Where do trust assets go when a relationship breaks down?


Upon the breakdown of a spousal relationship, dividing property between the two spouses is often a contentious issue. One common source of conflict is the interest one spouse has in a trust. Does the other spouse get half of that interest? In HSS v SHD, 2018 BCCA 199, the British Columbia Court of Appeal recently clarified what will and won’t be taken into consideration when looking at those trust assets.

At issue in this case was how to apply section 65 of the Family Relations Act, RSBC 1996, c 128 [FRA]. Though the FRA has now been repealed and replaced by the Family Law Act, SBC 2011, c 25 [FLA], this case still provides insight into what courts will do with trust assets.

The parties, Mr. S and Ms. D, married in April of 1989. Before getting married, they signed a marriage agreement outlining how their property would be divided upon separation. Though the parties separated in 2003, divorce proceedings didn’t begin until 2013, when Ms. D applied to the court to disregard the marriage agreement on the grounds that following the agreement would be unfair. Section 65 of the FRA allows courts to set aside a marriage agreement if that agreement would be unfair considering, among other factors, “the needs of each spouse to become or remain economically independent and self-sufficient” (s 65(1)(e)).

The financial circumstances of Mr. S and Ms. D changed dramatically from when they first got married to when they filed for divorce. In 1989, Ms. D’s father had significant wealth and Ms. D was the beneficiary of family trusts worth a considerable amount of money. But by 2002, the family business came under court protection and the family trusts shrunk in value. While Ms. D’s financial health declined over the course of the marriage, Mr. S’s prospects soared. He founded a law firm which saw extraordinary levels of success, allowing him to purchase property in Vancouver and Hawaii.

At trial, the judge analyzed the marriage agreement and concluded that it would not be fair to follow the agreement’s division of property, in particular considering Ms. D’s ability to remain economically self-sufficient. In its analysis, the court concluded that it could consider two trusts in which Ms. D had a beneficial interest: the Spousal Trust and the Insurance Trust. The Spousal Trust was created by Ms. D’s father in favour of her mother and Ms. D stands to inherit 25% of the estate. The Insurance Trust is a discretionary trust, the assets of which will be distributed according to what the Trustees determine. Based on an analysis of these two trusts, the trial judge concluded that Ms. D would receive a “substantial inheritance” on her mother’s death. The Court of Appeal disagreed and sought to clarify the law on when a spouse’s trust interest can be considered in a section 65(1)(e) analysis.

Whether or not a trust interest qualifies as family property requires a careful factual analysis: How is the substance (not the form) of the trust interest characterized? Can the interest be described as being “owned” by the spouse? How certain is it that the spouse will benefit from the trust?

In this case, the Court of Appeal disagreed with the trial judge’s analysis regarding Ms. D’s interests in the Spousal Trust and the Insurance Trust. There were too many contingencies to warrant including those trusts in an analysis of section 65(1)(e). Ms. D’s mother had a right to encroach on the capital of the Spousal Trust, so one couldn’t say for certain how much Ms. D would obtain upon her mother’s passing. Both the Spousal Trust and the Insurance Trust may not generate any distribution for Ms. D for many years, so the trial judge was wrong to consider them. The Insurance Trust wasn’t sufficiently valued at trial and while the trial judge said Ms. D would “likely” receive around $3 million, the trial judge didn’t properly consider the discretionary nature of the trust and the possibility of an unequal division of trust assets.