On March 18, 2013 the new Family Law Act (the “Act”) came into force in British Columbia replacing the Family Relations Act. The Act introduces significant changes to the rules surrounding property division upon a relationship breakdown. These new rules have startling implications on the division of property on a relationship breakdown where a spouse is a beneficiary of a discretionary trust with certain characteristics.
Implications for Discretionary Trusts
Under the former legislation, the Family Relations Act, three classes of assets were subject to a presumption of equal division at the end of a relationship breakdown. These assets were as follows:
- a spouse’s interest in a home, RRSP and pension plan;
- property ordinarily used for a family purpose during the marriage; and
- a business or venture of a spouse to which the non-owing spouse made a direct or indirect contribution.
Under the FamilyRelations Act, an interest in a trust could be found to be family asset if the court determined that the interest itself was “ordinarily
used for a family purpose.” The court’s interpretation of “ordinarily used for a family purpose” was a very elastic concept and could include assets that were never actually used by the family during the marriage.
Under the new Act, it is now clear that an interest in a discretionary trust that has certain characteristics will be “family property” that is subject to division on a relationship breakdown. “Ordinary use” is not relevant in the new Act for determining which assets will be subject to a division.
Under the Act, where a spouse is a beneficiary of a trust, any increase in value of the property owned by the trust during the relationship will notionally belong to the beneficiary who separates from his or her spouse for the purposes of the division of property upon a relationship breakdown.
The implications are best illustrated by way of an example. Jane is a beneficiary of a discretionary trust. In 2013 Jane married John. At the time of the marriage, the value of the property owned by the discretionary trust is $1,000,000. In 2015, John and Jane divorce. The value of the property owned by the discretionary trust has increased to $1,500,000. Under the new Act, John will be entitled to one-half of the increase in value of the property, being $250,000. Jane will be required to pay to John one-half of the increase in the value, even though she has no power to force the trustees of the trust to make distributions to her and despite the fact that there may be other beneficiaries who have an interest in the trust property.
What is a Spouse?
The new property division regime applies not only to married persons, but also to a person who has lived with another person in a marriage-like relationship and has done so for a continuous period of at least two years. This means that common-law spouses, including same-sex spouses, in addition to married spouses, are presumptively entitled to one-half of the increase in value of property owned by a discretionary trust during the relationship.
We would be pleased to discuss how the Act may affect your estate planning and any trusts of which you are a beneficiary or may have set up.