Leak-proofing your Discretionary Trust: Protecting against Future-Generation Spousal Claims


By Chantal Cattermole and Kyle Gough

Families frequently make use of a discretionary trust when planning their business succession arrangements. However, assets in a discretionary trust may be subject to unwanted family law claims upon a beneficiary’s separation from their spouse. Designing a discretionary trust to protect against such claims should be front of mind for any founders of a family business looking to pass on the wealth and legacy of their hard work to the next generation.

This article provides an overview of discretionary trusts and suggests their benefits in family business succession. Then, this article summarizes the ways in which assets held in a discretionary trust may be susceptible to claims from a beneficiary’s spouse upon separation. Finally, this article lists specific safeguards that may be included in a discretionary trust to limit the possibility and/or scope of such family law claims.

An overview of discretionary trusts and their use in family business succession

A discretionary trust is a type of trust arrangement that provides the trustee (or trustees) with absolute discretion and authority over the distribution of capital and income in the trust. Consequently, the beneficiary (or beneficiaries) of a discretionary trust do not have an automatic right to any income or capital in the trust, unless specifically provided for in the trust document.

A discretionary trust provides families with multiple benefits in their business succession planning, such as:

  1. Keeping the business and its assets within the family: a family can use a discretionary trust to prevent a beneficiary from selling, or otherwise disposing, the trust assets outside of the family. Similarly, a discretionary trust can offer a certain level of protection if a beneficiary divorces or files for bankruptcy.
  2. Providing for future generations: a family can use a discretionary trust to preserve the capital and assets of a family business for future generations.
  3. Flexibility: every discretionary trust has one defining feature: discretion. A family can use a discretionary trust to provide the trustee with absolute flexibility to determine the distribution of the trust. As such, a discretionary trust allows the trustee to consider the changing circumstances of all beneficiaries and the business when deciding how and when to distribute trust property, if at all.

Nevertheless, assets in a discretionary trust may be susceptible to unwanted family law outcomes. Specifically, upon a beneficiary’s separation from their spouse, the beneficiary’s interest in a discretionary trust may be subject to the division of family property framework found in British Columbia’s Family Law Act (FLA).

Issues with discretionary trusts from a family law perspective

When referring to the division of family property upon separation, British Columbia’s FLA classifies property into two categories: “family property” and “excluded property”. In the absence of an agreement to the contrary, “family property” is all property owned by one or both spouses at the date of separation, and includes real property, personal property, shares in a corporation, and the increase in value of all such property. Family property is presumptively shared equally unless it would be significantly unfair to do so. Significant unfairness is a high threshold to meet.

Excluded property includes property acquired before the relationship started, gifts from third parties, and inheritances. Excluded property is not normally subject to sharing unless:

  1. Family property or family debt located outside British Columbia cannot practically be divided; or
  2. It would be significantly unfair not to divide excluded property considering the following:
    1. The duration of the relationship between the spouses; and
    2. A spouse’s direct contribution to the preservation, maintenance, improvement, operation or management of excluded property.

The FLA contains provisions that deem certain trust interests to be family property. Firstly, family property includes any part of trust property that is contributed by a spouse to a trust in which:

  1. The spouse is a beneficiary, and has a vested interest in that part of the trust property that is not subject to divestment;
  2. The spouse has a power to transfer to themselves that part of the trust property; or
  3. The spouse has a power to terminate the trust and, on termination, that part of the trust property reverts to the spouse.[1]

Secondly, family property includes property that a spouse disposes of after the relationship between the spouses began, but over which the spouse retains authority to require its return or direct its use or disposition in any way.[2] This has been interpreted by the British Columbia Supreme Court to include property which a spouse has settled onto a trust during a spousal relationship, or at least the increase in value of such property if the property itself is considered excluded property.[3]

Thirdly, the amount by which the value of excluded property has increased is family property since the later of:

  1. The date the relationship between the spouses began; or
  2. The date the excluded property was acquired.

Despite the provisions of the FLA, it is unclear whether a spouse’s interest in a discretionary trust is subject to the division of property because the spouse does not have a determined interest in the trust. To date, the courts have yet to adequately address the question of how a spouse’s interest in a discretionary trust would be valued. The BC Supreme Court attempted to address this uncertainty in Cottrell v Cottrell2022 BCSC 1607. Here, the Court determined that the husband did not have access to the wife’s interest in a discretionary trust as he was unable to assign a value to the increase in the wife’s interest. However, the Court explained that a different conclusion could be reached if the parties’ were somehow able to assign a value to the discretionary interest or its increase.[4] This has left the door open to a finding that interests in a discretionary trust, or at least the increase in value of such interest, may be subject to division between spouses upon separation in certain circumstances.

Ways to mitigate risks to beneficiaries’ interests from potential family law claims:

Given the limited case law regarding how discretionary trusts are treated for family purposes, it is not possible to say with certainty how the Court would react to specific strategies to protect property and/or interests in such trusts from claims under family law. Nonetheless, families who are developing a business succession plan may want to consider the following safeguards when designing and implementing a discretionary trust, with the goal to try to limit, as much as possible, any exposure to the Court making a finding that the trust property is divisible as family property:

  1. Disqualification provision: a discretionary trust may contain a term that if any person with an interest in the trust becomes separated from their spouse, then that person will automatically be disqualified on the date that is one day prior to the person’s separation from their spous It is preferable to impose disqualification rather than require such person renounce or resign, since disqualification lessens the chance that a separating spouse is seen as deliberately trying to divest themselves of potential family property.[5]
  2. Family Law Agreement: a discretionary trust may include, as a condition precedent to a person becoming a beneficiary, a requirement that the person enter into a family law agreement and provide proof satisfactory to the initial trustee(s) that (a) such an agreement has been executed; and (b) the person has taken steps to prevent against claims being made in respect of their interest in the trust assets pursuant to the FLA. Family law agreements allow parties to contract out of many of the property division requirements contained in the FLA, as long as such agreements are not significantly unfair or entered into under improper circumstances.
  3. Limit a beneficiary’s control of the trusts: a discretionary trust should avoid listing a beneficiary as trustee and ensure that there are no indirect opportunities for the beneficiary to gain control of the trust later as well. Appropriate measures to ensure that the beneficiary does not have an opportunity to gain control of the trust include:
    1. The settlor of a discretionary trust can name a trusted friend or family member, or a neutral party such as a trust company, as a successor trustee(s) and/or successor trustee appointor(s) in case the trustee is unwilling or unable to act. This may help prevent control of the trust devolving to a beneficiary.
    2. The discretionary trust could contain specific provisions that become effective when the current trustee is no longer acting as the trustee or trustee appointor. Such provisions could be, for example, to stipulate a minimum number of trustees, to require that there be a neutral/corporate trustee, and to require that a neutral/corporate trustee be included in the majority for decision-making purpose
  4. Exhaustion of the trust: the discretionary trust may expressly provide that the trustee (or trustees) can fully distribute the trust assets prior to the time of division of the trust, in the trustee’s absolute This would make clear that the benefits to be provided to a beneficiary are not certain, being contingent on not only the trustee exercising its discretion in favour of the beneficiary, but also on there being trust assets remaining at the time of division.
  5. Additional beneficiaries, other than children: the discretionary trust may list charitable objects as beneficiaries of the trust in addition to any children so as to increase the discretionary options of the trustee upon distribution. The trust need not name a particular charity, thereby guarding against an argument that the charity is entitled to know of the trust. Instead, the discretionary trust could include language about the kinds of charitable objects they may wish to b
  6. Additional trusts: the discretionary trust could be subjected to a distribution structure that permits transfers to alternate/related trusts. This may provide an added layer of protection against a finding that the beneficiary is guaranteed to benefit from the trust.
  7. Trust amendments: the discretionary trust may include a specific provision that allows for amendments to the terms of the trust. This again provides extra support for an argument that the beneficiary is not guaranteed to benefit from the trust.
  8. Contribution to, and disposal of, the trust property: the discretionary trust should prohibit any contribution of assets by a trustee or beneficiary to the trust. Additionally, the trust should explicitly prohibit the beneficiary from participating in any transactions to settle property onto the trust in order to limit arguments that the beneficiary has “contributed” or “disposed of” property to the trust for the purposes of ss. 84(3) and 84(2)(f) of the FLA. Specifically, the discretionary trust should prohibit the beneficiary from:
    1. directly transferring assets (cash, shares, real estate, etc.) to the trust;
    2. participating in any corporate restructuring, such as to surrender or exchange shares, as part of settlement of the trust; and/or
    3. participating in any corporate decision making that may be involved in transferring assets/property to the trust.

If you or someone you know is considering or is in the process of developing a family business succession plan involving a discretionary trust, or if you have any concerns over yours or another person’s discretionary trust, please feel free to contact Chantal Cattermole or anyone in the Clark Wilson Family Office group for more information.


[1] FLA s. 84(3).

[2] FLA s. 84(2)(f).

[3] M.C.V. v. F.V., 2018 BCSC 96.

[4] For a more detailed analysis of the Cottrell decision, see Chantal Cattermole’s article “A Certain Uncertainty – Discretionary Trusts and the Division of Family Property”, which can be accessed here.

[5] The tax consequences of such a change to the beneficiaries of the trust would need to be considered.