Valuing Interests in a Discretionary Family Trust

Valuing Interests in a Discretionary Family Trust

Posted January 28, 2017 Category: Individuals/Families

Under Ontario’s Family Law Act (the “Act”), when married spouses separate, or when a spouse predeceases the other spouse, a right to equalization of net family property is triggered. On separation, a married spouse is entitled to an equalization of the spouse’s net family property which is intended to equally divide the wealth accumulated during marriage.

Under section 4 of the Act, “property” is defined as any interest, present or future, vested or contingent, in real or personal property. This definition is very broad and the courts in Ontario have found that the definition of property includes a contingent or vested interest in a trust. This includes both a present and future interest in a trust, whether or not the trust is discretionary or nondiscretionary and whether or not interest is in capital or income. As such, a separated spouse’s property for purposes of equalization includes a discretionary interest in a family trust unless it is excluded property for purposes of the Act.

Canadian courts have generally struggled with the concept of valuing an interest in a discretionary trust. In commercial transactions, for example, property is generally valued at “fair market value” defined as the highest price obtainable in an open market between informed parties dealing at arm’s length. In the family law context, however, courts seem to prefer the concept of “fair value”. Fair value reflects the notional concept that describes a value that is just and equitable in the circumstances. Unfortunately, the introduction of equitable principles does not provide greater certainty for advisors giving advice to those who have separated as likely obligations for equalization based on his/her interest in a discretionary trust.

Current case law reflects generally three methods used by the courts to value a discretionary trust interest:

  1. If and when: this approach considers “if and when” a beneficiary receives payment from the trust in the future, they will be considered to be holding a portion of the payment received in trust in favour of the non-beneficiary spouse.This method of valuation has been found to be fair to the beneficiary spouse in the event that nothing is ever distributed to him or her. It provides certainty based on actual value received by the beneficiary spouse but may be subject to manipulation by the trustees [who may be parents of the beneficiary or other “friendly” trustees] who may find other ways to distribute value to the beneficiary spouse other than through the family trust. It also creates the problematic issue of attributing value to property received after the Valuation Date, being the date on which net family property is to be determined;
  2. Notional pro rata distribution: this approach will simply take the value of the trust on the Valuation Date, divided by the number of beneficiaries and assigns a notional equal share to the property of the beneficiary spouse. This is a simple approach generally viewed as unfair where there are a number of classes of beneficiaries, some of whom may not ever receive income or capital;
  3. Examination of purpose and history: using this approach, the court will examine the facts of the particular case, including the way and reason the trust was created and how it has been operated. Using this assessment, the court can assign a value to a spouse based on the likelihood that he or she will continue to receive, or will receive such value in the future.
Posted January 28, 2017 Category: Individuals/Families

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