In a previous post, we discussed some of the issues raised by the new Family Law Act (the “FLA”) in the context of discretionary trusts.
Under the FLA, “family property” is divided equally between spouses, and includes all real and personal property owned by one or both spouses at the date of separation, unless the property is “excluded property”. If the property is “excluded property”, any increase in its value during the relationship is still shared equally between the spouses on a breakdown. Currently, “excluded property” includes property held in a discretionary trust where the spouse did not contribute to the trust, the spouse is a beneficiary of the trust, and the trust was settled by a person other than the spouse. As a result, many discretionary family trusts used for estate planning fall within “excluded property” under the FLA. This means that the growth in value of trust property during the relationship may be subject to division, which is problematic since the spouse’s interest in the trust is only discretionary and there is no guarantee the spouse will benefit from the trust property.
Recently, the provincial government introduced Bill 14, Justice Statutes Amendment Act, which proposes amendments to the FLA in an effort to address this concern. If the amendments come into force, the meaning of “excluded property” will be modified with the result that only the growth in value of a spouse’s beneficial interest in trust property (and not the trust property in its entirety) will be subject to division. This change will help clarify the application of the FLA to interests in discretionary trusts, but will also raise valuation issues since it is more difficult to value a spouse’s interest in a discretionary trust, than it is to value the underlying trust property.