Lorne N. MacLean, QC, heads our BC beneficial interest in a discretionary trust and family trust property division legal department across BC. MacLean and his team of top rated*
family property division lawyers (selected once again as Vancouver’s Best Family Law firm), have been closely watching the new Family Law Act family trust property division and beneficial interest in a discretionary trust interest valuation case law develop under the new Family Law Act.
Division Of Discretionary Trust Interests Is Complex And It Pays To Hire Someone Experienced
One thing all BC family lawyers agree on is that, the division of a spouse’s family trust interest and of their beneficial interest in a discretionary trust plus dealing with the valuation of their trust interest coupled with a balancing of the rights of competing beneficiaries will be complicated. Ensure right from the start that your lawyer has experience in this area particularly when the money stakes are routinely huge. You can rest assured Lorne N. MacLean, QC has the experience you need when millions of dollars are at stake.
Our Team Has The Experience Dealing With A Beneficial Interest In A Discretionary Trust
Lorne MacLean, QC successfully obtained a declaration that a contingent interest in a $15,000,000 family trust was a family asset under our old family Relations Act in the case of Fulton v. Gunn 2008 BCSC 1159. MacLean has also educated BC lawyers and written articles on family trust division and valuation issues related to a contingent interest under a discretionary trust. He knows the arguments that can be made on both sides of this complex issue.
Some Say A Beneficial Interest In A Discretionary Trust Is Not Even Property!
Some trust lawyers argue that a beneficial interest in a discretionary trust is not “family property” because no one would buy it and if it is property it is worthless as no buyer would pay to buy a beneficial trust interest in property they could not compel be paid out to them.
Sections 84 and 85 of our Family Law Act set out the scheme for how the gain in value of a spouse’s interest in a discretionary trust is to be shared:
85 (1) The following is excluded from family property:
(f) a spouse’s beneficial interest in property held in a discretionary trust
(i) to which the spouse did not contribute, and
(ii) that is settled by a person other than the spouse;
But section 84 (2) says the gain on a spouse’s beneficial interest in property held in a discretionary trust is shared:
(g) the amount by which the value of excluded property has increased since the later of the date
(i) the relationship between the spouses began, or
(ii) the excluded property was acquired.
Saskatchewan’s Highest Court Provides Guidance
The recent Saskatchewan Court of Appeal decision in Grosse v Grosse, 2015 SKCA 68 (CanLII) applying similar language to our new Act found a beneficial interest in a discretionary trust to be family property and held that:
[24] Subparagraph (a) refers to, among other things, “an interest in a trust”. A spouse may have an interest in a trust as either a beneficiary or a trustee. Legal title to trust property rests with the trustee, while the objects of the trust (i.e., its beneficiaries) hold beneficial ownership of its property. Key to determining whether a spouse has an “interest” in a trust is the trust agreement. That agreement should set out what constitutes the corpus of the trust, who the beneficiaries are, how the income and capital of the trust is to be distributed, who will administer the trust (the trustee(s)), what powers the trustee will have, how the trust can be dissolved, and what will happen should the trust fail. A spouse’s “interest in a trust”, may be contingent or vested. Pursuant to subparagraph (a), it is the spouse’s “interest in a trust”, not the property, income or corpus of the trust, that constitutes family property and must be valued for division purposes.”
Saskatchewan Court of Appeal Values Beneficial Interest in Trust Based on Asset Value Less Disposition Costs
The Saskatchewan Court of Appeal relied on several BC cases dealing with discretionary trusts and held that the “if and when” order made by the trial judge was inherently unfair and defeated the equitable division of family property contemplated by the Act. The value of the trust was found to be the fair market value of its assets as of the date of adjudication (after taking into account the costs of distribution and any income tax liability) and it was ordered to be divided equally between the parties. However, in this case the husband was the trustee which made the case much easier to deal with than a trust created by a third party.
What Will BC Do With A Beneficial Interest In a Discretionary Trust?
To date no BC case has dealt with the thorny issue of family trust property division under the new FLA. Our firm looks forward to helping establish the law in BC on family trust property division and valuations of spouse’s interests in discretionary trusts.
In Stober v. Stober 2015 BCSC 2505 the parties argued over whether an expert could be appointed to deal with a beneficial interest in a discretionary trust on a case headed for trial in BC and their lawyers argued different courts have applied different approaches and that no beneficial interest in a discretionary trust decision has occurred yet in BC.
[2] One of the issues in the case is whether the parties’ respective interests in a family trust known as the Mark Stober Family Trust (the “Trust”) are family property within the meaning of the Family Law Act, S.B.C. 2011, c. 25 [FLA]. The claimant says yes and the respondent says no.
[3] By way of this application, the respondent seeks an order for a joint valuation of the parties’ respective interests in the Trust. He submits that if the court determines that the parties’ interests in the Trust are family property, the court will need evidence as to the value of those interests. …
[30] The respondent submits that fair market value is the starting point for determining the value of family property as set out in s. 87 of the FLA. He makes the point that the family property in issue here, assuming the court finds it to in fact be family property, is the parties’ beneficial interest in the Trust, and not the Trust property itself.
[31] The respondent submits …Mr. Spence’s opinion will inform and assist the trial judge in his or her assessment and that it will be up to the trial judge to accept or reject that opinion and, if accepted, to determine the weight to be attached to it.
[32] The claimant notes, again, that there is no existing judicial consideration of the relevant provisions of the FLA and correspondingly, no established approach or methodology to valuing beneficial interests in discretionary trusts. She cites a number of cases from other jurisdictions where the courts have taken different approaches. She also notes that there has been considerable academic commentary and debate on this issue and she refers, as an example, to Freedman and White, Financial Principles of Family Law, where the authors identify a number of factors that may be relevant to the valuation of an interest in a discretionary trust as follows:
- a) the circumstances of the owner-spouse, the trust, and the other beneficiaries;
- b) the number and ages of the various beneficiaries;
- c) the obligations of the trustee(s) under the terms of the trust;
- d) the owner-spouse’s overall estate planning;
- e) the trustee’s possible plans for the underlying assets of the trust;
- f) the obligation of the trustee(s) to maintain an even hand when dealing with all beneficiaries;
- g) the fair market value of the underlying assets of the trust; and
- h) the expectations and legal rights of the other beneficiaries (at 28-13-28-14).
[33] She says that all of these factors are ones that the trial judge will have to consider and determine based on evidence adduced at trial and that, as such, it is impossible to provide the expert with a set of factual assumptions that will enable him to produce a useful or meaningful report.
[34] The claimant submits further that the valuation of family property under the FLA involves issues of statutory interpretation and, with respect to the parties’ beneficial interests in the Trust, the application of principles of trust law. She submits that the valuator cannot render the opinion sought without straying improperly into issues of law….
[35] One other key point made by the claimant is that s. 87 of the FLA does not mandate that fair market value must be the value used when valuing family property. Rather, it simply provides that the value of family property must be based on fair market value. She submits that it will be open to the trial judge to adopt a different approach to value which, in fact, is quite likely given the absence of a market for a beneficial interest in a wholly discretionary trust. For that reason, she submits that an opinion on the fair market value of the beneficial interests will be of no assistance.
[36] In coming to a decision on the application, I start with the observation that valuation evidence is regularly accepted in this and other courts as proper expert opinion evidence. The rationale underlying the acceptance of such evidence is that the principles of valuation and the methodologies employed are generally beyond the normal experience and knowledge of trial judges.
[37] In many cases in which such evidence is adduced, for example business disputes or personal injury claims, the governing principles are well known and the valuation occurs within a well-established context. For example, the experts will apply Generally Accepted Accounting Principles and statutory discount rates.
[38] The challenge in this case, as submitted by the claimant, is that the principles and methodologies are not well-known or established. There is no clear jurisprudence that guides the court or the expert in approaching the issue of the value of the interest in issue. It is not clear to me that the concept of fair market value, which is the central question to be posed to Mr. Spence, even has any meaning or application to beneficial interests in a discretionary trust, again, given the likely absence of any market for such interests. Frankly, that may, in fact, be Mr. Spence’s response when the question is posed to him. We do not know.
[39] However, what we do know is that while s. 87 of the FLA leaves open the possibility that a value other than fair market value will be used when ascertaining and dividing family property, it nonetheless dictates that the value must be based on fair market value. Thus, when valuing family property for the purposes of division, the court must start with the fair market value and then go from there. In order to do so, the court requires evidence of fair market value or, as the case may be, evidence that there is no fair market value for a particular type of property.
[40] In my view, that evidence is properly obtained through the expert opinion sought by the respondent.
[45] I would add that, not surprisingly, the majority of cases cited by the parties involve circumstances in which an expert report was prepared and then the court made a determination of admissibility. That is because, except in very rare cases, it is necessary for the trial judge to actually see the report and accompanying opinion in order to determine if it meets the threshold test for admissibility.
Conclusion
[46] In summary, I find that it is appropriate that Mr. Spence be asked for his expert opinion as to the fair market value of the beneficial interests of Kimberly Stober and Mark Stober in the Trust property of the Mark Stober Family Trust. The parties will share equally in the cost of obtaining the opinion without prejudice to their right to argue at a later date that the costs were unnecessary or should be allocated differently.
We would be honoured to help you and to further the law in British Columbia on how to value and divide a spouse’s beneficial interest in a discretionary trust just as we helped set the law on child custody and support in the leading cases of Young and Leskun in the Supreme Court of Canada. Call us across BC at 1-877-602-9900 today.
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