British Columbia Law

Protecting Trust Assets in a BC Divorce: What Beneficiaries and Trustees Need to Know

By Andrew Liggett, Sea to Sky Law, New Westminster, BC

Trust assets are one of the most complex and contested areas in BC high-net-worth divorce. Whether trust property is accessible to a divorcing spouse — and to what extent — depends on the type of trust, the terms of the trust deed, how distributions have been managed, and evolving BC case law. Both beneficiaries and trustees need to understand the legal landscape before a separation becomes a litigation battle.

How BC's Family Law Act Treats Trust Property

Under the Family Law Act (FLA), the starting point is that "family property" includes all property that either spouse owns or has a beneficial interest in at the time of separation. Property that was received as a gift or inheritance — including an inheritance held in trust — may qualify as "excluded property," meaning it is protected from division. However, the rules are more nuanced than they appear.

Excluded property under the FLA includes:

• Property acquired by gift or inheritance from a third party during the relationship
• The property of a trust that was settled by a third party (not by either spouse)
• Property derived from excluded property

But any *increase in value* of excluded property that occurs during the relationship is family property and is subject to equal division. This is an important distinction that often surprises people: the original trust corpus may be protected, but if the trust grew in value during the marriage, your spouse may have a claim to a share of that growth.

Discretionary Trusts: The Key Battleground

Most modern family trusts are discretionary — the trustee has full discretion to decide whether, when, and how much to distribute to any beneficiary. A beneficiary of a discretionary trust does not own trust property; they have only the possibility of receiving a distribution if the trustee chooses to make one.

BC courts have generally been reluctant to treat a purely discretionary interest as family property with a definable value. If you have never received distributions and there is no reasonable expectation that you will, it is harder for your spouse to quantify and claim that interest.

However, if distributions have been regular and substantial during the marriage — particularly if they funded the household — courts may find that the interest has a real and measurable value. The pattern of actual distributions, the relationship between the beneficiary and the trustee (especially in family trusts where the settlor is a parent), and any letters of wishes are all relevant.

What Trustees Need to Know During Divorce Proceedings

When a beneficiary is going through a divorce, trustees face difficult questions:

• Continuing distributions: A trustee is not required to stop making distributions simply because a beneficiary is separating. However, if distributions are made strategically to frustrate a spouse's family property claim — for example, channeling assets away immediately before or after separation — courts can scrutinize those transactions.
• Trust documents in disclosure: BC courts routinely order production of trust deeds, letters of wishes, financial statements, and records of distributions going back several years. Trustees should be prepared for this.
• Variations or terminations: A trust that is collapsed or restructured during divorce proceedings in circumstances that look designed to defeat a spouse's claim can attract adverse findings from the court.

Trustees who are also family members (parents who set up a trust for children, for example) sometimes feel caught in the middle. Taking independent legal advice — separate from the beneficiary's family law lawyer — is prudent.

Tracing: When Trust Money Has Mixed with Family Assets

Even if the trust corpus is excluded property, things become complicated when trust money has been mixed with family assets. If trust distributions were deposited into a joint bank account and used to fund family expenses, pay down the mortgage, or make investments, tracing becomes essential and difficult.

The burden of proof is on the spouse claiming excluded property to trace it — commingled funds that cannot be specifically traced lose their excluded status.

Meticulous record-keeping throughout the relationship — keeping trust distributions in a separate account and clearly documented — is the most effective way to preserve the excluded-property argument.

Inherited Trusts vs. Self-Settled Trusts

The source of the trust matters enormously:

• A trust settled by a parent or grandparent for you (whether before or during the marriage) is generally excluded property — though growth during the marriage may not be.
• A trust you created yourself with your own money is different: the property that went into it was already yours (and potentially family property), so sheltering it in a trust does not protect it.
• A joint trust or a trust funded with family property will be treated as family property for division purposes.

Practical Steps to Protect a Trust Interest

If you are a beneficiary and your marriage is breaking down:

1. Obtain the trust documents. You need the full trust deed, any amendments, letters of wishes, and financial records. Understand exactly what your interest is.
2. Get legal advice before taking any distributions. Large distributions immediately before or after separation can look strategic and will be closely examined.
3. Document your excluded property clearly. If trust money has come to you, show it was kept separate and not commingled.
4. Consider whether the trustee needs independent advice. If the trustee is a family member, they may need their own counsel to navigate their obligations during your divorce.
5. Understand the growth-in-value issue. Even if the principal is protected, be prepared to address what portion of the trust's growth occurred during the relationship.

Litigation Risk

Trust disputes in BC family law are expensive and uncertain. Courts have significant discretion, and outcomes depend heavily on the specific trust deed, the history of distributions, and how the trust was managed during the relationship.

Mediation or negotiated settlement — with both sides represented by lawyers experienced in high-net-worth family law — often produces better outcomes than full litigation for trust disputes.

This article is general information, not legal or tax advice. Meetings are by appointment only, by phone or secure video.