A Certain Uncertainty – Discretionary Trusts and the Division of Family Property

Articles

Many families choose a discretionary trust when planning their estates for the operative term: discretion. However, along with this discretion comes a high degree of uncertainty. The BC Supreme Court attempted to address this uncertainty in the Cottrell v Cottrell, 2022 BCSC 1607 decision rendered on September 12, 2022, but in doing so have muddied the waters further. The Cottrell case attempted to settle the division of family property in relation to the wife’s interest in a discretionary trust where she is a named beneficiary. The court determined that NO, the husband would not have access to the discretionary trust as he was not able to establish that there has been an increase in the value of the wife’s beneficial interest. However, the court left the door wide open in stating that a different conclusion could be reached if the facts were different – which has left some scratching their heads.

The Contested Property

Joanne and Paul Cottrell were married for 26 years when they were granted their divorce in 2021. Paul was the primary income earner while Joanne cared for the family at home. The proceeding in question decided on the division of family property and spousal support – their children are now adults thus no child support issues were in question.

The most serious disagreement is over how to address the future financial impact of two discretionary trusts (“the Muster Trusts”) set up by Joanne’s parents, Robert Muster and Patricia Muster. A discretionary trust gives trustees the power to decide how much beneficiaries get from a trust and when they get it. While someone may be a named beneficiary, this does not guarantee that they will receive any of the property.

The Muster Trusts encompass assets accumulated through investments and savings made by the Musters after they won a $5 million lottery prize in 1990. As Patricia Muster passed away in 2012, Robert Muster now exclusively manages the trusts. These trusts are discretionary – the assets are considered to be Mr. Muster’s property to be dealt with as he sees fit during his lifetime. Therefore, while Joanne is an intended beneficiary of the Muster Trusts, she cannot unilaterally effect a distribution of assets. Furthermore, Joanne’s interest in the discretionary trusts can be defeated, extinguished, or rendered valueless through a number of means: Mr. Muster could distribute the entire trust to himself, the trust could be distributed to someone else besides Joanne, Joanne could be removed as a beneficiary, her entitlement could be reduced, or Joanne could also die before Mr. Muster.

Paul argued that the growth in the value of Joanne’s portion of the Muster Trusts can be quantified and that there is sufficient certainty that Joanne will ultimately receive a distribution of the Muster Trusts’ assets.

The Legal Framework

The legal framework applicable to the division of family property and family debt is set out in Part 5 of the Family Law Act (“FLA”).

Section 81 of the FLA provides that upon separation, the spouses are each presumptively entitled to half an interest in all family property and family debt.

Section 84 of the FLA defines family property to include property owned by at least one spouse on the date of separation.

Section 85 of the FLA describes categories of excluded property which remain the sole property of the spouse who claims the exclusion. This includes property acquired by a spouse before the relationship began, gifts and inheritances received from others, and a spouse’s beneficial interest in property held in a discretionary trust.

Notably, s. 84(2)(g) of the FLA, provides that if there has been an increase in the value of excluded property during the spouses’ relationship, that appreciation is considered family property.

Discretionary Trusts

Logic dictates that the Muster Trusts have accumulated interest and therefore, grown in value since 1990, and also since Joanne and Paul were married in 1995. However, given that Mr. Muster has exclusive ownership over the property and can disburse it as he wishes, there is no guarantee that Joanne’s theoretical portion of the trust has grown.

Due to the discretionary nature of the amount Joanne would receive from the trust, this uncertain amount did not factor into the Judge’s calculation of spousal support, nor did it offset the equal division of Paul’s government pension, or the family home. However, the court acknowledges that it is possible that there may be a material change in circumstances if or when Joanne obtains assets from the Muster Trusts. Should this occur, the court acknowledged Paul’s statutory right to apply for a variation of his spousal support obligation.

Future Uncertainty

The court concluded that since Paul was unable to value the increase in Joanne’s beneficiary interest in the discretionary trust, he is not entitled to any of the proceeds. It follows that if a party COULD value a beneficiary’s interest with any certainty, any increase to this property would fall under family property. Unfortunately, the court did not grapple with the seemingly impossible task of how one might assign a value to a discretionary amount. Again, that operable term: “discretionary”.

The only certainty around discretionary trusts is that the value to a beneficiary remains uncertain until the property is distributed. This may be a space to watch, but it will take a creative argument or set of facts to change the current state of affairs.

 

If you or someone you know has questions about the nature of property disputes and what this case means for it, please feel free to contact Chantal M. Cattermole or anyone in the Clark Wilson family law group for more information.