Treatment of trusts in equalization claims

Law360 Canada (October 10, 2024, 2:07 PM EDT) --

Mukta Batra

Calculation of an equalization claim under the Family Law Act first requires the value of an individual spouse’s Net Family Property (NFP). Where a spouse is a beneficiary of a trust, there are two key questions to consider while calculating NFP:

1. whether the spouse’s interest in the trust constitutes “property” under the statute; and 
2. the value of that interest.

Property interest

As a general principle in property law, a beneficiary has only an expectancy in any undistributed trust property unless the trust document provides the beneficiary with an entitlement to enforce the transfer of the particular item or places an obligation on the trustee to transfer the asset in specie to a specific beneficiary. Treating trust property as a beneficiary’s personal property is an exception that applies when the settlor created a “sham trust” and retains control over trust assets. 

In the context of family law and equalization, however, a spouse’s present, future, vested or contingent interest in a non-discretionary trust and in any discretionary trust in which the spouse retains at least some control, are included in the calculation of NFP, even if the spouse does not have property interests in any specific trust assets.

Valuation

A fixed trust is a trust in which the beneficiaries have a fixed interest and the trustee has no discretion in the distribution of the funds. It is relatively easy to value the beneficiary spouse’s interest in a fixed trust as a result.

In contrast, valuing the beneficial interest of a spouse in a discretionary trust is complex and fact-specific. This is because the trustee has discretion to determine the amount, timing and frequency of distribution amongst beneficiaries, some of whom may not have equal claim to distributions of a discretionary trust. In Cottrell v. Cottrell, 2023 BCCA 471, the British Columbia Court of Appeal was asked to consider whether a spouse had an interest in a discretionary trust. The court found that there was no historical pattern of distributions giving rise to an expectation of future distributions.

While there is no set formula to value a beneficiary spouse’s interest in a discretionary trust, a number of factors are relevant, such as the:

1. circumstances of the spouse, the trust and the other beneficiaries;
2. number and ages of the various beneficiaries;
3. obligations of the trustee under the terms of the trust;
4. spouse’s overall estate planning;
5. trustee’s possible plans for the underlying assets of the trust;
6. obligation of the trustees to maintain an even hand when dealing with all beneficiaries;
7. fair market value of the underlying assets of the trust;
8. expectations and legal rights of the other beneficiaries;
9. pattern of historical distributions and assurances of future distributions, if any; and,
10. property tax statements, where the trust owns real property.

Disclosure

A spouse seeking equalization has the right to obtain disclosure in respect of trust assets. A non-party trustee may be ordered to produce documents and answer questions in an equalization claim despite the general rule protecting non-parties from potentially intrusive, costly and time-consuming processes.

The test for ordering disclosure against and questioning a non-party (including a trustee) is described in Rules 19 (11) and 20 (5) of the Family Law Rules and in Weber v. Merritt, 2018 ONSC 3086. The principles are summarized below:

1. the onus on a motion for non-party disclosure is on the moving party;
2. the test is an objective test, which requires analysis beyond simply the litigant’s belief system;
3. the need for full and frank disclosure needs to be balanced by proportionality, common sense, and fairness built into these rules;
4. privacy interests of third parties must be carefully balanced against the interests of the parties in the proceeding;
5. the discovery process must be kept within reasonable bounds;
6. there must be an evidentiary basis to show that the documents sought are relevant; suspicion and conjecture will not suffice; and,
7. the production is limited to documents in the trustee’s possession, power and control.

A lawyer advising a trustee on a motion for disclosure of trust documents in the context of an equalization claim should consider the test for disclosure, privilege and whether something is in the possession, power and control of the trustee while advising the trustee on his or her rights and obligations and potentially negotiating the terms of a consent disclosure order.

If you practice estate or family law and would like to learn more about the treatment of trusts in equalization claims and best practices while representing a trustee client administering a discretionary trust, David Freedman and Kristy Warren will be speaking at a lunch-and-learn seminar hosted by Wagner Sidlofsky LLP on the topic, in collaboration with Epstein Cole, on Oct. 15, 2024, starting at 12 p.m. This seminar is an opportunity for new and experienced estate and family lawyers to learn more about this rapidly evolving area of family law and estate litigation. For more information and to register, please visit here.  

Mukta Batra is an associate at Wagner Sidlofsky LLP and a member of the firm’s Estates and Commercial Litigation Groups.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, Law360 Canada, LexisNexis Canada or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.   

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