This month’s blog post was written by Lynne Daubaras, family, estate, and trust lawyer at Lynne Daubaras Professional Corporation.
Introduction
Trusts are a common estate planning tool, often used to preserve wealth for future generations. But when a marriage ends, the legal treatment of trust interests – particularly discretionary ones – can become a point of dispute.
In Part I of this blog series, we explored how traditional trust law treats a beneficiary’s interest in a discretionary trust. As a brief review, a trust separates legal and beneficial ownership: trustees hold legal title and control distributions, while beneficial ownership rests with the beneficiaries. In a discretionary trust, no beneficiary is entitled to a fixed share, and trustees often have broad discretion. As a result, courts applying trust law typically view a beneficiary’s discretionary trust interest as a mere expectancy and too uncertain to be considered as “property”. This principle also underpins estate law, making discretionary trusts effective for asset protection.
In Part II of this series, we turn to the application of family law principles to interests in discretionary trusts and examine how this treatment varies across provinces (particularly Ontario and British Columbia). Understanding the treatment of discretionary trust interests under family law is essential to ensuring that trust structures continue to serve their intended purpose, even in the face of marital breakdown.
Ontario Family Law: A Broader Net
In Ontario, courts have sometimes treated a spouse’s interest in a discretionary trust as “property” for the purposes of equalization under the Family Law Act (“FLA”)[1]; this reflects a broader, more pragmatic approach aimed at achieving financial fairness between spouses. The FLA defines “property” broadly, including “any interest, present or future, vested or contingent.”[2] Ontario courts often interpret this to capture discretionary trust interests, particularly where the beneficiary exercises some degree of control over the trust. For example, the court in the following key cases assigned property interests to the beneficiaries of discretionary family trusts:
- Sagl v Sagl[3]: the beneficiary’s discretionary trust interest was determined to be property given his influence over trustee decisions. The beneficiary’s interest was valued on a pro rata basis, being one-seventh of the value of the trust’s assets at separation.
- Mudronja v Mudronja[4]: The husband’s sweeping powers as sole trustee of a discretionary trust, including his ability to add or remove beneficiaries, led the court to treat his beneficial interest in the trust as tantamount to ownership. The full value of the trust was attributed to him as property.
- Tremblay v Tremblay[5]: The court set out factors for assessing whether a beneficiary exercises control over a trust. Such factors include the trust’s founding intent and whether it was structured to allow beneficiary control; whether the beneficiary is also a trustee; trustee composition; veto powers; history of distributions; and the relationships among trustees and beneficiaries. The more influence a beneficiary has, the more likely their interest is considered property.
Not all cases take such an expansive approach. The courts in Dillon v Dillon[6] and Kochar v Kochar[7] recognized that a discretionary interest with no trustee control is only an expectancy interest and not property. Similarly, in Spencer v Riesberry,[8] the Ontario Court of Appeal held that a trust interest resembling an inheritance did not constitute property. Despite these exceptions, the trend in Ontario is clear: family courts are often willing to stretch the definition of “property” to include discretionary trust interests, especially when control exists.
Valuing Trust Interests: An Ongoing Challenge
Even when courts classify a trust interest as “property”, valuation is notoriously difficult. Ontario courts have taken three main approaches:
- Pro Rata Valuation: Dividing the trust assets equally among beneficiaries as if distributed at separation.
- Fair Value Approach: Attributing the full value of trust assets to a spouse with significant control.
- Historical or “If and When” Analysis: Basing value on past distributions or deferring until distributions actually occur.
These approaches reflect the tension between trust law and Ontario family law. While trust law treats discretionary interests as expectancies with no fixed value, Ontario family courts often prioritize practical control and financial fairness, expanding the scope of “property” under the FLA to include such interests.
A Different Approach: British Columbia and Cottrell v Cottrell
In contrast, British Columbia suggests a more restrained view. It has legislated and now judicially clarified a framework that aligns more closely with trust law. British Columbia’s Family Law Act[9] expressly addresses discretionary trusts. A spouse’s interest in a discretionary trust settled by someone else is generally excluded property, unless the spouse contributed assets. However, any increase in the value of that interest during the marriage is included in family property. Importantly, the legislation refers to the increase in value of the interest itself – not in the underlying trust assets.
Further, in Cottrell v Cottrell (“Cottrell”)[10] the British Columbia Court of Appeal reaffirmed that discretionary trust interests cannot be equated with fractional ownership of trust assets, and that their value may remain unchanged even as the value of the trust property fluctuates. In that case, the wife, Joanne, was a discretionary beneficiary of a family trust created by her parents. Her husband argued for a pro rata valuation of the trust’s assets. The court rejected this, emphasizing that:
- a discretionary beneficiary does not hold a proportionate share of the trust property;
- what matters is whether the value of the beneficiary’s interest itself has increased during the marriage; and
- because Joanne’s interest was subject to the same contingencies at separation as at settlement (i.e., trustee discretion, life expectancies, investment risks, and potential changes in beneficiaries), it had not increased in value during the marriage.
This reasoning respects both the protective nature of discretionary trusts and the equitable aims of family law, avoiding artificial valuations.
Conclusion
The treatment and valuation of discretionary trust interests under family law continue to raise important questions, particularly in Ontario. Courts have shown a willingness to treat them as property for equalization purposes, especially when the beneficiary has some control over the amount and timing of the distributions. Yet, the valuation of such interests is inconsistent and often at odds with established trust law principles.
British Columbia’s approach, as seen in Cottrell, offers a clearer framework – recognizing the contingent nature of discretionary interests and avoiding artificial valuations. Though Ontario’s definition of “property” under the FLA is broader, Cottrell presents a model that may help Ontario courts strike a better balance between fairness and legal integrity.
For advisors and planners, these jurisdictional differences underscore the importance of tailoring trust structures to the applicable family law regime – especially when planning across provinces.
[1] RSO 1990, c F3.
[2] FLA, s 4(1)(b).
[3] 1997 ONSC 12248 (CanLii).
[4] 2014 ONSC 6217 (CanLii).
[5] 2016 ONSC 588 (CanLii).
[6] 2014 ONSC 2236 (CanLii).
[7] 2015 ONSC 6650 (CanLii).
[8] 2012 ONCA 4182012 (CanLii).
[9] [SBC 2011] Chapter 25.
[10] 2023 BCCA 471.
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