Broken heart, lost trust: Trust planning that fails to account for family realities

One reason parents place assets into a corporate trust structure may be to reduce the amount of tax paid on such assets while preserving a specific estate plan. An alternative reason may be to protect their family assets from potential spousal claims.

However, as recently discussed by the Supreme Court of British Columbia in P.T. v. K.T., 2016 BCSC 2367, the issue of ownership of family property may include family property that is held in a trust.

P.T. v. K.T., involved a daughter, her parents, and her former husband. The main dispute was over the ownership of a property (the “Property”), in which the daughter and husband resided but that was owned by a holding company (the shares of which were held by a family trust). The husband claimed an interest in the Property as family property on the breakdown of the marital relationship.

Three years into the husband and daughter’s marriage, the daughter’s parents had transferred the Property into a corporate trust structure, wherein:

  • the family trust and a holding company were formed, both of which the parents had control over;
  • the family trust held non-voting shares in the company; and
  • ownership of the Property, which was then a rental property, was transferred from the parents to the company.

Three years after the family trust was settled, the daughter and her husband decided to develop the Property into a fourplex. They would live in the largest unit while renting out and managing the other three units. The couple spent the latter fourteen years of their marriage developing, living in, and maintaining the Property.

Following their subsequent separation, the husband brought a claim for, among other things, an interest in the Property on the basis of unjust enrichment.

The Court found that, despite the corporate trust structure in which the Property was held, the husband was entitled to a 25% interest in the Property, valued at approximately $1,000,000 at the time of trial. Due to the parents acting as if the husband and daughter owned the Property, the Court looked through the corporate trust structuring and awarded the husband money equal to his determined share of the Property.

Critically, the Court found that the parents and the husband and daughter were “partners” in the development and management of the Property based on the following:

  • the daughter left her job so the development of the Property could complete;
  • during this time, the husband supported the daughter;
  • the parents were rarely on-site during the Property’s development and the contractors gave evidence at trial that they treated the husband and daughter as the Property owners;
  • the parents made their daughter a director of the holding company so she could sign a mortgage on the Property;
  • the husband and daughter made monthly payments towards this mortgage;
  • the husband and daughter worked as the caretakers of the Property;
  • the parents told their daughter that she was “doing work on [her] home” and gave evidence that the Property was hers “start from the scratch”; and
  • the parents told their daughter repeatedly that they would be giving her the Property.

If you are considering the use of corporate trust structuring as part of your wealth preservation plan, please feel free to contact one of the lawyers in our Wills, Estates + Trusts Practice Group.

Special thanks to Ephraim Fung, Articling Student, for his contribution to this post.