When one goes through a divorce, it is commonly understood that the parties must divide their property before they go their separate ways. If the parties cannot come to agreeable terms on their own, then the courts will get involved to sort matters out in accordance with the law. While most people know that, after a divorce, each person is legally entitled to take anything they brought into the marriage, the rules concerning what happens to assets or money acquired during the marriage could be clearer. It is particularly true for something that, while technically owned or available before marriage, is greatly appreciated during the marriage.

The British Columbia Court of Appeal recently clarified what happens when one party to the divorce owns an asset appreciated during the marriage.

A Marriage Begins; A Marriage Ends

The parties involved in the Cottrell v Cottrell divorce had begun their relationship in March of 1993, moved in together in July of 1994, and were married in June of 1995. The husband had been the primary income earner for much of the marriage. At the same time, the wife, Joanne, had given up her career to care for the family home and the couple’s two children (both of whom were pursuing post-secondary education at the time of these proceedings). The parties separated in November 2017, and Joanne commenced family law proceedings in May 2019. At the time of the trial, Joanne was 54, and her husband was 56.

The Wife is Gifted a Trust by Her Parents Before She Ever Met Her Husband

In 1990, Joanne’s parents had won $5 million in the lottery before the parties ever met. Joanne, who was in university then, was gifted $50,000 by her parents, who also established a trust for her for $500,000. This investment trust was controlled by Joanne’s parents, who were in charge of deciding when funds could be withdrawn from that trust. She received a $5,000 distribution from the trust every 3 months for several years until that trust was dissolved in 2011, and the remaining funds were transferred into Joanne’s account. Joanne took the position that these funds constituted excluded property under the Family Law Act, and the husband did not dispute her claim.

However, Joanne’s parents had established additional trusts after the dissolution of Joanne’s original investment trust. Specifically, Joanne’s parents established two new trusts, the Muster Family Trust and the Muster Joint Partner Trust, in addition to amalgamating all of their companies into a single entity, “Muster Management Inc.” (MMI). While Joanne is one of the many beneficiaries of these two trusts, the Family Trust was the one at issue in this legal dispute. The terms of the Family Trust dictated that the trustees had absolute discretion to distribute monies unequally among the beneficiaries, should they desire. Moreover, the parents had the ability, per the terms of the trust, to appoint additional beneficiaries, remove beneficiaries and amend the trust’s provisions at will. The trustees of the Family Trust were granted absolute discretion to manage the trust. 

While the parents were originally the named trustees of the Family Trust, when Joanne’s mother passed, she and her brother were added as trustees. However, as was noted in court, this amendment was in name only, as neither Joanne nor her brother was ever involved in the management of the assets of the trust. Moreover, as soon as Joanne became involved in family law proceedings, she resigned as trustee of the Family Trust at her father’s request. Notably, the Family Trust owns shares of the parents’ company, MMI, a key asset of which is a commercial property which generates rental income. 

Joanne did not receive any distributions from the Family Trust while married. By her father’s intentions, she understood that the money could be redistributed in any manner her father chose, at any time, so she had never planned to receive any money from this trust during her lifetime.

Husband Seeks Division of Increased Value of Wife’s Interest in Family Trust, Company

When Joanne sought a divorce from her husband, he counterclaimed for his share of the increase in value of Joanne’s interest in the Family Trust and the family business, MMI. He argued that all property and support issues between the couple should be decided on the basis that Joanne would eventually receive a large distribution of funds through the trust. In contrast, Joanne argued, “that this possibility ought not to be accounted for given the uncertainty as to timing and value of any amount she might get from the trusts in the future.” The trial judge found that, since the Trust was discretionary, none of the beneficiaries’ entitlements could be established at settlement. As such, the husband could not demonstrate that Joanne’s share of the Family Trust had been appreciated, so he was not entitled to anything. The husband appealed.

Appellate Court Upholds Lower Court Ruling

The Court of Appeal noted at the outset that the division of family property is governed by the Family Law Act, which “approaches property division on the breakdown of a spousal relationship by categorizing property either as “family property,” which is subject to presumptive equal division under s. 81, or excluded property”. It was further noted that “all property owned by a spouse … is family property unless it is excluded property”.  Section 85 of the FLA provides a list of property that is excluded from the definition of  “family property.” It includes, in section 1(f), a spouse’s beneficial interest in property that is held in a discretionary trust to which the spouse did not contribute and that is settled by any person other than the spouse herself. The party claiming that the property is excluded bears the onus of proving that assertion to the court. That means that, in this case, Joanne had to prove to the court that the discretionary trust of which she was a beneficiary constituted excluded property. Since the trust is discretionary, Joanne had never contributed to it, and her parents had settled it. Joanne satisfied the court that the Family Trust did not come within the definition of “family property” for property division related to the divorce. As such, her husband was not entitled to receive any portion of the value of the Family Trust of which Joanne was a beneficiary.

Vancouver Family Lawyers Advising On Property Division Family Matters 

Meridian Law Group’s family law lawyers have years of experience assisting clients through family law disputes. Whether your dispute relates to property division, domestic agreements, family violence, or parenting issues, Merdian Law Group’s family law lawyers have the knowledge and experience to guide you through the process, ensuring your rights are preserved and protected at every step. Contact a family lawyer at Meridian Law Group today, either online or by telephone, at (604) 687-2277, to schedule a confidential and comprehensive meeting with one of our capable team members.