THE LENGTHS PEOPLE WILL GO TO KEEP ASSETS FROM A FORMER SPOUSE DON’T ALWAYS WORK.
Legislation can be swift and unforgiving
Over the years, moneyed spouses who do not have the protection of a marriage contract have tried numerous strategies to evade the long arm of family law legislation, with varying degrees of success.
One approach has been to create a trust to hold property, then argue that properties owned by a trust should not form part of the property to be equalized with their spouse on separation.
In some cases, the wealthier spouse (or his or her family), has transferred assets into a trust, arguing that the assets in the trust were out of reach from the other spouse on separation.
In Tremblay vs. Tremblay, the wife sought to equalize assets held by a family trust in which the husband had an interest. The husband’s father had set up a complex corporate structure to defer tax, and as part of that structure, the father periodically disbursed income from an entity controlled by him, to a company held by a trust of which the husband was both a beneficiary and a trustee.
The first question asked by the trial judge, Justice Kevin Phillips, was whether the husband’s interest as a beneficiary of a trust, meant that the husband actually owned the property, bringing it within assets to be equalized with his wife?
In his analysis, Justice Phillips confirmed the traditional role of the trustee and the beneficiary of a trust. The trust, of course, does not own the property; legal ownership is in the hands of the trustees of the trust. The trustees are obliged to hold property for the beneficiaries. Where the terms of the trust deed are discretionary, the beneficiary has an “expectancy,” but no current interest in the trust property unless the trustees choose to exercise discretion in favour of a particular beneficiary.
While Justice Phillips found that the husband did not own the property, as a beneficiary, his enquiry did not stop there. He then asked whether the husband, as beneficiary, effectively controlled the trust by virtue of being a trustee. In doing so, he reviewed the past actions of the trustees to see if there was actual control by the beneficiary, whether the beneficiary had the power to remove trustees and examined whether the trustees were independent, especially as they were family members who did not act independently.
In Tremblay, Justice Phillips found that none of the transactions were arm’s length, and while the trustees were the husband and his parents, the husband had the sole ability to appoint more trustees, which meant he could always access funds in the trust. This degree of control meant that his interest as a beneficiary was a certainty. As a result, he was obliged to include the property in the trust as part of his net family property.
The Ontario Court of Appeal had previously dealt with a similar issue in 2012, in Spencer vs. Riesberry, and came to a different conclusion. In Spencer, the wife’s mother bought four properties, one for each of her children and their families to live in. The properties were held by a trust, and the beneficiaries of the trust were all four of the mother’s children. The children were also trustees of the trust.
When the couple separated, the husband sought to have their home, held within the trust, included in the wife’s net family property and equalized.
Even though each sibling lived in a home held by the trust, as the trust did not specifically indicate that each child was entitled to a specific asset, the appellate court found that the house could not be a matrimonial home.
In Ontario, a matrimonial home is given special status, which would have had an effect on the parties’ property settlement. The court went on to state that even though the wife was both a trustee and a beneficiary of the trust, in this case, it did not mean that the wife had control of the trust.
In Borges vs. Santos, when considering whether to enforce $40,000 of child support arrears against a trust, Justice Marvin Kurz had to determine the husband’s interest in a trust. The child’s father was the beneficiary of a trust set up by his late mother. The trust was set up in a way that ensured that the father would not lose his government disability payments.
The trust was completely discretionary, and was structured to ensure that the income or assets of the trust would never be the beneficiary’s property. While the father’s brother and sister were the trustees of the trust, Justice Kurz reluctantly found that the child support arrears could not be enforced against the trust, as the husband did not control the trust.
Wealthy spouses attempting to avoid sharing property or income with a separated spouse do so to control what happens to their assets.
Paradoxically, if they fail to give up control when creating a structure to escape an equalization of assets, the wealthy spouse may well defeat the entire purpose of the structure he or she created.
JUSTICE PHILLIPS CONFIRMED THE TRADITIONAL ROLE OF THE TRUSTEE AND THE BENEFICIARY.