Discretionary Trust Does Its Job in Family Law Case

In Cottrell v. Cottrell 2022 the BC Supreme Court addressed the subject of discretionary trusts and how and when they are divisible as family property between separated spouses. The Cottrell’s began their marital relationship in 1994 and separated in 2017. Paul Cottrell was a marine biologist while Joanne Cottrell was primarily a stay at home mom to their two children.

Prior to meeting one another and when Joanne was still in university her parents Robert and Patricia Muster struck it lucky and won $5 million from Lotto 6/49. The Musters established two trusts and over the years gifted funds to their children including Joanne. In 2010 the trusts were reorganized and two new trusts were settled by the Musters. The trusts were discretionary trusts and the beneficiaries were Joanne, her parents and her brother. Her parents were the trustees. Upon the death of Mrs. Muster in 2012, Joanne and her brother were added as trustees, however, Joanne was never actively involved in managing the trusts. At this time Joanne also received monies from the trust which she placed in a personal bank account that she maintained at the date of separation such that her husband was compelled to concede that the remaining funds were excluded property.

When the Cottrell marriage broke down, Mr. Muster asked Joanne to resign as a trustee and as a director of a related company. Mr. Muster testified that given the litigation between his daughter and her husband he wanted to distance Joanne from the corporation and the trusts. Paul Cottrell viewed this as indicating a conspiracy to deny him any alleged interest he could assert over these properties. The court did not agree.

Expert testimony at trial confirmed that the trusts were entirely discretionary, that Joanne had a “beneficial” interest within in the meaning of S. 84 of the Family Law Act, and that Joanne’s interest in the trusts were excluded property under s. 85 of the Family Law Act as she did not contribute funds to the trusts, neither was she a settlor of the trusts. However, the court noted that pursuant to s. 84(2) (g) of the Family Law Act any increase in value of excluded property qualified as divisible family property.

The expert also stated that there were several ways Joanne’s interest could be extinguished including a distribution of all the trust property to Mr. Muster or to other beneficiaries to her exclusion or Joanne could die before receiving any further trust distributions.

While Mr. Cottrell’s counsel did not object to the admission of expert evidence with respect to the law of trusts in family law, the trial judge referenced Walsh v. BDO Dunwoody 2013 BCSC 1463 where the court refused to admit expert evidence where the evidence was used to educate the court on the interpretation of domestic law and suggest what the court’s conclusions should be. Inherent in this view is that judges are deemed to know the law. The trial judge did not formally exclude the expert’s evidence but stated that he had reached his own conclusions independent of the expert’s evidence.

The issue before the court was the conceptual difficulty of reconciling an increase in the value of a discretionary interest in a trust as family property alongside the traditional notion that discretionary beneficiaries have no property rights in discretionary trusts or the assets of the trusts. Further, Joanne had no ability to compel the trustees to make a distribution to her.

Mr. Cottrell argued that the Family Law Act provided the path for him to receive an interest in the growth of the trust property which could then be quantified. He pegged his interest at $1.3 million based on financial statements and property assessments produced in the litigation.

The court recognized that there was no clear jurisprudence on this discrete issue, but that Mr. Cottrell’s claim must be analyzed by reference to the provisions of the Family Law Act. In examining the language of the Act the court stressed that when the relevant sections are read conjunctively, ss. 84(2)(g) and 85 (1) (f) provide only that the increase in value of the spouse’s beneficial interest in property held in a discretionary trust is family property. These provisions do not state that an increase in the value of the actual property held in a discretionary trust is family property.

The court concluded that the onus fell on Mr. Cottrell to establish that there had been an increase in value in the trusts and he had not met the onus. Justice Brongers held that given the uncertain nature of Joanne Cottrell’s contingent beneficial interest it could not be said that at the time of trial there had been an increase in her discretionary interests value.

With respect to Paul Cottrell’s valuation of trust property, the court noted that his valuation did not reflect the value of Joanne’s beneficial interest. Mr. Cottrell’s claim was dismissed as was his claim for a reapportionment of family property in his favour on the basis that his wife would be receiving a future “windfall” from a discretionary trust, gift or inheritance. The court reasoned that none of the factors raised by Mr. Cottrell fell within the provisions of s. 95 of the Family Law Act.

The discretionary trust is a powerful legal tool in estate planning that covers many different situations and purposes. Its use in family law permits an individual to enjoy the beneficial use of and interest in property while protecting the property from claims under the Family Law Act.

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