Divorce And Discretionary Trusts: What Can Be Divided Between Spouses? ' Cottrell v Cottrell, 2022 BCSC 1607

• Published date: 01 November 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Family and Matrimonial, Family Law, Trials & Appeals & Compensation, Divorce, Trusts
• Law Firm: Borden Ladner Gervais LLP
• Author: Mr Scott Kerwin, Kathleen McDormand, Daniel Dochylo, Pamela Cross and Peter Glowacki

The Supreme Court of British Columbia has released an important decision relating to the treatment of a spouse's interest in a discretionary trust within the context of family law proceedings. In Cottrell v Cottrell, 2022 BCSC 1607 (12 September 2022, Brongers J.), the Court interpreted provisions in Part 5 of the Family Law Act, S.B.C. 2011, c. 25, (FLA) to mean that, when considering the proper division of family property, the court must focus on whether there has been any increase in the value of a spouse's "beneficial interest" in such a trust, and not an increase in the value of the underlying property of the discretionary trust. The Court in Cottrell held it had not been proven that there had been any increase in the value of the spouse's beneficial interest and, in consequence, there was no basis for ordering any division of the property.

The claimant Joanne Cottrell was a beneficiary of two discretionary trusts settled by her parents: a joint spousal trust, as well as a family trust that had been settled to manage lottery winnings. Joanne's beneficial interest in both trusts fell within the meaning of "excluded property" under s. 85(1)(f) of the FLA because she did not contribute to or settle either trust. Excluded property is not "family property" that is subject to division between spouses. However, s. 84(2)(g) of the FLA provides that "family property" includes the amount by which the value of excluded property has increased since the beginning of the spousal relationship or when the excluded property was acquired. When ss. 84(2)(g) and 85(1)(f) are read conjunctively, the increase in value of Joanne's beneficial interest in the two trusts would be considered "family property" and prima facie subject to an equal division with her former spouse Paul.

Joanne argued that it was not possible to quantify any increase in the value of her beneficial interest in the trusts. She cited the conceptual difficulties that are inherent in valuing the interests of objects of discretionary trusts. In contrast, Paul argued that it was possible for the Court to determine a value of the increase in value of Joanne's beneficial interest in the trusts, and this amount would be caught by ss. 84(2)(g) of the FLA. He claimed that the post-tax value of the increase exceeded $2.6 million, based on Joanne being one of three remaining beneficiaries of the trusts and the underlying trust property increasing by $12 million during the marriage. In consequence, his undivided...