Vancouver Discretionary Trust Family Lawyers are frequently asked: what happens to the assets in a Discretionary Trust upon the breakdown of a relationship? This question was recently considered in the case of Cottrell v. Cottrell, 2022 BCSC 1607. The case went up to the BC Court of Appeal which upheld the lower court decision.
The key issue often involves whether a spouse or third party created the trust. Trusts created by a spouse that hold family property will likely be family property. Secondly, in cases where a spouse did not create the trust their contribution or control over the trust is critical to valuation and determination of whether it is family property. If you have a multi-million dollar Vancouver Discretionary Trust Family case, Contact Lorne MacLean KC and Fraser MacLean.
The Best Vancouver Discretionary Trust Family Lawyers will consider arguing for an “if and when” decision where a spouse is a beneficiary. See SCC decision of Stein in support. This was a concept used years ago which has fallen into disuse. Our high net worth Vancouver family lawyers know the rules for these types of cases.
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As a starting point, what is a Discretionary Trust? A discretionary trust is a trust that affords the Trustees discretion of when and how much of the assets held by the Trust will be distributed to the beneficiaries. These trusts allow the trustee to have absolute authority over payment of capital and income from the trust. In other words, the trustee has complete authority to decide whether to provide trust funds to the beneficiary, or to spend trust funds on their behalf. The beneficiaries of the Trust have no rights to the funds held in the Trust.
Under section 85 of the Family Law Act, a spouse’s beneficial interest in property held in a discretionary trust to which the spouse did not contribute; and that is settled by a person other than the spouse is excluded from family property. Section 84(4)(g) of the Family Law act further states that if the value of the excluded property has increased since either the relationship between the spouses began or the excluded property was acquire, whichever was the latter, that growth is family property.
These above concepts were discussed in the case of Cottrell v. Cottrell. What was important in this case was that the Court did not order the division of the exclusion because the Husband failed prove that there had been an increase in the value of the Wife’s beneficial interest in the Trust. The husband erroneously focused on the increase in value of the underlying property of the discretionary Trust- an approach the Court found was not supported by the language of the legislation.
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In Cottrell, two discretionary trust were established by the Wife’s parents – the Family Trust and the Partner Trust. The Partner Trust held as its main assets a diverse portfolio of savings and investments. The Family Trust held an interest in an incorporated company which in turn held a number of its own assets which included a valuable commercial real estate property.
The original beneficiaries of the trust were the wife’s parents, her brother and herself. After the Wife’s mother’s death, the wife and her brother were made trustees of the Family Trust and the Partner Trust. Despite being Trustees of the respective trusts, the wife and her brother were not actively engage in the management of the Trust, as that was fulfilled by the Wife’s father exclusively. At trial, the Wife argued that her beneficial interests in the trusts were not family property as it came within the requirements of section 85 (1)(f). The Husband did not dispute this, but sought to have the increase in the value of Wife’s beneficial interest in the Trust divided as that was family property. The Husband argued that the Court would be able to determine the increase in value of the Wife’s beneficial interest in the Trusts by looking to the underlying increase in value of the Trust assets. The Court rejected the Husband’s approach stating that only the increase in value of the Wife’s beneficial interest would be considered Family Property, the increase in the value of the underlying assets of the Trust did not translate to an increase in the value of the Wife’s beneficial interest as she had no way to compel a distribution or guarantee that she would receive a distribution in the future.
In summary, the factors that made the wife successful in this case was that:
- she did not settle any of the assets of the trust;
- her interest was purely discretionary; and
- she had little to no influence on the management of the trust or the distribution of the assets of the Trust
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The best vancouver family lawyers warn clients not to give up hope if they are making a claim against a spouse who has a beneficial interest in a discretionary trust created by a third party because:
[47] Before completing my consideration of this issue, however, I wish to be clear that my finding that Paul has not established that there has been an increase in value of Joanne’s beneficial interest in the Muster Trusts should not be taken as a conclusion of law that it is impossible to make a family property claim in respect of a spouse’s beneficial interest in a discretionary trust under the FLA. My finding is based on the evidence presented in this case, particularly the terms of the Muster Trusts instruments, as well as Mr. Muster and Joanne’s testimony about their intentions and expectations regarding these trusts. That evidence does not justify a conclusion that Paul is entitled to a remedy in relation to Joanne’s beneficial interest in the Muster Trusts. A different conclusion could well be reached in another case involving different trusts, trustees, beneficiaries, and spouses.
