This BC Family Law property division paper supplements a BC Family Law paper entitled ‘Valuation of Contingent and Discretionary Trusts’ prepared by Lorne N. MacLean for Continuing Legal Education in November 2004.
One of the problems with dividing a trust, is that the trust represents a complex package of rights, powers and interests which are not necessarily fixed at any point in time. While assets acquired during the marriage as a shared enterprise often represent little cause for emotion and bitterness, dividing a trust set up by a third party will likely cause that third party to believe the court is making an unjustified division of wealth completely unconnected to the marriage.
Valuation issues with respect to trusts can include the following:
- Actuarial information concerning the life expectancy of the spouse beneficiary and other beneficiaries of the trust.
- The extent to which other beneficiaries of the trust are eligible for distributions that may dip into the capital of the trust.
- A present value discount related to the delay in the beneficiary spouse receiving an interest in the trust.
- Considered a discount in cases where a beneficiary spouse needs to survive another beneficiary to receive a share or the likelihood of the spouse beneficiary dying before the other beneficiaries. Should medical evidence of a beneficiary spouse’s actual health be used for merely average life expectancy tables?
- If the trust is discretionary, how does the history of discretionary distributions of income and principal relate to valuation?
- What consideration of the life expectancy of a spouse beneficiaries’ parents should be lead?
- How should evidence of the likelihood that the trustee would invade the trust corpus in the future be considered in valuation?
- What is the likelihood or discount for the ability of a trustee to add further beneficiaries to a trust?
- What consideration should be made for tax liabilities, market changes in the value of the trust principal, and capital gains tax due on trust distributions in the future?
- Can the court look at the payment stream of income under a trust until a spouse’s projected date of death, taking into account an assumed interest rate on the capital as in Sagl after dividing the capital between the appropriate beneficiaries? What is the appropriate discount rate?
- What consideration should be given to the fact that the trustees of the trust may use their discretion in the face of court proceedings to dilute the value of the trust beneficiaries interest in the trust to defeat the claim of the non-beneficiaries spouse either by refusing to make further distributions, by transferring funds to a new trust, or by refusing to make any further distributions to the trust beneficiary.
- What impact of the terms of the trust in allowing principal to be invaded for a beneficiary other than the spouse involved in the divorce should be considered?
- What effect does the past performance of trust investments, the type of assets held in the trust, projections for future performance of the trust investments, prior trust distributions, the type of trustees involved including, for example, family members not sympathetic to the non-beneficiary spouse’s claim to share.
- What would the impact of a beneficiary spouse having a terminal illness have on the valuation of the trust that may require that spouse to survive another beneficiary or effect the duration of the stream of income payout that may flow from the trust?
- What does the impact of considering the comparative financial resources of all current trust beneficiaries have on the valuation of the trust interest of the beneficiary spouse? For example, if the beneficiary spouse is more well off than other beneficiaries, should a discount be made for the fact that the trustee may in their absolute discretion give more to the beneficiaries with greater need?
- Will there be a need to obtain financial disclosure from beneficiaries not directly involved in the divorce though document disclosure and discovery be required in cases involving the power to encroach or make unequal distribution for one beneficiary during that beneficiary’s lifetime?
- Should consideration be given to the intentions of the settlor, the fiduciary responsibilities of the trustees, the number of beneficiaries and the manner in which the power to distribute funds has been exercised in the past?
In conclusion, the courts have not yet deal with all of the factors to be considered in valuing a discretionary trust interest. In the Sagl case referred to above, the court used a very simplistic approach to valuing a trust interest. However, in divorce proceedings it is interesting to note that CCRA has adopted the Sagl method of evaluation of trust in determining the taxation of trust interests.
It would seem the courts penchant for awarding a percentage to the non-beneficiary spouse on an if and when basis has occurred because of the difficulty in valuing trusts. However, given that trusts are setup to protect assets from creditors including those who have become creditors as a result of divorce proceedings, the power available to trustees to defeat any sharing on an if and when basis ranges from a minor to a complete obstacle to a easily obtainable share in the trust by the non-beneficiary spouse.
These same issues need to be considered for child support and spousal support claims and defences. What is the value or income potential? How should it be considered? See CSG sections 19(1)(d)(e) and especially (e). The Spousal Support Guidelines say that they adopt the same income calculation method as the CSG.
Tags: BC Family Law Vancouver Family law, British Columbia Trust division and valuation