Trusts are an important tool from a tax perspective, governed by federal rules that apply equally province to province. But they can also protect your family assets when it comes to areas of property rights, family law and estate planning that can vary widely between jurisdictions.
In British Columbia, these distinctions are important to be aware of, experts say, especially with legislation that grants common-law couples the same rights as married spouses once they have lived in a “marriage-like” relationship (and not necessarily cohabited) for just two years.
Zachary Murphy-Rogers, a partner who primarily practises estates and trusts law at Clark Wilson LLP, a Vancouver law firm that specializes in the field, notes that this common-law relationship rule, combined with the fact that B.C. courts have the power to vary the terms of wills, makes trust planning especially important.
Murphy-Rogers, who is co-chair of the family-office group at Clark Wilson, says each province has its own version of legislation that deals specifically with the administration of trusts, governing areas such as adding or removing and remunerating trustees, for example. He notes that in Canada, a trust’s “central management and control” is deemed to be in the jurisdiction where the trustee or trustees carry out trust business—and is often, but not necessarily, where the trustee (or the majority of the trustees) reside. “The trust’s jurisdiction may move with whoever’s managing and controlling it.”
[A cohabitation agreement] rarely stems from any dislike or mistrust of a future son- or daughter-in-law, or doubt about the relationship itself.
Jason Nicola
Estate planning in B.C.
He notes that B.C. has historically posed difficulties for estate planning because of will variation provisions that, for example, allow spouses and adult and independent children to relatively easily apply to the court to ask a judge to change a parent’s or spouse’s will.
For any estate where there’s a risk of such a challenge after death, “trusts are almost always an important consideration, and may be an appropriate solution,” Murphy-Rogers says, especially as they cannot typically be varied in the way that wills can. “For anyone who has desire to create an estate plan that is less likely to invite litigation, you may achieve both greater privacy and greater certainty regarding the ultimate distribution of your estate with a trust rather than with a will.”
He says that while trusts in many other provinces are predominantly a tax-driven mechanism, “in British Columbia they are very much a tool to reduce the risk or occurrence of litigation.” Indeed, a majority of the trusts that Murphy-Rogers helps clients prepare are motivated by situations such as the possibility that an estranged child or a spouse could contest the will after death.
“Trusts are not challengeable in the same way that wills are in British Columbia,” he says, so long as a person had full mental capacity and was not unduly influenced or under duress at the time of creating the trust. Often, the types of trusts used for this sort of planning are alter ego trusts and joint-partner trusts, both of which become available to Canadian citizens only after the age of 65, although other types of trusts may be appropriate in certain circumstances.
High-net-worth families have different needs
He notes that high-net worth families especially should focus on their children having family-law agreements in place. For those who cohabit, B.C.’s Family Law Act says that couples who have lived together in a “marriage-like” relationship for two continuous years are treated identically to married spouses, with equal rights to property division and support following separation, unless they have a cohabitation agreement that modifies those rights.
Murphy-Rogers has seen trust tools that say children will be automatically removed as beneficiaries of a trust if they get into a common law relationship and hit the two-year mark without having signed such an agreement. “This is parents telling kids, ‘You will only inherit if you have a prenup in place,’” he adds.
Jason Nicola, a wealth advisor and client relationship manager at Nicola Wealth in Vancouver, warns there is no requirement to formalize a common-law partnership and “you can be in a ‘marriage-like relationship’ even if you don’t share a home full-time.”
Trusts can provide a degree of protection in the event of a relationship breakdown, he adds, while cohabitation agreements that require both partners to fully disclose their assets and income are another common tool. “When properly drafted,” he explains, “these agreements allow couples to opt out of the default property division rules.”
How to talk to your kids about this? “Carefully,” says Nicola. “Every situation is unique, but planning is ultimately about ensuring that a large portion of family wealth does not pass outside of direct descendants in the event of a relationship breakdown.”
If the couple has children, this type of planning can protect family assets for the next generation, he notes. “Without it, an ex-partner who remarries or enters a new common-law relationship could bring family assets into the property division rules of that new relationship, with the effect of disinheriting the children.”
This is about clarity and fairness, not about leaving one partner unprovided for, Nicola cautions. “A good agreement provides for both partners without risking a significant portion of family wealth,” he points out, adding that both partners should get independent legal advice to ensure the agreement is fair and reasonable.
Nicola says this is one of the most common estate planning areas discussed with high-net-worth families. “It rarely stems from any dislike or mistrust of a future son- or daughter-in-law, or doubt about the relationship itself. Rather, it is routine and responsible planning that becomes standard practice when significant wealth is involved.”
Murphy-Rogers notes that an inheritance is generally considered “excluded family property,” but once it’s commingled with a partner’s funds—for example, used to pay off the family home mortgage or put into a joint account—“it loses that protected status.”
He says that “trusts are not bulletproof,” but are a “useful tool” in conjunction with a cohabitation or marriage agreement, although this can be a delicate topic for families.
“Lots of people like to avoid it,” he says. “Ultimately, many choose not to rock the boat, not to talk about it or raise it, because it can be offensive to suggest a cohabitation agreement or marriage agreement.”
Meanwhile, a “large portion” of the estate litigation that he and other practitioners in British Columbia deal with are claims on wills where people come forward to say they should be considered a spouse and are entitled to an inheritance. “Once you’re recognized as a spouse, you can disrupt and challenge an estate plan involving a will, but it will be more difficult to disrupt an estate plan involving a trust.”
Murphy-Rogers adds that these kinds of challenges especially happen in B.C. because of the high cost of real estate in the province. “Estates here can have high values,” he says, “and therefore it’s worth it for someone to take a run at an estate that has a $2 million or $3 million house in it.”
Mary Gooderham is a writer, editor and communication advisor based in Ottawa. She leads Cohen Gooderham Communications and has worked as a journalist for more than 40 years at The Globe and Mail, as a recording officer at the International Monetary Fund and as a custom content creator for online and print media. She’s been a contributing writer at Canadian Family Offices for four years, focusing on investment strategy, trusts, philanthropy, women in finance and estate planning.
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