Family trusts have long been a favoured tool for protecting and managing family wealth. They facilitate intergenerational transfers, maintain financial flexibility, and safeguard accumulated assets. Trusts are especially prevalent among high-net-worth families. However, in the context of family law, these trusts often add layers of complexity during separations, divorces, property disputes, and support calculations.

Key Components of Family Trusts

At their core, trusts involve three key parties (or sets of parties): the settlor (who creates the trust), the trustee (who manages the assets), and the beneficiaries (in whose benefit the trust is held). While trusts offer strategic benefits, they may be scrutinized during family law proceedings.

For a trust to be legitimate, it must satisfy the “three certainties”:

1. Certainty of intention – the settlor must intend to create a trust.
2. Certainty of subject matter – the trust assets must be clearly defined.
3. Certainty of objects – the beneficiaries must be identifiable.

Sham Trusts as a Vehicle to Evade Family Law Obligations

If the conditions above are not met, a trust risks being invalidated as a sham — i.e., a trust that exists in form only while the settlor retains control. For instance, where one spouse transfers assets into a trust during marriage, the other spouse may challenge its validity at separation. The court may denounce a sham trust as an attempt to evade an individual’s family law obligations, such as property division or spousal support. Provisions in trust deeds attempting to override legislated rights (e.g., excluding beneficiaries’ trust assets from family law consequences) are unlikely to succeed.

A Unique Loophole: Trusts and Matrimonial Homes

Matrimonial homes are afforded special protections under the Family Law Act. If a home is owned by a trust rather than an individual spouse, it falls outside the statutory definition of a matrimonial home. The spouse that has the beneficial interest in the trust may be able to claim a deduction or exclusion of the value of the asset, even if a large part of the value may relate to the family home. The spouse without the beneficial interest in the trust will have no right of possession and no right to sell the asset.

Trust Interests as Family Property

Ontario’s Family Law Act broadly defines “property” to include any present or future interest, vested or contingent. In most cases, an interest in a trust is included as property under the Act for the purposes of equalization and division.

Fixed vs. Discretionary Trust Interests

A fixed trust is one where a beneficiary has a guaranteed right to income or assets. A discretionary trust grants the trustee full discretion over its distribution. As a result, beneficiaries under a discretionary trust can only hope to receive benefits under the trust rather than having a tangible right to the trust funds.

In some Ontario case law, discretionary trust interests have been included in property division calculations, particularly where the beneficiary exercises significant control over the trust (e.g., acting as a trustee or holding powers of appointment). However, courts have not been unified on this point. When determining whether a discretionary trust interest qualifies as property, courts may examine:

• The settlor’s intent and trust design;
• The composition and independence of the trustees;
• The beneficiary’s level of control over trust decisions; and
• The history of trust distributions and management.

Trusts and Support Obligations

Trusts are also relevant when determining child and spousal support. The Federal Child Support Guidelines and their provincial counterpart permit courts to impute income to a spouse who receives, or will receive, income or benefits from a trust. This consideration has also been extended to spousal support determinations.

Examples of imputed income based on a trust include:

• Loans taken from a trust; and
• Regular capital disbursements used to fund the spouse’s lifestyle.

Past trust distributions play a significant role in determining whether income will be imputed. However, courts may refrain from imputing income where trustees provide clear evidence that no further distributions will occur.

Ultimately, trust-related support determinations are highly fact-specific and require careful examination of the trust’s history and structure.

Disclosure of Trust Interests: Balancing Privacy and Legal Obligations

Trusts often involve sensitive financial arrangements, leading families to prioritize privacy. However, privacy takes a back seat to full financial disclosure in family law cases as it is essential for the fair resolution of property and support issues. Failing to disclose trust interests can jeopardize marriage contracts or separation agreements.

If a spouse holds an interest in a trust — even as a discretionary beneficiary — they must disclose it during family proceedings. This obligation may extend to third parties, such as trustees, who may be compelled to provide detailed financial records.

As of last year, trusts must now file T3 tax returns annually, disclosing:

• Trustees;
• Beneficiaries;
• Settlors; and
• Individuals with control over trustee decisions.

These reporting rules provide greater visibility into trust assets, simplifying disclosure obligations in family law matters.

Contact Boulby Weinberg Fishman LLP in Toronto for Trusted Advice on Family Trusts & High-Net-Worth Divorces

Family trusts provide significant benefits for asset protection and wealth management. However, they can complicate the division of property and equalization process and calculation of spousal and child support obligations. Understanding the interplay between trust and family law is crucial for individuals navigating these challenges.

The family and divorce lawyers at Boulby Weinberg Fishman LLP understand the intricacies of family trusts and their implications on divorce proceedings. We create robust legal solutions and provide tailored advice that helps clients make informed decisions and protect their interests. To schedule a confidential consultation, please contact us online or call 647-494-0113.