Family Trust to Family Property: The Value of Trust Assets Can Be Divisible Under The Family Property Act

In Grosse v Grosse, the Saskatchewan Court of Appeal found that an interest in a discretionary trust held by a spouse was considered family property under The Family Property Act.  In this appeal, Mr. Grosse was found to have more than a contingent interest in the Grosse Family Trust.  Therefore, the value of the interest in the trust was considered family property and should be equally distributed between the parties.  

The Grosses were married for 28 years prior to their separation.  During their marriage, Mr. Grosse acquired a number of revenue properties, which were held by Suite 100 Investments Inc., a corporation created by Mr. Grosse, who was the sole shareholder and director.  The Grosse Family Trust was established through this corporation by freezing the existing shares, following the Trust purchasing the newly issued “Growth Shares”.  These growth shares formed the corpus, or body, of the Trust.  This step was taken on the advice of Mr. Grosse’s accountant for tax and estate planning purposes.
The Trust was a discretionary trust with Mr. Grosse’s brother as the settlor, Mr. Grosse as the sole trustee, and the parties’ two sons as beneficiaries.  Ms. Grosse was not named in the Trust, allegedly for tax reasons.  Based on the Trust agreement and structure of the Trust, Mr. Grosse had the power to manage and distribute all of the property and dissolve the trust, including for his own benefit.  Twenty-one years less a day after Mr. Grosse’s death, the Trust would pay equally to its beneficiaries the value of anything held in the Trust, if anything.

At trial, Justice Danyliuk of the Court of Queen’s Bench for Saskatchewan found that Mr. Grosse only had a contingent interest in the trust property.  Based on that finding, Ms. Grosse was only entitled to the portion of the Trust that was actually distributed to Mr. Grosse, if any.  Therefore, the trial judge issued an “if and when” order,  meaning that if and when the trust property was distributed, Ms. Grosse would only be entitled to half of the value that Mr. Grosse distributed to himself. 

On appeal, the Court of Appeal grappled with two main issues.  The first issue was whether Mr. Grosse’s interest in the Trust was contingent.  The second issue was to determine if the trial judge erred in ordering an “if and when order”.

First, the Court held that the interest held by Mr. Grosse was sufficient for the Trust to constitute family property as defined under Section 2(1) of The Family Property Act.  The Court examined Mr. Grosse’s interest by “piercing the veil” and looking behind the corporate structure of the Trust.  By piercing the veil, the Court could consider Mr. Grosse’s sole discretionary power as trustee, that Mr. Grosse was also a beneficiary of the Trust, and, ultimately, that he had the power to distribute the entire portion of the Trust to himself.  These factors were crucial to the Court’s finding that Mr. Grosse held more than a mere contingent interest in the Trust.

The Court also considered the effect that its decision could have on the beneficiaries of the Trust, Mr. and Ms. Grosse’s sons: “A finding that the Trust’s assets constitute family property for division purposes does not necessarily mean the Trust will be dissolved. What it does mean is that the fair market value of those assets must be included in the division of family property to arrive at a fair and equitable distribution pursuant to the Act. In other words, the parties’ two sons will continue to be beneficiaries so long as the Trust exists and that remains within Mr. Grosse’s discretion as sole trustee.”  Because the sons had only a contingent beneficial interest, this was only a hypothetical issue, not, as yet, realized.  In the event that Mr. Grosse exercised his right to the property in the Trust and wound it up, “they have the right to take whatever legal action they deem appropriate.”

On the second issue, the Court considered whether or not the trial judge erred in directing an “if and when” order.  It acknowledged that in some cases an “if and when” order may be appropriate but it must used cautiously.  In this case, because the Trust allowed Mr. Grosse to “determine if and when his interest in the Trust would be divided and the amount of the division” this was inherently unfair.  Also considered were the important practical issues associated with delivering an order tying two former-spouses together for an indefinite period of time.  This would leave them in limbo, making it difficult to move on with their lives.  In this case, the value of the Trust was already determinable, which removed the rational for a wait-and-see approach.

This case clearly establishes that a spouse’s interest in trust property is the main consideration in determining if a trust is family property under The Family Property Act.  More importantly, the Court clarified that it can “pierce the veil” and look into the trust in order to establish a spouse’s interest in the trust and the family property that may flow from that review.  All of the factors of a trust are relevant including if the trustee must act solely or jointly, the number of beneficiaries and if the trustee is named a beneficiary, the degree of discretion given to the trustee if acting solely, and the presence of other clauses in the trust agreement that may allow for inequitable distribution.  If a court is satisfied from piercing the veil of the trust that there is more than a contingent interest, the trust may become family property whose value will be equally distributed between the spouses.

Grosse v Grosse, 2015 SKCA 68