Law Times

PAGE 12 FOCUS OctOber 26, 2009 • Law times Lawyers advised to think about all possibilities in dealing with clients Act when working with clients and con- sult a specialist rather than dabble, says Lorne Wolfson of Torkin Manes LLP. That's because the act has a few sur- prises that can trip up even the most ex- perienced trusts and estates lawyer if a cli- ent's marriage breaks down or even if their children or grandchildren's subsequent marriages go south in the event they are named as beneficiaries in the trust. In some cases, the trust has been creat- ed simply on the advice of an accountant as a way to defer taxes. However, in the event of a marriage breakdown, the Family Law Act comes into play and with it some pretty strong rules around what counts as matrimo- nial property and, by extension, income if the issue of support is on the table. "For the most part, none of these trusts are set up to avoid equalization or support in the event of a pending break- down," says Wolfson. "But there are some things to consider under the [act]. At the time of drafting the trust, they are prob- ably happily married and not thinking about separating. They are more worried about the tax man than anything else." For one, in the event of a divorce ac- tion, there's the question of whether the trust is property under the Family Law Act. It's not necessarily an easy a deter- mination since the trust may have been created before the marriage but may Trusts raise important family law considerations T BY I. JOHN HARVEY For Law Times rusts and estates practitioners are well advised to think about the impact of the Family Law not pay out until many years later. Is it considered a gift or income? And should the valuation be based on the net value or the accessible value consider- ing that the trust may not pay out in the divorcing spouse's lifetime. Because the questions are complicated, Wolfson advises his colleagues to refer their clients directly to a family law specialist. Determining if a trust is matrimonial property under s. 4 (1) of the Family Law Act has often been a ques- tion that has come back to bite many a spouse. He notes the first case Family law considerations can trip up even the most experi- enced trusts and estates law- yer, says Lorne Wolfson. to address the effect of this definition in the context of trusts was Black v. Black, in which a grandfather who died before his grandson got married left shares in trust that did not vest in the beneficiary until years after the marriage. The grandson argued he didn't acquire the shares absolutely until after his mar- riage and that the shares should be exclud- ed under s. 4(2) of the Family Law Act. The court, however, differed and found they were in fact property, allowing only a deduction of the value of the shares at the date of marriage. As the court noted at the time: "The definition of 'property' contained in s. 4 of the act is all encompassing. It specifically, and there- fore intentionally, in- cludes not only a vested, but also contingent, not only a present, but also a future interest in real or personal property." This, says Wolf- son, was followed by Brinkos v. Brinkos, in which a trust created by the parent endowed the daughter with an "inalienable life interest in the net income from the trust property." While the daugh- ter argued forcefully against a finding under the Family Law Act that deemed the trust income as property, the Ontario Court of Ap- peal rejected that position. With strong case law, subsequent rulings have followed the same pattern, which then prompts the tricky process of valuating the property for equaliza- tion or support purposes. But valuation under the Family Law Act is somewhat different from valuation under the Income Tax Act where a value is fixed as to what a free market with unfettered and unencumbered parties might arrive at, Wolfson says. Under the Family Law Act, courts have held that it is not market value that holds sway but fair value. "Fair value is a notional concept that describes a value that is just and equitable in the circumstances in order to determine the fair value of an asset," he points out. He adds that while in Brinkos the argument was the trust had no fair market value, the court held that trust interest "remain[ed] property without market value but with a very real value to the owner." With a non-discretionary trust, some of the factors to be weighed include the life expectancy of the beneficiary, the nature of the trust's capital, and an estimate of the fu- ture rate at which income will be generated by the trust's capital, says Wolfson. With a non-discretionary trust, the capital is the amount a beneficiary would accept immediately rather than waiting to receive it or a present value of an interest in a future value. As such, valuation is based on the ex- pected date the capital will be distributed to the beneficiary; the expected annual rates of return and appreciation rates; the amount targeted for reinvestment and cap- ital to be distributed to the beneficiaries; and the anticipated capital contributions or distributions to other beneficiaries. There aren't a lot of cases around valuation, he says, pointing to Grove v. Grove from British Columbia. In On- tario, the first case was Sagl v. Sagl. Wolfson's watchword, then, is cau- tion given that estates and trusts prac- titioners aren't family lawyers. "As LawPRO warns, 'dabbling is dan- gerous — don't do it,'" Wolfson says. "Estates practitioners must be extreme- ly cautious when advising clients with respect to the potential consequences of estate planning techniques in the event of a separation of their clients and/or their client's children." 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