On March 18, 2013, B.C.'s new Family Law Act (FLA) came into
effect to replace the Family Relations Act (FRA). One of the
reasons behind the change was to encourage families to resolve
their disputes outside of the B.C. court system. To achieve this,
the FLA provides more clarity on the division of assets upon
marital breakdown. However, as with most new legislation, there are
specific provisions that have raised concerns among professionals.
One particular area of concern for tax and estate advisors relates
to how an interest in a discretionary family trust is treated.
In B.C., discretionary family trusts are used extensively by
business owner-managers to facilitate income splitting, multiply
the capital gains exemption, purify a company and for estate
planning purposes. Beneficiaries of a discretionary trust are
entitled to a distribution only if the trustees choose to allocate
something to you. In other words, you may get something or you may
get nothing – what you get is out of your control.
Under the old FRA, an individual's interest in the trust was
considered a marital asset only to the extent that it was
ordinarily used for a family purpose. This was generally determined
by the courts on a case-by-case basis. Under the FLA, however, an
interest in a discretionary trust is considered an excluded asset.
If the value of an excluded asset increases during the
relationship, this increase is split evenly between the spouses.
Seems simple and sounds fair, right? Well, maybe not.
The key issue is that the excluded asset is not the
beneficiary's interest in the discretionary trust. Rather, the
FLA looks beyond the interest in the trust to the property owned by
the trust itself. In the case of an owner-manager, this property is
usually the shares of their companies. Therefore the excluded asset
is the growth in the value of the shares and it is this growth that
is shared equally.
There are some very significant and often illogical consequences
that can result from this wording. Consider this scenario: Mr.
& Mrs. Smith set up a discretionary family trust 15 years ago
which owns the common shares of their company. In that time period,
these shares have increased in value from $0 to $10,000,000. The
Smiths have four adult children – all of them married - who
are beneficiaries of the trust.
Suddenly, on March 19, 2013, all four children enter into
divorce proceedings. Because each child has an interest in a
discretionary trust, each of their spouses can claim 50% of the
growth of the common shares – i.e. $5,000,000 per spouse.
This means that $20,000,000 of total value will be transferred away
from the four Smith children. This is a rather interesting result
– some may say scary – since the shares are only worth
$10,000,000 in the first place.
Another concern is that the children are beneficiaries of a
discretionary trust. The Smith children each have an obligation to
pay their spouses $5,000,000, yet there is no obligation for the
trustees to distribute anything to them. As noted above, they may
get something, they may get nothing.
Although this is an extreme situation, obviously the outcomes do
not appear to be equitable, fair or even make sense. There has been
talk that the legislation will be amended to deal with these
concerns, but to date nothing has been addressed.
Does this mean that trusts are dead? No. There are still very
valid reasons to use a trust. This is just another factor that
needs to be taken into consideration when making the decision to
set one up. Hopefully the legislation will be amended to help
alleviate some of the issues.
Note that the FLA applies to a person who has lived in a
marriage-like relationship for at least two years. This means that
common relationships and same sex couples have the same rights
under the FLA as married couples. There are numerous other changes
considered by the FLA that have not been addressed in this
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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It is not uncommon for parents to provide monetary gifts to their adult children. Parents may wish to help their child with a down payment on a property, or help pay out their child's existing mortgage.
On March 31, 2014, BC's new Wills, Estates and Succession Act1 ("WESA") will come into force. WESA introduces new protections for beneficiaries of estates that are in danger of being disputed or deemed ineffective by a court.
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