Should a potential interest in an insurance trust impact property division?

In recent years there’s been a great deal of litigation around how to deal with an interest in a trust when a married couple separates (see previous AAMOL Interest in trust and matrimonial division). The B.C. Court of Appeal case of H.S.S. v. S.H.D 2018 BCCA 199 considered the potential impact a residual interest in both a spousal trust and a discretionary insurance trust had on the reapportionment of property in a divorce dispute. The issue raised was the value of the interest in the trust which was speculative.

The wife came from a wealthy family. Her husband had just started his law practice when the two married in 1989. At that time, the wife had more potential financial risk if the marriage failed than the husband did, so they signed a marriage contract that excluded her interests in family trusts and his law practice.

The wife started her own business once she was married and it was off to a good start when she became pregnant. The couple planned for the wife to return to work after the child was born. Even though the wife’s business began to ramp up, she decided to stay at home and care for the child who needed significant care because of severe allergies and health issues. The husband’s law practice began to flourish, and he purchased property in Vancouver. The couple had a second child who also needed special care. Again, the wife chose to stay home with the couple’s children and that decision effectively ended her career aspirations.

As the husband’s wealth and income spiraled upwards, the wife’s family’s business ran into financial difficulty and the wife’s financial resources deteriorated.

The parties separated in 2003 and started divorce proceedings in 2013. Ironically the wife applied to set aside the marriage contract. She argued that it would be unfair to apply it for divisions purposes. She relied on s.

65(1) of the B.C. Family Relations Act arguing that the needs of each spouse to become or remain economically independent and self-sufficient must be considered.

At trial the court determined that, based on fairness, it would not be right to follow the 1989 agreement relating to property division. However, the court considered the wife’s contingent residual interest in her mother’s spousal trust. The wife would receive 25% of the interest in that trust when her mother died. The wife was also named as a beneficiary under a discretionary life insurance trust. The court determined that the inheritance of substantial wealth from these two trusts was relevant and should be considered in the property division. The wife appealed.

The Court of Appeal considered:

the discretionary nature and contingency of each trust

the characterization of the interest in the trust

the certainty of receiving under the trust, and

whether the trust interest substantively constituted ownership.

The court concluded that there was too much uncertainty. The wife’s interest in the spousal trust greatly depended on whether the mother encroached on capital and potentially left little or nothing to distribute to the wife. The discretionary insurance trust provided no certainty that the trustee would distribute some or all the insurance proceeds that would be settled in the insurance trust once the mother died.

The Court of Appeal concluded that the trial judge did not properly consider the nature of the trusts and the possibility of unequal division under the trusts. The court ordered that a reapportionment of assets be sent back to the trial level for redetermination.

The BC Court of Appeal has indicated that the speculative nature of the interest in these types of trust should not be factored into property division. It’s uncertain what the wife would receive under the trusts. The court’s conclusion makes sense when you consider the contingent and discretionary nature of the respective trusts.

It was the nature of the trust terms that excluded them from consideration in the property division.