Family Trusts: Weighing The True Value Of A Discretionary Interest

This article was originally published by The Lawyer's Daily (www.thelawyersdaily.ca)

What is the dollar value of an interest in a discretionary family trust for equalization purposes under Ontario's Family Law Act?

The starting point is whether a beneficiary spouse's interest in a discretionary family trust constitutes "property" pursuant to the Act's provisions. Unfortunately, family courts have not been consistent in their approach to the issue and continue to grapple with whether or not such an interest constitutes property or a mere expectancy.

Adding to the complexity is the fact that even though the settlement of a family trust is generally intended and regarded as a gift, an interest in a discretionary family trust is not necessarily "excluded property" when determining net family property.

To be sure, a consistent history of distributions in favour of a beneficiary spouse from the family trust simplifies the analysis. However, more often than not the payments are occasional and wholly discretionary, with the beneficiary's spouse's parents frequently serving as trustees who have the sole power to determine quantum and frequency. Not surprisingly, faced with a separation affecting a beneficiary, they're inclined to turn off the tap entirely.

Family courts, then, have taken three distinct approaches to valuing an interest in a discretionary trust:

The "fair value" approach: the court examines the fair market value of a beneficiary spouse's interest in the family trust by asking how much such an interest would bring on the open market; The "pro rata" approach: the court divides the capital in the trust by the number of beneficiaries, allocating a proportionate value to the beneficiary litigant; The "historical analysis" approach: after analyzing the circumstances surrounding the settlement of the trust, the historical distributions therefrom and the beneficiary spouse's relationship to the trust during the marriage, the court assigns a value for equalization purposes as at the date of separation. Because all these approaches have significant limitations, the question of whether a better way exists looms consistently over the jurisprudence. And the short answer is: not yet.

The Supreme Court of Canada in S.A. v. Metro Vancouver Housing Corp. 2019 SCC 4 earlier this year, however, does offer some guidance. The court had to decide whether a beneficiary who was also a co-trustee (along with her sister) had an absolute interest in a Henson...