A number of months ago, a colleague of mine wrote a blog on British Columbia's new Family Law Act (FLA), which came into effect on March 3, 2013. The FLA deals with the division of assets on the breakdown of a marriage or a marriage-like relationship of individuals residing in B.C. It attempts to reduce the number of relationship breakdowns that end up in the B.C. court system. The FLA provides very specific legislation on how family assets are to be divided on the breakdown of a relationship. As is often the case, the wording of new legislation can lead to unintended consequences.
The FLA is one example of legislation that has had unintended consequences. In its attempt to provide a reasonable division of assets, the FLA missed the mark about how a beneficiary's interest in a discretionary family trust is handled. In very general terms, when a beneficiary of such a trust has a relationship break down, the FLA looks through the trust to the actual assets held by that trust. Any increase in the fair market value of these assets since the relationship began is then split between the spouses 50/50. On the surface this may seem reasonable, but one must keep in mind that these trusts are discretionary, meaning the beneficiary has no claim to these assets and may never actually receive them.
As an example, consider a discretionary trust that has four beneficiaries, each of whose marriage breaks down. The total increase in value in the underlying trust assets is factored into the asset split for each relationship. In effect, it tries to split the pie two ways for each divorce, but with each of the four beneficiaries and their spouses getting half. That is impossible and results in two times the increase in trust asset value being allocated to the spouses of the beneficiaries.
As a result of some of these odd scenarios, there has been concern about using family trusts in B.C. It was generally assumed that the FLA would be amended, but until recently, nothing happened. On March 3, 2014, the B.C. government tabled Bill 14, Justice Statutes Amendment Act, 2014 which attempts to address the unintended consequences of the FLA on a discretionary trust. The amended legislation proposes to look at the increase in the fair market value of the interest in the trust, rather than at the increase in value of the underlying trust assets. This is a positive change, as the fair market value of an interest in a discretionary trust is a lot less than the fair market value of the trust assets.
Compared to how the original legislation was worded, these changes will likely result in more work when trying to determine the fair market value of an interest in a trust. However, this is similar to the issue that existed under the old Family Relations Act, which the FLA replaced.
With the proposed changes to the FLA addressing certain unintended consequences on the division of assets, it is anticipated there won't be as much concern regarding the use of family trusts for tax and estate planning purposes in B.C.
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