Trusts as Family Assets Under the Family Relations Act

Trusts are becoming big family assets and are covered under the family relations act

Your child, Isabelle, married Eli five years ago. Unfortunately, the marriage was unsuccessful and Eli and Isabelle are presently going through the process of separation and divorce. Eli is advancing a claim under matrimonial law against a trust, which you had set up for the benefit of Isabelle. You are very concerned because your family had designed this trust solely for Isabelle and did not intend for Eli to receive any benefit from the trust. How could this situation have been avoided?

When married spouses separate, the Family Relations Act (the “Act”) is the legislation in British Columbia which governs property division. The Act provides that assets used for a family purpose are subject to an equal division between the spouses. Section 58(3) of the Act provides that an interest in a trust can be a family asset if it is used for a family purpose, and thus, subject to division under the Act.

How a Court will determine if an asset was used for a family purpose will vary depending on the circumstances.

Consider the following examples:

During the marriage, Isabelle and Eli decided not to contribute to an RRSP because they discussed the fact that the trust was going to provide for them upon their retirement. This could constitute “use” of the trust for a family purpose.

During the marriage, Eli engaged in risky investing behavior which was condoned by Isabelle because both spouses believed that their finances were secure because of the trust. This could constitute “use” of the trust for a family purpose.

During the marriage, Isabelle borrowed money from the trust in order to purchase the family home. This could constitute “use” of the trust for a family purpose.

During the marriage, Isabelle received $2,000 per month from the trust and placed this into her joint bank account with Eli. The funds were then used to pay the mortgage and the monthly bills. This could also constitute “use” of the trust for a family purpose.

All of these examples can result in a determination that Eli is entitled to a share in Isabelle’s interest in the trust.

There are various types of trusts that can be created. A trust typically has individuals assigned to be “trustees.” A trustee is an individual in charge of making decisions regarding the trust such as disbursement of funds or where to invest the trust’s assets. The type of trust could have an impact on a Court’s determination of whether the trust will be a family asset.

The following types of trusts KDYH been found to be family assets:

1. A fixed interest trust. This type of trust is where the beneficiary spouse is going to receive a specified amount or portion of the trust property. An example of this type of trust would be where Isabelle is to receive, lets say, $50,000 from the trust.
2. A discretionary interest trust. This type of trust is where the beneficiary spouse only receives something upon the exercise of discretion from the trustee. An example of this type of trust would be when Isabelle requires the trustee’s permission to receive $50,000 from the trust.

3. A contingent interest trust. This type of trust is where the beneficiary spouse will receive property after a specific event occurs. An example of this type of trust would be when Isabelle receives $50,000 upon graduation from University.

4. A fixed, subject to divestment trust. This type of trust gives the beneficiary spouse a share when an individual passes away. An example of this type of trust is when Isabelle is entitled to $50,000 upon the death of her parents.

5. A discretionary and contingent trust. This type of trust gives the beneficiary spouse a share upon the happening of an event and subject to the consent of the trustee. An example of this type of trust is where Isabelle is eligible to receive an amount determined by the trustee after 10 years have elapsed.

There are steps that can be taken to minimize the risk that the trust will be found to be a family asset. The foundation starts with the trust itself. The best practice is to consult a lawyer who is knowledgeable in the creation of trusts to ensure that the trust has been properly constructed. This makes it more difficult for the Court to attribute a value to the interest, and limits the Court’s ability to award an interest because payment is reliant on the trustee granting permission.

There are several also steps that can be taken which may assist the beneficiary in defending a claim that the trust is a family asset. To ensure that you are adequately protected, you should consult one of our experienced family law lawyers at Baker Newby LLP who can assist you in minimizing your risk.