Canada: Statute Of Elizabeth v Trusts: The Increasing Use Of The Fraudulent Conveyances Act To Undo Tax And Estate Planning

Two recent appellate decisions out of Alberta and BC demonstrate the willingness of courts to privilege the interests of spouses over the ability to enforce properly constituted trusts and legitimate estate planning. Laws prohibiting fraudulent conveyances are being used in attempts to unwind family trusts and dismantle deliberate estate planning as part of the division of matrimonial property. High net worth individuals, particularly those with children from previous relationships, ought to be concerned since such willingness undermines the reliability and certainty of previous tax and estate planning.  

In Alberta, the applicable law is the Statute of Elizabeth, 1571 (UK), 13 Eliz I, c 5, also known as the Statute of Fraudulent Conveyances. The Statute of Elizabeth, and comparable legislation, is an increasingly popular tool among creditors and others because it allows wronged parties to claim an equitable interest in property even if there was no legal or equitable relationship when the impugned conveyance was made.  

The two appellate decisions are Mawdsley v Meshen 2012 BCCA 91,  and Milavsky v Milavsky, 2011 ABCA 231. In Mawdsley, the BC Court of Appeal recognized the limitations of the Statute of Elizabeth and held the effect of the conveyance alone was not sufficient to void the transfer. In order to succeed, the plaintiff must prove there was intent to defraud. Milavsky, on the other hand, expanded the application of the Statute of Elizabeth when it held the 10 year drop dead limitation period was not applicable. Mawdsley actually decided the matter, whereas Milavsky merely decided there was a triable issue.

In Mawdsley v Meshen the British Columbia Court of Appeal considered whether it was necessary to prove fraudulent purpose and intent in order to void the conveyance. The Fraudulent Conveyances Act (the "FCA") replaced the Statute of Elizabeth in BC and the specific issue on appeal was whether the late Ms. Meshen's transfer of inherited property and assets to her children through a properly constituted trust was void under the FCA. The plaintiff husband argued the effect of the conveyance ought to be determinative, regardless of whether there was the actual intent to defraud.

Ms. Meshen had been married twice before and inherited assets worth approximately $1,300,000 following her third husband's death. She had two children from the first marriage, and one from the second. When Ms. Meshen died, her assets had a gross value of approximately $10.5 million. Ms. Meshen had begun the process of estate planning following her inheritance, and she accelerated the process in the weeks prior to her death, and transferred substantial assets into her children's names. There was no proof Ms. Meshen had ever concealed her estate and tax planning, in fact, Mr. Mawdsley was often present at meetings with lawyers and accountants.
Despite their spousal relationship, the Court of Appeal rejected the argument that "an intention to defeat creditors must be inferred from the effect of the impugned transaction" (at para 71). Mr. Mawdsley never had a legitimate expectation of a beneficial interest in her assets. The inter vivos trusts and alter ego trusts were part of larger, long-term plan. Although her diagnosis of terminal cancer prompted her to complete the transfers, her intentions did not appear out of nowhere.

Further, the Court of Appeal emphasized courts should be wary of including parties who have no claim at the time of the transfer in question in the category "creditors and others". An overly inclusive definition of "others" would mean that any person who qualified as a spouse or child would be prima facie entitled to "challenge every disposition of property, whether for valuable consideration or not, made by their spouse or parent during his or her lifetime, and even seek to prevent such dispositions by court action" (at para 90). The Court clearly refused to take on the "role of arbiter or personal and business decisions throughout a parent or spouse's life time without the legislature clearly directing us to do so".

Milavsky, on the other hand, gave less deference to estate and tax planning. Even though the plaintiff, Mrs. Milavsky, did not specifically plead the Statute of Elizabeth, the Alberta Court of Appeal chose to apply it. The parties met and began living together, married, and separated 10 years later. Mr. Milavsky had children from a previous marriage and during the course of their relationship, Mr. Milavsky established three trusts. First, he established the Residential Trust and transferred the condominium where they both lived into the trust. Second, he established a trust for his grandchildren, named the Grandchildren's Trust. The Grandchildren's Trust acquired the assets of the Residential Trust as part of a tax rollover and Mrs. Milavsky was the settlor of the Grandchildren's Trust. Third, Mr. Milavsky established the Descendants' Trust. His grandchildren were also the beneficiaries of the Descendants' Trust and in three years after it was established he transferred approximately $1,000,000 into the Descendants' Trust.

Following their separation, Mrs. Milavsky sought to attack the trusts on the basis of fraudulent intent. The Trial Judge in Milavsky held the 10 year limitation period applied, therefore there was no triable issue. The Court of Appeal however, reversed the trial decision and held it did not apply, and sent the issue to be tried.  

A comparison of Mawdsley and Milavsky suggests claims of unjust enrichment, where successful, will be determinative in the application the Statute of Elizabeth and the unwinding of legitimately constituted trusts as well as tax and estate planning. The urgent question for high net worth individuals will be whether there is any way to protect family assets, and plan complex estates, free from the threat of unjust enrichment claims?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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