This blog has been written by Darren Lund, a partner at Fasken LLP

In Ontario, trust law and family law have for some time taken very different approaches to valuing the interest of a beneficiary in a discretionary family trust.

For trust lawyers, a beneficiary’s interest in a discretionary family trust is a “mere expectancy”. Beneficiaries who are part of the class of discretionary beneficiaries have a right to be considered for discretionary distributions of income and capital, but they do not have a right to a particular distribution (subject of course to any specific terms of the trust). Family law strives to achieve different objectives, and considerations of fairness and equity between the spouses are part of the calculus.

In 1997, the decision in Sagl v Sagl, 1997 CarswellOnt highlighted the difference between these approaches. Among other things, the case dealt with the valuation of a spouse’s interest in a family trust that was settled prior to the marriage (and, as such, was not “excluded property” for purposes of the Ontario Family Law Act). In short, the court resolved the matter by dividing the fair market value of the assets in the trust by the number of capital beneficiaries on the relevant dates (i.e. date of marriage and date of separation). While this provided certainty, the reasoning gave little or no weight to the nature of a beneficiary’s interest in a discretionary trust from a trust law perspective.

Subsequent cases in Ontario have moved toward a more contextual analysis[1], taking into account factors such as the history of distributions to a spouse during the course of the marriage and the degree of control the spouse may exercise over the administration of the trust. For example, a court may look at which trustee is in fact exercising control, if the trustees are taking instruction from non-trustee actors, and who has the power to appoint and remove trustees. Still, the cases have not set out a clear or singular analysis of the nature of the interest of a beneficiary in a discretionary family trust.

In this context, the British Columbian Court of Appeal decision in Cottrell v Cottrell, 2023 BCCA 471 is a decision that trust lawyer’s have been waiting for (in the author’s view).

Paul Cottrell and Joanne Cottrell started living together in 1994 and were married in 1995. They separated in 2017 and matrimonial proceedings were started in 2019. They have two adult children. During the marriage, Joanne’s parents, Robert and Patricia, settled two trusts as part of a reorganization of their corporate structure, a joint partner trust and a discretionary family trust. The class of discretionary beneficiaries in the family trust included Joanne, her brother, and other lineal descendants of her parents.

Under British Columbia’s matrimonial property rules, a spouse’s interest in a discretionary trust is excluded property so long as the spouse did not settle the trust or contribute property to it, as in this case. However, the increase in value between the date the beneficiary acquired their interest (or the date of marriage if acquired before marriage) and the date of separation is not excluded. Paul Cottrell asked the court to apply a Sagl analysis to the valuation of Joanne’s interest in the family trust. The British Columbia Court of Appeal conclusively rejected that approach.

Importantly, the Court of Appeal clarified that the interest of a beneficiary in a discretionary trust is not equivalent to a proportionate interest in the value of the property held in the trust, even though there may sometimes be a correlation. It is the growth in value of the spouse’s interest in the trust, not the growth in value of the assets held in the trust, that is relevant for matrimonial property purposes.

In this case, the court considered the terms of the trust, the degree of control exercised by Joanne over the trust, the relationship between the trustees and beneficiaries, the history of administration of the trust (Joanne had received no distributions), and the contingencies that could impact if and when Joanne might receive a distribution from the trust. The list of contingencies the court considered is impressive. It included the life expectancy of her father, future investment decisions in managing the trust, the potential that the investments might decline in value due to market conditions or unsuccessful investment decisions, the potential future needs of Joanne’s parents, including whether they might have special medical needs when they age that are not provided for by other means, any special needs of Joanne’s children, Joanne’s needs and life expectancy, and whether her father might exercise the power to add or remove beneficiaries.

In the result, the court concluded that the same contingencies that surrounded Joanne’s interest in the family trust when it was settled existed on the date of separation. Therefore, it could not be said that the value of Joanne’s interest in the family trust had increased between the date of settlement and the date of separation, irrespective of whether the value of the assets had changed. In short, Joanne’s interest in the family trust was as contingent and unclear on the date of separation as it was on the date of settlement, so there could not be said to be a change in value.

The reasoning in Cottrell is music to the ears of trust lawyers, and provides a clear and nuanced analysis of the nature of a beneficiary’s interest in a discretionary family trust. It is hoped that this analysis will be adopted by Ontario courts in future decisions.

[1] See for example Tremblay v Tremblay, 2016 ONSC 588 (CanLii) and Mudronja v. Mudronja, 2014 ONSC 6217 (CanLII)