Separation is only the first of a series of unpleasant and surprising facts a separating spouse may be faced with when coming to terms with the end of a relationship. A particularly unpleasant surprise may be when a spouse learns that property he or she thought belonged to their ex did not “really” belong to them after all, but was instead held on behalf of a third party.
That relationship—where one person has legal title to property but only in order to benefit someone else—is called a trust. Trusts can greatly complicate family law cases.
In some trusts, the trustee (the person holding the property) may have wide discretion over the property. In fact, the trustee can often use the property however he or she wishes, and may choose to benefit (or not benefit) any beneficiary to the exclusion of any other. Sometimes the trustee is also a beneficiary of the trust, and sometimes the trustee has the power to add or remove beneficiaries. In essence, it is almost totally up to the trustee to do with the property what he or she likes, as long as in doing so he or she is carrying out the terms of the trust.
That can be a perplexing piece of news to the person married to the beneficiary of a discretionary trust. Although the beneficiary may have received great benefits from the trust during the relationship or even have treated the trust property as if it really belonged to the beneficiary, as a matter of the law of trusts the beneficiary does not own the trust property. If the beneficiary does not own the trust property, then the beneficiary’s spouse cannot claim against it. Or so the argument goes.
There are not many cases in British Columbia where Courts have squarely addressed the nature of a spouse’s interest (if any) in trust property as a beneficiary of a discretionary trust. They occur from time to time, and most recently in the case of Williamson v. Williamson, 2020 BCSC 108.
In Williamson, the wife’s family had long owned and operated a chicken farm. The wife’s interest in the farm was held through a discretionary trust, apparently set up by the wife’s father.
The wife’s family farm was at stake. The farm assets (comprised primarily of land and poultry quotas) was owned by a partnership of three companies. One of the companies was owned by the wife’s father; a second company was owned by the wife’s uncle; and the third was owned through two trusts, one having to do with the wife and the other with her brother. In essence then, the wife’s trust held a one-sixth beneficial interest in the farm.
The wife and her father were trustees of the trust, meaning that it was up to them to administer the trust assets for the beneficiaries of the trust. At the time of settlement (i.e. when the trust was created), the beneficiaries were the wife, the husband, and their children. The wife’s father retained the right to add new beneficiaries to the trust.
The wife and husband separated. Sometime later, the trustees of the wife’s trust (i.e. the wife and her father) gave notice that the wife would be removed as trustee of the trust, and that the wife’s mother would be added as a beneficiary. Further, the trustees announced that the trust assets would soon be distributed, and that the wife would probably not be among the beneficiaries receiving a distribution.
The implication here is that the wife would not have received any of the benefit of the trust. Presumably, the wife’s mother would receive the distribution (as this is probably why she was added as a beneficiary to the trust). As the wife would not receive any benefit, the husband would likewise not be able to claim against the wife’s interest.
The husband went to court to ask the court to essentially ‘freeze’ any distributions out of the trust and to prevent any additional beneficiaries from being added, at least until trial. These kinds of freezing orders (called injunctions) are commonly granted in family law cases, at least where the interests of people other than the spouses are not at stake.
The wife and the trustee both argued that the wife had no interest in the trust, because the trust was discretionary and as a result the wife had no more than an expectation that she would benefit from it. Further, they argued that if a distribution was not made immediately, there would be serious tax consequences that could result in the sale of the farm.
When asked to grant an injunction, the Court is usually asked to consider whether there is any merit to the case of the applicant (in other words, whether there is a serious question to be tried). If there is no merit, the injunction will not be granted. If there is merit to the case, the court must then weigh the harm that would be caused by the injunction being granted against the harm that would befall the applicant if the injunction were not granted (called the ‘balance of convenience’). If the harm that would befall the applicant if the injunction were not granted is greater than the harm that would be caused to the respondent if the injunction were granted, then the injunction should be granted.
The husband’s case here did have at least some merit. As the Court acknowledges, the fact that a trust agreement contains discretionary language is not the end of the story. Rather, the actual history and function of the trust needs to be examined to see whether the trust truly functioned in a discretionary way. In other words, if the trust documents say the trust is discretionary, but in practice the trust has not been dealt within a discretionary way, then it is at least open to the Court to find that the beneficiary does indeed have some interest in the trust property.
The Court in Williamson does not seem to consider whether there was a serious question to be tried. The husband’s claim against the trust assets would have been highly fact dependent, but the husband’s lawyer was able to point to a number of factors that could have led the trial judge to conclude that the wife had some interest in the trust. But the Court in Williamson did not carry out that exercise. Instead, it found that the trustee was not acting for an improper purpose. That may well have been so, but that fact alone does not mean an injunction could not have been issued. Even if the trustee was acting in good faith, the husband had at least a potentially valid claim against the trust property.
The Court should also have weighed the balance of convenience. On this point the trustee properly argued that there would be serious tax consequences were a distribution not made. That point could have justified the court in refusing the injunction. However, the court ought to have weighed the prejudice to both parties before reaching that conclusion.
The Court did not grant the injunction. As a result, the trustee (the wife’s father) was free to distribute the property to other beneficiaries.
No doubt an unpleasant surprise for the husband.
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