates that dreaming or pondering the possibility of what life would be like upon receipt of the capital from the trust is not enough. Again that is why it is important that there was objective evidence that the parties actually relied upon the income from the trust and the existence of the trust itself. In M. (H.R.) [H.R.M.] v. B.(D.M.)[D.M.B.] that reliance was the fact that neither party considered it necessary for one or both of them to pursue highly remunerative employment and in a similar case called Lotzkar/… that reliance was established by investing in a highly speculative venture which they could only afford to do because their reliance on the inheritance for their future security.
The division of trust assets is complex and a family law specialist together with a trust specialist and a certified business valuator will all need to be involved to properly deal with a division of these assets. Interestingly, there is a divergence in the case law on whether trusts are or are not family assets and there is as of the writing of this article no appellate authority on the point.
