Can a discretionary trust benefit your children and shield the assets that you want to leave to them from being divided between your child and their spouse in the event of a relationship breakdown? The British Columbia Supreme Court recently examined trusts that did just this.
In Cottrell v. Cottrell, 2022 BCSC 1607 ("Cottrell"), two parents, Robert and Patricia Muster, contributed assets to two trusts, a family trust and a joint partner trust (the "Muster Trusts"). The Muster Trusts benefited Robert and Patricia Muster and their adult children, including their married daughter, Joanne Cottrell. Joanne Cottrell and her husband, Paul Cottrell, eventually separated, and Paul claimed that he was entitled to half of the increase in the value of Joanne's interest in the Muster Trusts. The legislative framework for Paul's claim is set out in the Family Law Act, which states that upon separation, spouses are presumptively entitled to an undivided half interest in all family property.
The question became what exactly was the value of Joanne's interest in the increased value of the Muster Trusts. Paul claimed to have calculated this by determining the increase in value of the trust assets, accounting for taxes and dividing the resulting amount equally among the beneficiaries of the Muster Trusts. However, the Honourable Mr. Justice Brongers determined that the calculation was not that simple, drawing attention to the difference between an increase in the value of trust assets and an increase in the value of Joanne's interest in them.
Paul's calculation was at odds with the traditional trust law notion that beneficiaries do not have property rights in either discretionary trusts or their assets. While Joanne was a beneficiary, this did not entitle her to the assets of the Muster Trusts. She did not have the ability to compel a distribution to herself from the Muster Trusts. She could be removed as a beneficiary, she could die before the Muster Trusts were fully distributed or the assets could be fully or largely distributed to other beneficiaries. Therefore, there was too much uncertainty to establish that Joanne's beneficial interest in either of the Muster Trusts had increased, let alone by how much.
This decision will provide some comfort to estate and trust planners and their clients who want to protect trust assets from family law claims. However, it is likely not the final word on this topic. The decision is fact specific, and a different conclusion could well be reached in another case. It remains important to ensure that children do not have the ability to compel a distribution to themselves from discretionary trusts (for example, by appointing multiple trustees) or gain any certainty over distribution that would allow the increase in their beneficial interest to be valued.
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.