Bill 14 Fixes Wording of Family Law Act Provisions on Rights of Spouses to Interests in Discretionary Trusts

Last week I wrote about one of the changes that Bill 14, Justice Statutes Amendment Act, 2014 will make to the Wills, Estates and Succession Act if the bill is passed and brought into effect.

Bill 14 will also make some welcome changes to the FamilyLaw Act provisions concerning entitlements of spouses to assets held in discretionary trusts on separation. As I have written before, the Family Law Act provisions concerning discretionary trusts were poorly drafted.

Currently section 85 (1) (f) excludes from family property that is subject to a division on separation:

(f) property held in a discretionary trust

(i)  to which the spouse did not contribute,

(ii)  of which the spouse is a beneficiary, and

(iii)  that is settled by a person other than the spouse;

But section 84(2)(g) includes in family property that is subject to a division,

(g) the amount by which the value of excluded property has increased since the later of the date

(i)  the relationship between the spouses began, or

(ii)  the excluded property was acquired.

The problem is that section 85(1)(f) refers property held in the trust, rather than the spouse’s interest in the trust. A beneficiary of a discretionary trust only receives distributions from the trust when the trustee exercises his or her discretion to distribute. The effect of these two subsections together may be that on separation a beneficiary’s spouse may be entitled to half of any increase in value of the property inside of a trust to which the beneficiary has no entitlement. In my previous post, I illustrated how this could lead to the absurd position that former spouses of beneficiaries could be entitled to more than the total value of the trust.

Bill 14 should fix this by changing the wording of the relevant sections. For example, Bill 14 amends section 85(1)(f) so that it refers to “a spouse’s beneficial interest in property held in a discretionary trust” rather than to the “property held in a discretionary trust.”

The relevant amendments are as follows:

11 Section 83 is amended by adding the following subsections:

(3) For the purposes of this Part, property received by a spouse from a trust in respect of the spouse's beneficial interest in property held in the trust must be considered to be property derived from that beneficial interest.

(4) In this Part, "property" includes a beneficial interest in property unless a contrary intention appears.

12 Section 84 is amended

(a) by repealing subsection (1) and substituting the following:

(1) Subject to section 85 [excluded property], family property is all real property and personal property as follows:

(a) on the date the spouses separate,

(i) property that is owned by at least one spouse, or

(ii) a beneficial interest of at least one spouse in property;

(b) after separation,

(i) property acquired by at least one spouse if the property is derived from property referred to in paragraph (a) (i) or from a beneficial interest referred to in paragraph (a) (ii), or from the disposition of either, or

(ii) a beneficial interest acquired by at least one spouse in property if the beneficial interest is derived from property referred to in paragraph (a) (i) or from a beneficial interest referred to in paragraph (a) (ii), or from the disposition of either. , and

(b) by adding the following subsection:

(2.1) For the purposes of subsection (2) (g), any increase in value of a beneficial interest in property held in a discretionary trust does not include the value of any property received from the trust.

13 Section 85 (1) is amended by repealing paragraphs (b) and (f) and substituting the following:

(b) inheritances to a spouse;

(b.1) gifts to a spouse from a third party;

(f) a spouse's beneficial interest in property held in a discretionary trust

(i) to which the spouse did not contribute, and
(ii) that is settled by a person other than the spouse; .

If these amendments are passed and brought into effect, it will be clear that it is only the increase in value of the spouse’s beneficial interest in a discretionary trust that is subject to a division on separation rather than the increase in the value of all of the property in the trust.