Saturday, March 28, 2020

Williamson v. Williamson

In British Columbia, a separated spouse may make a claim to his spouse’s interest in a trust. In some cases, the claim will be successful, but in others, property held in trust may be insulated from family law claims. The law is quite nuanced. This is illustrated by the case of Williamson v.Williamson, 2020 BCSC 108.

Diane Williamson was a trustee and a beneficiary of a family trust. The property held in trust consisted of an interest in a farm business that had been in her family for generations. The other beneficiaries were her spouse, Robert Williamson and their children. The trust was a discretionary trust in which the trustee had the power to decide if and when to make distributions to any one or more of the beneficiaries. No beneficiary had any entitlement to the property held in trust unless and until the trustee decided to make a distribution to that beneficiary.

On the breakdown of the marriage, Mr. Williamson pursued a family law claim against Ms. Williamson, including a claim to a division of her interest in the trust property.

Ms. Williamson’s father, Lorne Jack was a co-trustee and a “protector” of the trust. As the protector, he had certain powers including the power to remove and replace a trustee and to add beneficiaries.
The lawyer for the trustees gave written notice that the Ms. Williamson would be removed as trustee and her mother appointed as a beneficiary. Mr. Jack intended to make a distribution before the 21st anniversary of the trust and Ms. Williamson would not likely receive any of the trust property. The significance of the distribution before the 21st anniversary is that if the property were still held in trust, there would be a significant amount of tax payable because there would have been a deemed disposition of the property under the Income Tax Act, Canada.

Mr. Williamson asked the court to grant an order essentially restraining Mr. Jack from distributing the property held in trust. Mr. Williamson wished to preserve the property in trust in order to pursue is family law claim to an interest in the trust property.

“Family property,” divisible under the Family Law Act may include a beneficial interest in property held in trust, including in some circumstances property held in a discretionary trust. Section 84 (3) provides that

“…family property includes that part of trust property contributed by a spouse to a trust in which
(a)        the spouse is a beneficiary, and has a vested interest in that part of the trust property that is not subject to divestment,
(b)        the spouse has a power to transfer to himself or herself that part of the trust property, or
(c)        the spouse has a power to terminate the trust and, on termination, that part of the trust property reverts to the spouse.”

If one spouse contributes property to a discretionary trust and retains the ability to distribute the property to herself, then the other spouse may have an interest in the property on the breakdown of the spousal relationship (unless excluded on some other basis).

On the other hand, section 85 (1) excludes interest in property held in a discretionary trust in certain circumstances:

Excluded Property
85.(1) The following is excluded from family property:
(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;

In Williamson, Mr. Justice Punnett found that the trust property was excluded property. Ms. Williamson had not contributed the farm property, which had been in her family for generations.

Mr. Jack, who said he wanted to preserve the farm operation as a family business, acted consistently with his powers under the terms of the trust agreement.

Mr. Justice Punnett dismissed the application for restraining orders, with the result that Mr. Jack was entitled to add his wife as a beneficiary and distribute all of the trust property to the exclusion of Ms. Williamson.

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