How the New Family Law Act Could Affect Your Family Trust

B.C.’s relatively new Family Law Act (FLA) has introduced some significant changes to the division of family property when a couple separates. One of the most significant changes is to the definition of a spouse. A spouse now includes not only legally married persons but also persons living together for over two years in a marriage-like relationship.

The new FLA property division rules state that on separation each spouse has a right to an undivided half interest in all “family property” with the exception of “excluded property”. In addition, the new FLA has changed the game when it comes to interests in discretionary family trusts. While a beneficial interest in your typical family trust falls within the excluded property category, to the extent that beneficial interest in that family trust grew in value during the relationship, that increase in value must now be included in the claim of the spouse against a discretionary beneficiary of such a family trust upon separation.

The big unknown here is determining how to value a beneficial interest in a fully discretionary trust. The leading experts would argue that such beneficial interests would have no value until the trustee has exercised their discretion to make a distribution in favour of the particular beneficiary. Unfortunately, there is no case law under these new provisions to confirm that view. Needless to say, there is no doubt there will be lawyers willing to argue that these provisions must be applied so as to add to the settlement awarded to the non-beneficiary spouse.

So, if you are the aging parents of married children and you have implemented or are planning to implement an estate plan by settling the growth shares of the family business in a family trust for the benefit of your children, you should be aware of these new rules and consider whether further legal precautions should be taken.

Where does this leave you? The family law bar is strongly suggesting that where a child has an interest in a discretionary trust they should require their non-beneficiary spouse to enter into an agreement waiving any FLA claim to that interest, even if there is no agreement with respect to other family assets.

To be effective, such an agreement will require independent legal advice and properly informed consent. Is this extra level of protection worth the effort? To a great extent, the answer to this will depend on each individual family and their specific dynamics.

 

Tags: Bill Cooper, Family Law, Tax Law, Wills, Trusts and Estates, Article