Trusts and family property – when can you trust a trust?
The laws relating to trusts are complex enough, before issues relating to family law are introduced. Even at the best of times, individuals establishing trusts need the advice and services of professionals to ensure that trust structures are sound and their trust goals are met.
But toss in marital discord or separation, and the picture can get murky.
In Ontario, and some other provinces, family law requires an equalization of net family property when a marriage ends. What would happen then if a spouse, perhaps knowing the marriage is on rocky ground, transfers some assets to an alter ego trust, with a child as beneficiary. The transfer to a trust has the effect of reducing the individual’s net family property.
The issue? If the exclusion of a trust asset is challenged, a court could examine the timing and intention in establishing the trust and include it in net family property because the establishment of the trust was a fraudulent conveyance, or intended to avoid an individual’s family law obligations.
Another complication relating to trusts and the calculation of net family property is valuing a spouse’s contingent or vested interest in a discretionary trust. Unless the interest is excluded (gifts or inheritances received during the marriage are excluded for example), interest in a trust forms part of net family property. How then do you value an interest when distributions from the trust are at the discretion of the trustee? Courts have taken different positions – a good overview of different valuation methods is provided here: http://cswan.com/valuing-interests-in-a-discretionary-family-trust/.
Estate freeze considerations
Other forms of estate planning that don’t necessarily involve a trust – such as an estate freeze – can also be impacted by family law. Because the law in many provinces excludes gifts from family property definitions, courts have ruled that shares received gratuitously as a gift through an estate freeze can be excluded from net family property. What’s not clear is whether shares purchased for a nominal amount would still be considered a gift (and excluded for family law purposes) or considered a purchase (which is not excluded).
Thanks for reading.