What the Family Law Act Means for Estate Planners
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The Family Law Act means changes for estate planners, including: 1) Common-law spouses now have rights to divide family property and assets upon separation. 2) The definition of "spouse" now includes unmarried couples who have lived together for 2 years or have a child together. 3) Guardians now have the ability to appoint successor guardians or "standby" guardians, and can receive small amounts of property for children without court approval.
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What the Family Law Act Means for Estate Planners
- 1. WHAT THE FAMILY LAW ACT MEANS FOR ESTATE PLANNERS Abbotsford Estate Planning Council Anna Laing - Fasken Martineau LLP May 15, 2013
- 2. Changes of Interest to the Estate PlannerChanges of Interest to the Estate Planner • Division of assets – Part 5 • common-law spouse rights • family property/excluded property • trusts • transition • Support obligations binding estates – sections 170-171 • Appointment of guardians – sections 53, 55 • Guardian’s ability to receive certain funds for children and provide a valid discharge – section 178 • Appointment of trustees for children’s funds – sections 179, 180 • Financial abuse – Part 9
- 3. The Old Law – the Family Relations ActThe Old Law – the Family Relations Act • Division of “family assets” available only to legally married spouses or those spouses who have opted in under s. 120.1 of the Act • “Family assets” are assets ordinarily used for a family purpose • Business assets are excluded in the absence of direct or indirect contribution by non-owning spouse • Family assets can be reapportioned if the prima facie 50/50 division is unfair
- 4. Definition of “Spouse” (section 3)Definition of “Spouse” (section 3) Spouses are persons who: • (a) are married, • (b) have lived in marriage like relationship for continuous period of at least 2 years, or • (c) have lived in marriage-like relationship [no duration specified] if they have a child – but (c) is only relevant for spousal support purposes
- 5. Property Entitlement (section 81)Property Entitlement (section 81) • Unless modified by an agreement or order, • spouses are both entitled to family property and responsible for family debt regardless of their respective use or contribution • upon separation, each spouse is entitled to an undivided one-half interest in all family property as tenants in common and is equally responsible for family debt
- 6. Family Property (section 84)Family Property (section 84) Family property is: • all property that either spouse owns on the day they separate that does not qualify as excluded property • property acquired after the date of separation derived from family property • Includes: • the amount by which the value of excluded property has increased since the later of the date the relationship began or the excluded property was acquired
- 7. Excluded Property (section 85)Excluded Property (section 85) • Property owned by a spouse before the relationship began • Gifts and inheritances • Settlement and damage awards from tort claims – except awards meant to compensate both spouses or to replace wages • Non-property related insurance proceeds • Property referred to above that is held in trust for a spouse • Property held in certain discretionary trusts – s. 85(1)(f) trust • Property traceable back to excluded property
- 8. Family Debt (section 86)Family Debt (section 86) • Includes all financial obligations incurred by a spouse • during the period beginning when the relationship between the spouses begins and ending when the spouses separate • after separation if incurred to maintain family property • In the case of spouses who cohabited before marriage, will the Court define the beginning of the period as the date cohabitation began or the date of marriage? • Prima facie, both spouses will be liable for debt incurred in relation to excluded property
- 9. 9 Section 85(1)(f) TrustSection 85(1)(f) Trust • Excluded property includes property held in a discretionary trust to which the spouse did not contribute, of which the spouse is a beneficiary, and that is settled by a person other than the spouse e.g. the trust established to hold common shares after an estate freeze where the children and grandchildren are beneficiaries • Note: it is the property in the trust, not the beneficiary’s interest in the trust, that is the excluded property. Per s. 84(2)(g), the increase in value of excluded property – the entirety of the trust property – is family property.
- 10. Unequal Division (section 95)Unequal Division (section 95) • Court can order unequal division of both family property and family debt but NOT excluded property • Pre-requisite for unequal division is significant unfairness • Factors to consider substantially different from factors for reapportionment under FRA and include: • whether family debt was incurred in the normal course of the relationship • whether a spouse not acting in good faith substantially reduced the value of family property or negatively affected the other spouse’s interest in family property by disposing of it • whether a tax liability may arise from the sale or transfer of property • any other factor that may lead to significant unfairness
- 11. When to Divide Excluded Property?When to Divide Excluded Property? (section 96)(section 96) • When it increases in value during the relationship – then the increase is divided • If family property/debt located out of BC can’t practically be divided OR • It would be significantly unfair not to divide excluded property on consideration of … • the duration of the relationship, and • a spouse’s direct contribution to the preservation, improvement, operation or management of excluded property
- 12. Triggering eventTriggering event • FRA: the triggering event was the making of a separation agreement, an order for divorce or judicial separation, the making of a declaration under section 57 that there was no reasonable prospect of separation, or an annulment of marriage. • FRA actions end if a spouse dies before the triggering event • FLA: the triggering event is simply the date of separation
- 13. Valuation (section 87)Valuation (section 87) • The value of family property must be based in its fair market value • The valuation date of family property is date an agreement is signed after separation or the date of a court hearing regarding the division of property, unless the spouses agree otherwise • In the case of excluded property, another relevant valuation date is the date the parties’ relationship began or the date the excluded property was acquired during the relationship because the increase in value from that date to the relationship’s end is family property. 13
- 14. Marriage and Cohabitation AgreementsMarriage and Cohabitation Agreements • All provisions of the Act are subject to the spouses’ agreement otherwise • Agreements may be set aside due to defects in the process of making the agreement: • failure to make proper disclosure • a spouse takes improper advantage of the other’s vulnerability, ignorance, need • a spouse did not understand nature and consequences of agreement, or • other circumstances existed which would make all/part of a contract voidable at common law
- 15. Continued. . .Continued. . . Agreements that are procedurally fair may also be set aside if it would be “significantly unfair” not to do so, having regard to: • length of time that has passed since the agreement was executed • intentions of the parties to achieve certainty • the degree to which the spouses relied upon the terms of the agreement
- 16. TransitionTransition The old Act continues to apply where: • the issue is an agreement regarding property made before the FLA comes into force – e.g March 18, 2013 – unless spouses agree otherwise • a proceeding respecting property division has already been started under the FRA (does not apply to unjust enrichment claims started by common law spouses prior to March 18)
- 17. Support Obligations and EstatesSupport Obligations and Estates Sections 170-171 •Court can order as between spouses that a support obligation survives the payor’s death and is a debt of the estate •If payor dies, personal representative can apply to Court to vary/terminate an order/agreement that makes support binding on an estate •If order/agreement is silent as to whether support is binding, the recipient can apply to Court for an order that support is binding
- 18. Sections 53-55 •A guardian can appoint a successor in the event of the appointing guardian’s death (section 53) or an additional guardian (a “standby” guardian) in the event the appointing guardian is facing terminal illness or permanent mental incapacity (section 55). •If the appointment of a guardian is made outside of a will, there is a prescribed form of appointment that must be executed in the same manner as a Will – see Family Law Act Regulation, B.C. Reg. 347/2012. 18 Guardian Appointments
- 19. Guardian appointments, cont’d • Section 55(5) provides that a standby guardian continues as guardian after the appointing guardian’s death, notwithstanding any other instrument made by the appointing guardian, unless the appointing guardian specifically revoked the appointment while capable or the appointment provides otherwise.
- 20. ChildrenChildren’’s Property (sections 176-178)s Property (sections 176-178) • Prima facie, a guardian is not a trustee of a child’s property or entitled to give a valid discharge simply by virtue of being a guardian • A person having the duty to deliver property to a child can be discharged in relation to the delivery of property worth less than the prescribed amount of $10,000 (“small property”) – s. 178 • Discharge occurs upon: • delivery of the small property to a child who has the duty to support another person, or to a guardian with parental responsibilities for the child, and • receipt of an acknowledgment in the prescribed form from the recipient of the small property.
- 21. ChildrenChildren’’s Property (conts Property (cont’’d)d) • Exception: child/guardian cannot receive small property if that will cause the child/guardian to hold more than $10,000 in aggregate • The guardian who receives small property for a child is a trustee of that property for the child • The small property can also be delivered to the PGT if the PGT will accept it
- 22. Court Appointed Trustees (section 179)Court Appointed Trustees (section 179) • Empowers Court to appoint a trustee of property for a child and to fix the terms of the trust • Outlines what the Court is to consider including the suitability of the trustee, the views of the child (if appropriate), consider), wishes of the guardians, the written comments of the PGT • Court can make orders as to accounting, investment policy, remuneration, security, duration of the trusteeship, and any other order the Court considers appropriate • PGT’s suggestions as to the information it wants to see are found at www.trustee.bc.ca/services/youth/protective_services.html under the heading “Minor’s Property”
- 23. Financial Abuse (Part 9)Financial Abuse (Part 9) • These are the “Family Violence” provisions • The Court can make orders protecting a person determined to be an “at-risk family member” from “family violence” when it determines that family violence is likely to occur. The definitions are broad enough to capture an adult child financially abusing a parent. • The application can be brought by an at-risk family member or by a person on that at-risk family member’s behalf or by the Court on its own initiative (s. 183) and can be brought on a standalone basis (i.e. not as part of an FLA proceeding) (s. 183(1)). 23
- 24. Financial Abuse (contFinancial Abuse (cont’’d)d) • Key definitions: • “family member” with respect to a person includes a person who lives with and is related to the person and includes the person’s child (s. 1) • “at-risk family member”: a person whose safety and security is or is likely to be at risk from family violence carried out by a family member (s. 182) • “family violence” includes “psychological or emotional abuse of a family member including . . . unreasonable restrictions on, or prevention of, a family member’s financial or personal autonomy” (s. 1)
Notes de l'éditeur
- As you know, the FLA came into effect on March 18, 2013 after being enacted into law in Nov 2011. It represents a seismic shift in family law in BC. It contains a lot of seemingly scary provisions that you may have heard about – extension of rights to c.l. spouses, impact on trusts, including those that were settled and have been in operation long before the FLA was a gleam in a civil servant ’ s eye. But perhaps the scariest thing from your perspective is how little family law lawyers can predict about how this Act is going to operate. Some of you may be lucky enough, if that ’ s the word, to have been around for the last seismic shift when the FRA came into effect in 1979. It took a few years of litigation then to resolve issues of interpretation and establish the rules. The same will apply this time around. So what I am telling you today is not always the gospel truth but just my educated guess as to what will happen under the new Act. There are a number of provisions in the Act that are of interest to estate planners. I ’ m going to deal with property to some extent but not exclusively b/c of these other provisions that I think are of interest.
- Under the FRA, only legally married spouses could assert property claims under FRA. C.l. sp limited to asserting an unjust enrichment claim , unless they made an agreement dealing with property. Under FRA, what gets divided are Family assets – property owned by 1 or both sp and ord. used for a family purpose by spouse or minor child – e.g. house, car, chequing account, a few defined assets, like pensions and RSPS. Also includes 58(3) (i) a share in the corporation, or (ii) an interest in the trust owned by the spouse if the corp or trust owns property that would be fam asset if owned by the spouse Business assets - were not divided unless non-owning spouse could establish a direct or indirection contribution to the acquisition of the property. Indirect contrib. includes savings through effective management of household or child-rearing respon by non-owning spouse. FRA started with a presumption of 50/50 division of family assets but the Court could order something other than 50/50 if it would be unfair, based on consideration of 5 factors set out in FRA. In practice, it seemed that our Courts were very free and easy in their use of the power to reapportion.
- Determining whether a couple is in a marriage-like relationship not always simple. Number of estate cases in which that is argued. Sometimes Court finds that couple is in a boyfriend/girlfriend relationship but not one that reaches level of spousal. Sometimes Court finds that couple who have separate residences and still maintain some level of financial independence are nonetheless in a marriage-like relationship b/c they have a demonstrated level of commitment to one another. The other big issue will be about when the relationship began b/c certain financial consequences flow from the date the relationship began, rather than the date it became marriage-like after two years. Again, not always easy to pin down. Is it the day he made her the dependent on his health plan even though she kept her apartment and stayed there at least 2 nights per week?
- Under FLA, 2 main classes of property: family property and excluded property. Family property gets shared. Excluded property gets shared if it increases in value. Under the FRA, the entitlement was to an undivided ½ interest in family assets – meaning assets used for a family purpose. Now it is to an undivided ½ interest in all family property and use and contribution are irrelevant. [read] So what is family property?
- Family property is: all property that either spouse owns on the day they separate that does not qualify as excluded property or in which at least one spouse has a beneficial interest (s. 84(1)(a)(ii) – so the argument goes that this catches trust interests Excluded property : note the increase in value dates back to the date the relationship began – so again, that is why the issue of when a relationship began will become relevant. Your CEO takes her company public and her shares increase in value by 500%. She gets engaged 1.5 years after the IPO but his toothbrush wound up in her bathroom two months before the IPO date? What we don ’t know yet is whether, in the case of cohabiting couples who marry before 2 years of cohab, whether the Court will reach back to the date they started living together. I suggest they could b/c the Act doesn’t refer to the dates the parties became spouses but to the date the relationship began. Family pty isn ’t an interest in the excluded property but the “amount” of increase in value. So Ct can award monetary compensation or set off against other assets. But there is ability for Court to make orders under s. 97 including ordering xfr of pty to spouse to give effect to division of pty – doesn’t refer to “family pty” but pty. Family property also includes includes property disposed by the spouse after the relationship began that the spouse retains authority to require its reutrn or direct its use or further disposition in any way. So spouse disposes of pty into a trust but retains the right to name bens and terminate the trust – that pty is family pty. Again, risk that client may find transaction caught because he or she is unwittingly in a common law relationship.
- (b) Gifts and inheritances – Property brought into relationship and gifts/inheritances – significant change b/c under FRA, over time, the fact that a spouse brought property into relationship or inherited it ceases to matter for reap. purposes. If you bring $500K house into marriage and 12 years later it is worth $1,000,000, Ct won ’t reapportion in your favour and will likely divide entire house equally. Now, under FLA, Court will only divide the $500K increase in value. (g)property that can be traced back to excluded property is also excluded. So if you sold that house that was $500K at start of relationship and is now $1 million and bought a new house, $500K of value of that house would also be excluded. The difficult issues will be around tracing: If you use your excluded property to pay mortgage on your house, can trace – each dollar you put in correlates to dollar increase in equity. But what if house declines in value? Do you still get $ for $? Or proportional credit? What if use $ to renovate house? No $ for $ credit there. Do you get any credit? Do you have to get evidence to show increase in value from renos? What if you use $ to pay your spouse ’ s consumer debt, that $ is lost. Give example of FLAG and the debate about whether mortgage was deducted from value of excluded property – shows lawyers don ’ t know what the rules will be yet.
- Court can apportion family debt even if there is no family property – something it cannot do now under the FRA. Very far-reaching – again, wonder if legislators thought through all t he consequences. Wife brings house into the marriage. She takes out a line of credit and puts some money into an investment that fails, use some money for family expenses, and uses some money for renos to the house. The house does not increase in value during the relationship notwithstanding the renos. Under a strict application of s. 86, the husband is liable for half the line of credit. He will have to seek relief under the unequal division provisions
- This is absolutely problematic. Representations made to gov ’t to amend. Amendments not made prior to FLA coming into force. If gov’t intends to amend, have no idea when they will do so. This is meant to catch the interest of a spouse in a trust settled say by a parent or grandparent. Odd that it does not refer to the spouse’s interest being excluded property but the trust property itself being excluded property. Therefore – the argument goes - the increase in value of the trust property – all of it – is family property. So what happens if two of the kids have relationship breakdowns – does this mean 2 of the spouses can claim that that 100% of the increase in value of the trust property is family property? Seems absurd but who can predict how Court will interpret, particularly if faced with a sympathetic claimant who will walk away empty-handed otherwise? What if increase in value far exceeds value of other family assets? Will Court leave ben with none of the assets and only his discertionary interest in trust? Will Court make orders against the trustees to give effect to division? Consensus in family bar that this couldn ’t happen w/o trustees being made defendants first and possibly other bens as well b/c their interests are possibly effected. David Thompson has written a very good paper about discretionary trusts under the Family Law Act which he presented at a joint meeting of the CBA Family Law and Taxation Law sections held on March 7/13. Available from CBA.
- “ significantly unfair” – this is supposed to denote a higher threshhold for the court to cross before it interferes than simply unfairness. Factors: this is not the comprehensive list Any other factor – that is where you will deal with issues like a spouse being equally liable for debt related to excluded property or perhaps increase in value of s. 85(1)(f) trust property – unfairness does not seem to be limited to spouses and could possibly encompass unfairness to other bens.
- Note there is one set of significant unfairness criteria for family property and a different set for excluded property [So consider claims to be made against business owner ’s property. He comes into c.l. relationship with a valuable business. His c.l. works side by side with him. The value of the company doesn’t go up substantially but she is instrumental in helping him maintain its considerable value. After 25 years, relationship ends. There is a fairly compelling argument there that it would be significantly unfair to her not to divide the business with her.]
- Historical valuations: husband comes into marriage with 30% of the common growth shares in family business. After 15 years of marriage, split. Now have to go back 15 years to figure out what that 30% was worth. What if they lived together for 2 years before marriage?
- Even if no procedural unfairness, agmt can be set aside if significantly unfair having regard to 3 factors – length of marriage, intention of parties to achieve certainty, degree to which spouses relied on terms of agreement. If 20 year marriage and parties have not really conducted selves in accord with agreement – e.g. it says they will own certain property as ten in common but then they register it as joint ten, may be Court will find it significantly unfair to hold parties to agreement. One school of thought that if parties say they intend to achieve certainty in their agreement, then Court should give effect to that – that provision is there for a reason – and maybe it WILL be harder to overturn agreements. Only about 3-5 years of litigation will give us a clear idea. May also be that Courts try harder to find defect in process b/c it ’ s harder to set aside for unfairness.
- S. 171(1) - an order to bind the estate can only be made after considering: whether the payee has a significant need for support that is likely to continue past the death of the payor that the estate is sufficient to meet the payee ’s need after taking into account all claims on the estate, including those of creditors and beneficiaries; that no other practical means exist to meet the payee ’s need Quaere: how does the Court assess the sufficiency of the estate and claims on it in the context of a 35 year old payor who may live for a very long time?
- These provisions are in addition to existing provisions in the Infants ’ Act, at section 50, that allow only a parent to appoint by deed or Will a guardian in the event of the parent’s death.
- The government ’s intent, as set out in its explanation, is that the standby guardian’s appointment takes priority over any other guardianship appointment.
- Prescribed form is found at same Family Law Act Regulation I referred to on earlier slide.
- So if 3 grandparents each leave $5K, can ’ t accept the last $5K. Or if guardian invests really well and turns $2K into $8K, can ’ t take any further $.
- – e.g. RSPs that designate a child as beneficiary
- Little publicized provisions that might be used in elder abuse situations b/c language and definitions are quite broad.
- Application to financial abuse depends on court being willing to accept that safety and security could encompass economic security . Why not if family violence definition includes unreasonable restrictions on a family member ’ s financial autonomy. Unreasonable restrictions on a family member ’ s personal autonomy might also be used to deal with those situations where an elderly person is being isolated from other family members and prevented from seeing them. Scenario: son tells mother she is worthless and none of the other family members want to see her and only he will look after her so she should turn over all her assets to him b/c he is the only one who cares about her.