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The Problem in Valuing BC Discretionary Trusts

The Problem with Valuing BC Discretionary Trusts has bedeviled lawyers for decades and there is a recent trend toward assigning zero value to an ex-spouse’s beneficial interest in third party created trusts. Family lawyers for the non-beneficiary spouse will need to resort to the age old if and when approach in dealing with cases of third party discretionary trusts. Our lawyers suggest the SCC decision in Stein dealing with the sharing of a potential but unknown tax liability could support this approach in modern cases to solve the problem in valuing BC discretionary trusts.

The Problem In Valuing BC Discretionary Trusts tel:1-877-602-9900

Third party created discretionary trusts pose particular problems in family law support and family property division cases. In today’s blog by founding partner, Lorne MacLean, KC we learn there is a huge difference in valuing and dividing discretionary trusts on marriage breakdown depending on whether a spouse or a third party such as a spouse’s parent or grandparent created the trust. The difference comes down to the level of control of the beneficiary to enforce distributions to them out of the trust.  Our Family Law Act requires that the value of family property must be based on its fair market value. This raises serious issues for claims made by the non-beneficiary spouse in discretionary trust interest cases when the trust was not set up or controlled by the ex-spouse.

In the Supreme Court of Canada’s decision in  S.A. v. Metro Vancouver Housing our highest court ( other courts must follow their decisions) held that a discretionary interest in a third party trust had no value.

“the trustee is given ultimate discretion with respect to payments out of the trust to the person with disabilities for whom the trust was settled, the effect being that this person cannot compel the trustee to make payments to him or her, and is prevented from unilaterally collapsing the trust. As a result, A has no enforceable right to receive any of the trust’s income or capital. Her interest in the trust is akin to a mere hope that some or all of its property will be distributed to her at some point in the future.”

Under the BC Family Law Act the starting “value” (or no value) of a beneficiary’s third party created trust interest is not shared and only the gain in the beneficial interest (not property) is, so if there is no value for the beneficiary’s interest in a discretionary trust as the nature of the interest is speculative, uncertain, and a mere promise, it follows that there can be no increase in value in a discretionary trust interest.  

Third Party Created Discretionary Trusts 1-877-602-9900

The Problem in Valuing BC Discretionary Trusts
Lorne MacLean, QC founder of MacLean Law

A blockbuster new BC case builds upon recent BC Appeal Court and Supreme Court of Canada decisions in concluding that a discretionary trust interest in trusts created by a third party in favour of one of the separated spouses has no value. The degree of control by the beneficiary in the discretionary trust is a critical factor. Beneficiaries with no influence or control over the trust are forced to depend solely on the discretion of a trustee to decide what if any payment to the beneficiary may occur.  Traditional valuation principles say this discretionary trust interest trust has no fair market value. Simply put no one would pay to buy the beneficiary’s interest when there is no guarantee they would ever get a penny from the trust. In family property division cases an interest in a discretionary trust may be relevant as a source of income for deciding what if any spousal support and what amount of child support should be paid by a person who has an interest in a third party discretionary trust. Further, the interest may have a value to be divided in family property division disputes. So what are the rules?

The Problem In Valuing BC Discretionary Trusts – Factors 1-877-602-9900

In Cottrell v Cottrell2022 BCSC 1607, the court concluded that since Paul was unable to value the increase in Joanne’s beneficiary interest in the 2  third party created discretionary trusts, he was not entitled to any share of the beneficial interst of his ex-wife. However, the court acknowledged that it is possible that there may be a material change in circumstances if or when Joanne obtains assets from the Muster Trusts. Should this occur, the court acknowledged Paul’s statutory right to apply for a variation of his spousal support obligation.

At paragraph 38 the court found the wife had not created the trust her parents had. At paragraphs 39-40 the court noted the increase of the beneficial interest as opposed to the value of the property in the trust was the “family property” to be divided.

The Court then stated the law:

 [41]         However, it is important to stress that, when read conjunctively, ss. 84(2)(g) and 85(1)(f) of the FLA provide only that the increase in value of the spouse’s beneficial interest in property held in a discretionary trust is family property. These provisions do not state that an increase in the value of the actual property held in a discretionary trust is “family property”. This is an important distinction that must be considered and respected.

[42]         Accordingly, the fundamental question to be determined is whether Joanne’s beneficial interest in the discretionary Muster Trusts has increased in value since Joanne acquired her interest on September 14, 2010 (in the case of the Family Trust) and on January 5, 2011 (in the case of the Partner Trust). Given that Paul is the party asserting a claim in respect of this alleged family property, which Joanne opposes, it is Paul that bears the burden of establishing that there has been such an increase in value.

[43]         On my assessment of the evidence presented, I am not satisfied that Paul has met this burden. In particular, I agree with the submissions of Joanne’s counsel that the uncertain nature of Joanne’s contingent beneficial interest in the Muster Trusts is such that it cannot be said that, at the time of the trial, there has been an “increase in value” of this interest. This uncertainty stems from the fact that Joanne has never had the actual or even an apparent ability to compel a distribution of the Muster Trusts, and has no reliable assurance regarding the specific extent to which she may receive such a distribution in the future. In these circumstances, the Court cannot find that Joanne’s beneficial interest in the property held in the Muster Trusts is greater now than it was when the trusts were settled. In the absence of such a finding, there is no “increase in value of excluded property” to which a s. 84(2)(g) FLA claim can be asserted. Paul’s request for a remedy in relation to such a claim must therefore be dismissed.

[44]         I have reached this conclusion notwithstanding Paul’s attempt to value Joanne’s interest in the Muster Trusts. Leaving aside my significant concerns about its reliability given the limited scope of the evidence tendered and the lack of a valuation opinion from a qualified expert assessor, Paul’s estimate relates to the property held in the discretionary trusts, not to Joanne’s beneficial interest in that property. As such, even if I had been inclined to accept his estimated values of the trust assets, they do not show that there has been an actual increase in the value of Joanne’s beneficial interest in these assets, which is all that can be claimed pursuant to ss. 84(2)(g) and 85(1)(f) of the FLA.

[45]         I am also fortified in my conclusion by the academic commentary of Carmen S. Thériault, Q.C in a paper titled “WESA, Trusts and Family Law” that was prepared for the Continuing Legal Education Society of British Columbia’s 2015 Family Law Conference. This text contains a discussion of the 2014 legislative amendments to the FLA that modified ss. 84 and 85 to address concerns with their original drafting. Prior to the amendments, those provisions indicated that the actual property held in a discretionary trust was excluded property, and that any increase in its value was family property. Ms. Thériault noted at pp. 4.1.8 and 4.1.9 of her paper that the legislative fix that was ultimately adopted was to specify that ss. 84 and 85 of the FLA apply to the beneficial interest in discretionary trust property, and not to the property itself that is held within a discretionary trust:

The Problem In Valuing BC Discretionary Trusts – UNFAIRNESS

There may be unfairness in paying the non-beneficiary spouse a huge sum “up front” based on a notional value of the beneficiary’s discretionary interest from a trust they have no control over for something the beneficiary may never receive anything of. For example giving one spouse the entire family home and the beneficiary spouse an uncertain trust share they can’t control receipt of.

Cottrell  relied on this key argument:

Another concern raised was that a non-beneficiary spouse could be given a definite entitlement to half of the growth in the value of the discretionary trust property, even though the actual beneficiary spouse’s entitlement would still be dependent on the exercise of discretion by the trustees in his or her favour, something that might or might not occur and over which the beneficiary spouse would have no control.

If you have questions concerning The Problem In Valuing BC Discretionary Trusts, contact our high net worth divorce lawyers at any of our offices across BC to get the guidance you need.