By Howard S. Simmons, Puneet S. Kohli & Mahira Adeeb
Is it possible to set up a discretionary family trust for estate and tax planning, and at the same time ensure its assets are excluded from family court litigation, and that it is protected from future claims by the spouses of the beneficiaries?
It may be possible to structure a trust in a way that protects the beneficiary’s interests from future claims by the spouses’ beneficiaries provided:
- The primary purpose of the trust is estate and tax planning, and all documents pertaining to its formation clearly indicate that purpose
- The beneficiary is not in control – either in law or in fact – of the family trust
- It may assist if the trust provides that if a beneficiary separates from his / her spouse, the trustees may remove the beneficiary from the trust, or temporarily remove him / her as a beneficiary while the family court is deciding the separation
Additionally, a marriage contact may ensure a beneficiary’s assets are protected from a future equalization claim. The trust terms can also provide that the trust has the right to remove the beneficiary if his / her marriage contract is not in a form satisfactory to the trustees
The Court judgments in this regard have not been consistent because there is a lack of a fully-developed jurisprudence in determining a beneficiary’s interest in a discretionary trust, and the Courts have depended upon the unique facts of the case rather make a precedent-based interpretation.
Pertinent issues in deciding the matter have generally included the following:
- How do Family Courts treat a beneficiary’s potential future interest in a discretionary trust?
- Can a potential future interest in a discretionary trust be treated as property that can be included in a beneficiary’s property for equalization purpose?
- If a potential future interest is treated as property, how should it be valued?
Based upon a plain reading of the Family Law Act, it may be possible to interpret that a contingent interest may be included as net family property for equalization purpose. However, there is conflicting case law on whether a contingent interest of a beneficiary in a trust will always be considered property that is capable of being valued, and thereby included in a spouse’s net family property for equalization purposes.
The following four cases are relevant in this discussion, and each case has depended upon its own set of unique facts.
Sagl v. Sagl: The court decided that the husband’s contingent interest in the assets of the family trust was property that was to be included in his net family property for equalization purposes. The Court’s decision was based on the facts that the husband had considerable control over the trust as a trustee; and that he was a trustee and a beneficiary; and that he treated the trust’s property as his own.
Spencer v. Riesberry: In the family court matter between a beneficiary daughter and her husband, the Court held that the house (which the husband claimed was matrimonial home) was not a matrimonial home. The Court granted that while the wife had a general contingent beneficial interest in the trust property, she didn’t have a specific property interest in any of the trust’s assets.
Ludmer v. Ludmer: The beneficiary’s trustees instructed him to enter into a marriage contract to exclude all discretionary trust’s assets from any future family court claims. Upon the breakdown of the marriage, the beneficiary’s estranged wife sought to set aside the marriage contract, but the Court held that the marriage contract was valid. The Court found that the value of the Respondent husband’s interest in the family trust was an excluded asset and didn’t form a part of his net family property for equalization purpose.
Dillon v. Dillon: In this case, the Court was of the view that any potential interest a beneficiary may have in a discretionary trust was incapable of valuation. In its findings, the Court observed, “discretionary trusts occur when trustees are vested with property and are required to allocate it as they think fit among a class of beneficiaries.” It further specified, “The discretionary trust normally requires the trustees to dispose off the trust property to whom among the class they think fit and when they think fit.” Finally, the Court stated, “The object of the discretionary trust is either to protect the beneficiaries from themselves or from a heavier tax liability than might otherwise have been incurred in the transmission of wealth of the settler or trustee.”
The Family Law lawyers and the Wills and Estates Lawyers at Simmons da Silva LLP have the experience in setting up discretionary trusts and assist you with family law provisions with regard to the discretionary trusts.
If you have a matter that you would like to discuss / pursue, one of our lawyers will be pleased to meet you. Call now on 905.457.1660 and ask for either Howard S. Simmons, Puneet S. Kohli or Mahira Adeeb.
Disclaimer: This article is only intended for information purposes and is not intended to be construed as legal advice.