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Planning with Discretionary Trusts for the Matrimonial Home

A common consideration when completing or updating your estate planning is often how best to protect assets in the event of marital breakdown–whether your own marriage, including a second marriage, or an intended beneficiary’s (e.g., a child or grandchild). The need to protect certain assets may be even more pressing when the property is a home or cottage that has been in a family for generations, carrying strong emotional ties and significant memories. Protecting this property can be complicated, however, if it qualifies as a matrimonial home under Ontario’s Family Law Act.

A matrimonial home is any property occupied by married spouses or by a spouse and their children as a family residence and in which at least one of the spouses has an ‘interest’. Married couples may have more than one matrimonial home. If a property qualifies as a matrimonial home, it is subject to a special set of rules. Our Advisory “Estate Planning and Marital Property Considerations” reviews some of these rules in relation to equalizing family property. In addition, both spouses have possessory rights in every matrimonial home while the spouses are still married regardless of whether they have an ownership interest in the property. Further, under the Act a spouse who does not hold title is entitled to receive notice of and must consent to any encumbrance or sale of the property.

We’ve recently discussed marriage contracts (see our January 7, 2014 post) as valuable and sensible tools for protecting certain property down the road in the event of separation or divorce. Properly negotiating and finalizing a marriage contract that will be enforceable in future, however (especially in the face of a pending marriage), may be easier said than done.

Our May 2013 post “Great Family Cottage Memories? Keep them that Way” mentioned that a carefully drafted discretionary trust may keep a spouse from acquiring an ownership interest in a property, thereby preventing it from becoming a matrimonial home. The 2012 Ontario Court of Appeal decision in Spencer v. Riesberry supports this position.

Sandra Spencer and Derek Riesberry were married in 1994. Prior to their marriage, Sandra’s mother Linda purchased a property and on the same day it was purchased, she settled a trust called the Spencer Family Realty Trust (“SFRT”) and transferred the property’s ownership to the SFRT. Linda was the trustee as well as the beneficiary of the trust while living. Upon her death, the capital of the trust at that time would be divided equally among her surviving children (or in the case of a deceased child, his or her issue). Linda transferred three more properties to the trust–each of which was occupied by one of her four children and the child’s respective spouse. Sandra and a sister eventually replaced their mother as trustees of the SFRT.

Derek and Sandra separated in 2010. A trial was held to determine, among other matters, whether their family residence was a matrimonial home under the Act. If it was, Sandra had to include its full value in her net family property on the date of separation. The trial judge found that because Sandra only had an interest in the SFRT and not any specific asset held by the trust, the home did not qualify as a matrimonial home. This conclusion was subsequently affirmed on appeal.

Because the property in Spencer v. Riesberry was not a matrimonial home, the value of Sandra’s interest in the SFRT on the date of marriage was also deductible from her net family property and only the increase in value of her trust interest during the marriage was includable for the purposes of the equalization calculation. Other important implications of the court’s decision include that Derek would have had no possessory right to remain living in the home for a time upon separation and his consent would not have been needed if the property had ever been sold or mortgaged during the marriage.

The decision in Spencer v. Riesberry has important implications, including the use of a trust to protect an interest in a matrimonial home. If you are considering similar planning, professional assistance is necessary to ensure its proper implementation and other matters are considered, such as tax implications. Thought should also be given to whether other assets owned by the spouse outside of a trust would be available to satisfy any equalization payment.

Please watch for our next blog on the topic of digital assets from an estate planning and administration perspective.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.