Insights & Articles
Trusts and Property Division in the Family Law Context
In Ontario, the Family Law Act governs property division when married couples separate. The parties calculate their “net family properties” (that is, property accumulated during the marriage) and the party with the higher net family property (“NFP”) pays the other party half the difference. The parties’ home(s), vehicle(s), bank account(s), pension(s), corporate share(s), and other types of assets are all included in this calculation, less any liabilities (such as personal debt) and any “excluded property” (such as gifts received during marriage). The definition of property in the Family Law Act is expansive, and may capture property that a party might believe is exempt from the equalization process, including interests in, or powers over, trust property.
Typically, outside the family law context, a beneficial interest in a trust is not considered property. An important principle of trust law is the division of ownership in a trust: the legal owner of the trust property is the “trustee”, and the person or entity with equitable ownership is the “beneficiary”. The beneficiary only ‘owns’ the property once the property vests with them – but the family law legislation modifies this. Section 4(1) of the Family Law Act expands the definition of property to include “any interest, present or future, vested or contingent, in real or personal property” (emphasis added). The definition includes “property over which a spouse has, alone or in conjunction with another person, a power of appointment exercisable in favour of himself or herself” and “property disposed of by a spouse but over which the spouse has, alone or in conjunction with another person, a power to revoke the disposition or a power to consume or dispose of the property”. This definition of property attempts to capture the bundle of rights by which a spouse has power to control the disposition of a trust property, whether as a beneficiary or a trustee.
On separation, the court may value the beneficiary’s contingent interest in the property and include that value in the beneficiary’s NFP, even though the beneficiary is receiving no benefit from that property at the time of separation. Furthermore, property under which a party holds a power may also be included in their NFP. As an example, if a party is a trustee and has a power of appointment that would allow the party to appoint themselves as beneficiary, the trust property could theoretically be included in that person’s NFP, even though they are receiving no benefit, and may never receive a benefit, from the trust.
A court will look at a number of factors when determining whether it is appropriate to include ‘trust property’ in a party’s NFP, including a history of care and control of the trust, the relationship between the beneficiary(ies) and trustee(s), and the powers to remove or appoint trustees. Briefly, the courts are looking for any factors that “[elevate an] expectancy into something more of a certainty”. In other words, is there an indication that the party benefits, or will eventually benefit, from this ‘trust property’?
The inclusion of trust property is also subject to the typical ‘excluded property’ exclusions provided in the family law regime. Gifts and inheritances are excluded from a party’s NFP, and therefore trust property that is found to be a gift or inheritance will be excluded in any event. However, there are various ways trusts are used in relation to family businesses and corporate restructuring, and a failure to consider the family law implications of the trust can jeopardize the status of a trust as a gift. For example, some estate freezes may have adverse consequences in this area if the proper tax, family law, estate planning, and corporate law professionals are not consulted. Unless properly constituted, there is a risk that these trusts may be included, at least partially, in the equalization calculations.
An ounce of prevention is worth a pound of cure when it comes to trusts and family law matters. A marriage contract which takes into account potential family law issues and division (or lack thereof) of any trust property can mitigate against some of the risks of having ‘trust property’ included in a party’s NFP. This type of contract can be entered into at any point in a marriage. It is also important to receive legal advice upon separation, as property division involving trusts can be a complex process. Please consult McKenzie Lake Lawyer’s Family Law, Corporate, Estate, and Tax teams if you have any questions about trusts and their impact on your family law issues.