The Family Law Implications Of Estate Planning Strategies: The Net Family Property Freeze, Alter Ego Trusts And Joint Partner Trusts

The House of Lords, in Inland Revenue Commissioners v. Westminster (Duke) established the following fundamental principle of tax law:

"Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be."1

People over the age of 60 have generally amassed the maximum wealth to be had in their lifetime and have planned prudently for their retirement, and ultimately their passing. As noted by John-Paul Boyd and Anna Laing, "ours is an aging population" and more people over the age of 60 are divorced or separated than ever before.2 While estate planning is both a legitimate and encouraged practice in Ontario,3 it is imperative to acknowledge the family law implications of the various estate planning strategies for a client who seeks to order their affairs in an effort to undermine their family law obligations prior to or upon the breakdown of a relationship.

Here we will examine the more common estate planning practices, their respective advantages and disadvantages and the treatment of these strategies by the courts in the context of the equalization of net family property. Part I will provide the statutory framework, under which the entitlement to an equalization of net family property arises. Part II will investigate the net family property freeze and the reticence of judges to deem 'gifted' freeze shares as an exclusion from net family property. Part III will analyze the utility of alter ego and joint partner trusts and the treatment of trust assets by the judiciary when equalizing net family property. Part IV will conclude by offering some practice tips, which may bridge the exposure gap between estate planning and avoiding family law obligations.

PART I: THE EQUALIZATION OF NET FAMILY PROPERTY

In the eyes of the court, a relationship is at an end upon the earlier of the following events:

The date the spouses separate and there is no reasonable prospect that they will resume cohabitation; The date a divorce is granted; The date the marriage is declared a nullity; The date that one of the spouses commences an application under subsection 5(3) (improvident depletion) that is subsequently granted; or The date before the date on which one of the spouses dies leaving the other spouse surviving.4 In Schreyer v. Schreyer, the Supreme Court of Canada succinctly described the legislative efforts to construct a regime for the division of property upon the breakdown of a relationship:

"Every Canadian province has tried to address in some way the inequities or difficulties arising out of the distribution of family assets after the breakdown of a marriage or of a common law relationship to which the same rules apply. Broadly...