Sunday, October 30, 2022

Cottrell v. Cottrell

 When assisting clients in creating trusts to benefit their children, I am sometimes asked about potential claims that a child’s spouse might make to trust assets if there is a breakdown of the child’s marriage or marriage-like relationship. Typically, the parent is concerned that if she puts assets into a trust to benefit her children, the trusts in fact benefit the children and not future ex-spouses of any child. I can’t give a definitive answer to that question, but a recent decision provides some comfort to parents creating trusts for their children, provided that the trust does not give the child the right to distributions or control of the trust. The case is Cottrell v. Cottrell, 2022 BCSC 1607.

Robert and Patricia Muster contributed all of the funds to two trusts: the Robert and Patricia Muster Family Trust and the Muster Joint Partner Trust. They were created in 2010 and 2011 respectively. The beneficiaries were Robert and Patricia Munster, their son, and their daughter Joanne Cottrell. The trusts are described in the decision as discretionary trusts in which the beneficiaries received distributions only at the discretion of the trustees.  (I suspect from the name, that there were restrictions in the Joint Partner Trust such that during the lifetimes of Robert and Patricia, all of the income was payable to them, and no one else would be entitled to capital until the last of them to die.) The Family trust held shares in a company, Muster Management Inc., and the Joint Partner Trust held investments.

When a trust is completely discretionary, no beneficiary has any particular entitlement until the trustees decide, and there is no certainty that the beneficiary will receive anything.

Robert and Patricia Muster were the original trustees of both trusts, but when Patricia Muster died in 2012, Joanne Cottrell and her brother became co-trustees with their father. Decisions required a majority vote. There was evidence that neither Joanne Cottrell or her brother were active in the management of the trusts and trust assets, and that their father considered that the assets of the trusts were his property during his lifetime.

Unfortunately, Mrs.  Cottrell’s marriage to Paul Cottrell broke down. Following their separation, she ceased to be a trustee of the trusts. In the litigation over the division of their property, Paul Cottrell claimed an interest in the trusts.

The way the Family Law Act (the “FLA”) in British Columbia works there is included family property, in which spouses share an interest on separation, and excluded family property, in which they do not. Because all of the funds in the trusts were contributed by Mr. and Mrs. Muster, and not by Joanne, her interest in the trust property is excluded. This is set out in section 85(1)(f):

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....

However, the increase in value of a spouse’s interest in excluded property during the marriage is included property, subject to a claim by the other spouse. This is set out in s. 84(2)(g) of the FLA:

84(2) Without limiting subsection (1), family property includes the following:

(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.

Paul Cottrell acknowledged that the assets settled on the trusts were not included family property, but he argued that the assets increased in value, and he is entitled to a portion of that increase, reflecting Joanne Cottrell’s interest in the trusts.

The contrary argument is that because the trusts were discretionary, Joanne has no property interest in the trust assets, she cannot compel any distributions to her, and her interest could be defeated such that she might not receive any distributions in the future.

Mr. Justice Brongers held in favour of Joanne Cottrell on this issue. He wrote:

[42]         Accordingly, the fundamental question to be determined is whether Joanne’s beneficial interest in the discretionary Muster Trusts has increased in value since Joanne acquired her interest on September 14, 2010 (in the case of the Family Trust) and on January 5, 2011 (in the case of the Partner Trust). Given that Paul is the party asserting a claim in respect of this alleged family property, which Joanne opposes, it is Paul that bears the burden of establishing that there has been such an increase in value.

[43]         On my assessment of the evidence presented, I am not satisfied that Paul has met this burden. In particular, I agree with the submissions of Joanne’s counsel that the uncertain nature of Joanne’s contingent beneficial interest in the Muster Trusts is such that it cannot be said that, at the time of the trial, there has been an “increase in value” of this interest. This uncertainty stems from the fact that Joanne has never had the actual or even an apparent ability to compel a distribution of the Muster Trusts, and has no reliable assurance regarding the specific extent to which she may receive such a distribution in the future. In these circumstances, the Court cannot find that Joanne’s beneficial interest in the property held in the Muster Trusts is greater now than it was when the trusts were settled. In the absence of such a finding, there is no “increase in value of excluded property” to which a s. 84(2)(g) FLA claim can be asserted. Paul’s request for a remedy in relation to such a claim must therefore be dismissed.

[44]         I have reached this conclusion notwithstanding Paul’s attempt to value Joanne’s interest in the Muster Trusts. Leaving aside my significant concerns about its reliability given the limited scope of the evidence tendered and the lack of a valuation opinion from a qualified expert assessor, Paul’s estimate relates to the property held in the discretionary trusts, not to Joanne’s beneficial interest in that property. As such, even if I had been inclined to accept his estimated values of the trust assets, they do not show that there has been an actual increase in the value of Joanne’s beneficial interest in these assets, which is all that can be claimed pursuant to ss. 84(2)(g) and 85(1)(f) of the FLA.

Doe this mean that a separated spouse will never have a FLA claim to an interest in a discretionary trust? I would not go that far. Key factors in this case were 

  1.  that Joanne Cottrell did not contribute any of the assets to the trusts,
  2. her interest was purely discretionary,
  3. she was never the sole trustee or in a position to require distributions be made to her, and
  4. in practice, she appears to have had little or no influence on the management of the trust and decisions about distribution. 

a.      One can envision cases in which, on reading the trust documents, the beneficiary appears to have no control, but in practice the beneficiary is the one making the decisions. In such circumstances, the outcome may be different if a separated spouse makes a family law claim.  

Mr.  Justice Brongers was careful to qualify his decision:

[47]         Before completing my consideration of this issue, however, I wish to be clear that my finding that Paul has not established that there has been an increase in value of Joanne’s beneficial interest in the Muster Trusts should not be taken as a conclusion of law that it is impossible to make a family property claim in respect of a spouse’s beneficial interest in a discretionary trust under the FLA. My finding is based on the evidence presented in this case, particularly the terms of the Muster Trusts instruments, as well as Mr. Muster and Joanne’s testimony about their intentions and expectations regarding these trusts. That evidence does not justify a conclusion that Paul is entitled to a remedy in relation to Joanne’s beneficial interest in the Muster Trusts. A different conclusion could well be reached in another case involving different trusts, trustees, beneficiaries, and spouses.

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