Discretionary trusts are frequently utilized in estate planning to avoid tax, to defer the gift of assets to beneficiaries and to protect the assets from claims of third parties, including current or future spouses of a beneficiary.

To advance a claim under the Family Relations Act of BC (the “Act”), a beneficiary’s spouse must establish that his or her spouse 1) has an interest in a trust and 2) the property owned by the trust would be a family asset if that asset was owned by the spouse.

Not all assets owned by either of the spouses are “family assets” subject to division under the Act. Assets are family assets or become family assets if they are ordinarily used for a family purpose. The Act places a reverse onus on the party opposing a claim to establish that an asset was not ordinarily used for a family purpose. Accordingly, if there is no evidence regarding the use of a trust asset, there is a legal presumption that the asset was ordinarily used for a family purpose and would have become a family asset if owned by the spouse. The party opposing such a claim must lead evidence to rebut this presumption.

Where the assets of the trust are real estate, vehicles or other chattels, evidence of ordinary use tends to be relatively clear. Ordinary use for a family purpose is easily established in the case of residential property which is occupied regularly. Recreational property which is used for vacations, even once a year, over a period of years will be found to have been ordinarily used for a family purpose.

Where the assets are securities, cash or other “passive” investments, the distinction that is made is between the use of income from the trust as opposed to capital held by it. It has generally been held by courts that the “mere” use of income derived from assets (including assets held by a trust) does not necessarily amount to ordinary use of the assets themselves for a family purpose. However, consistent use of income over many years for family purposes may convert the asset or trust interest into a family asset. The use of capital assets usually takes the form of either an advance or a loan by the trust to the beneficiary. In determining whether such transactions amount to ordinary use for a family purpose, a Court will look to the frequency and amount of the advances as well as to the use to which the funds were put If the trust assets include shares in a company in which the beneficiary is involved as an employee, director or officer, the Act may also apply to make the trust interest a family asset.

To maximize the effectiveness of a trust to protect assets from claims by a spouse, the structure of the trust is crucial. Trusts which hold assets which will be ordinarily used for a family purpose will be open to attack as discussed above. They remain, however, effective in a practical sense. The successful claimant can only obtain a share in the beneficiary’s interest in the trust. Where that interest is a contingent one, it is virtually impossible to value as it may never be perfected. The only remedy available is an “if and when” order requiring the beneficiary to pay the claimant his or her share of any assets received by the beneficiary from the trust. This may never occur if the trust is entirely discretionary. It will, however, permanently “charge” the beneficiary’s interest and effectively defeat one of the goals of the trust.

There are some practical strategies which may prevent the trust interest from being characterized a family asset. The obvious strategy is to ensure that the trust assets are never used for a family purpose during the marriage. Ideally, not even the income would be used for a family purpose, but this would effectively defeat the purpose of the trust. Although there is some risk that the use of income alone from a trust will be found to be ordinary use of its assets for a family purpose, this is less likely under current jurisprudence unless the use is frequent and the family is to a significant degree dependent on the trust income for its general living expenses.

Despite the provisions of the Act, trusts can still be an effective asset protection vehicle if they are structured with specific goals in mind. They can be particularly effective in protecting assets which would otherwise be divided under the Act at the end of shorter marriages. Their effectiveness decreases with longer marriages during which increased use of trust assets is likely to occur and a mutual intent to rely on the trust assets for future family security would be more evident.