Spencer v Riesberry: Ontario Court of Appeal Affirms the Nature of a Beneficiary’s Interest in a Trust and its Status Under the Family Law Act
November 26th, 2012
The parties were married and lived in a home owned by the Spencer Family Realty Trust (“SFRT”), a discretionary trust of which Spencer was a beneficiary and trustee. When the couple separated it became necessary to determine the nature of Spencer’s interest in the home for purposes of the division of property under the Ontario Family Law Act (“FLA”)
In Spencer v Riesberry, 2012 ONCA 418 the Ontario Court of Appeal affirmed the lower court’s decision which held that Spencer’s contingent interest in the trust property did not qualify as an “interest” for purposes of the FLA’s definition of “matrimonial home”. The lower court went on to hold that Spencer’s interest in the trust was an asset within the meaning of the FLA such that it must be included in the equalization calculation.
The Court of Appeal rejected the appellant’s argument that the court should compromise fundamental trust principles in order to give effect to the FLA’s intention of equal division of the matrimonial home. The decision is wise and well supported; the court should be very cautious in changing well established trust law principles which are relied upon in many different areas of law, not just family. If the result in this case is offensive, the proper remedy is to amend the FLA, not to change trust principles.
Riesberry appealed on the basis that the trial judge erred in finding that Spencer did not have an interest in the property within the meaning of section 18(1) of the FLA. In particular, he argued that the required interest was made out by Spencer’s status as a beneficiary of the trust, her role as trustee or a combination thereof.
Section 18(1) of the FLA reads:
“Every property in which a person has an interest and that is or, if the spouses have separated, was at the time of separation ordinarily occupied by the person and his or her spouse as their family residence is their matrimonial home.”
The FLA provides that both spouses have equal rights to possession of the matrimonial home and a matrimonial home can be neither deducted nor excluded from a spouse’s net family property (“NFP”) calculations, regardless of when it was acquired. The effect of the Court of Appeal decision is to exempt the parties’ home from these provisions; accordingly, Spencer will likely get exclusive possession of the home and a more favourable equalization settlement than she would have if the property had qualified as a matrimonial home. Although Spencer’s contingent interest in the trust remains an asset to be included in her NFP for equalization purposes, she must only include the change in the contingent interest’s value over the course of the marriage.
The parties agreed the property had been ordinarily occupied as their family residence. Accordingly the only issue to be decided was whether Spencer had an “interest” in the property for the purposes of section 18 of the FLA.
In dismissing the appeal, the Ontario Court of Appeal made the following findings:
1) Spencer’s Interest as a Beneficiary of the Trust is Not an “Interest” in the Property within the Meaning of Section 18(1) of the FLA.
The trust property consisted of four homes, each occupied by one of the settlor’s children and their families. The trust beneficiaries were the settlor and her four children, including Spencer. The settlor had a life interest in the use of the properties; upon her death, the trust property is to be divided into equal shares for her living children.
The Court of Appeal found Spencer had only a contingent beneficial interest in the trust property as a whole. If she were to predecease her mother, for example, her estate would receive no interest in the trust property. Similarly, Spencer had no interest in any specific trust asset. Upon her mother’s death she might receive the home in which she resided, a different home, or a combination or fraction of the value of each. At no point could she force the transfer of an interest in the home to herself. Even upon the settlor’s death, there was no automatic conveyance of the property to her.
Based on these factors, the Court of Appeal affirmed the trial judge’s decision that Spencer’s interest as a beneficiary of the SFRT is not an interest in the property within the meaning of section 18(1) of the FLA.
2) Spencer’s Role as Trustee Cannot be Combined with her Beneficial Interest in the Trust to Establish an Interest in the Property within the Meaning of Section 18(1) of the FLA.
It is easy to see the logic of Riesberry’s argument that Spencer’s role as trustee, combined with her beneficial interest in the trust, are sufficient to establish an interest in the property. Although Spencer has only a contingent beneficial interest, in her capacity as one of two trustees she is able to make decisions about the property including which beneficiary receives which property and in what proportion upon the settlor’s death. Common sense suggests that she will receive the home she has been living in upon her mother’s death. It is easy to see why Riesberry would want to couple her beneficial interest with her role as trustee in order to give effect to this expectation.
Unfortunately, this argument seriously misunderstands the nature and structure of a trust.
The Court of Appeal rejected Riesberry’s assertion that Spencer’s role as a trustee in some way amounted to or supported a finding of an interest in the property. Spencer’s duties and powers as trustee are not an interest in the property. She possesses them in her fiduciary role as trustee, which requires her to act in the best interests of the beneficiaries and not herself. The roles of trustee and beneficiary are distinct and cannot be conflated.
3) The Separate Entities of Trustee and Beneficiary Must be Respected Regardless of the Goals of the FLA
Riesberry argued that the Court should not recognize the separation between trustee and beneficiary as doing so would undermine the FLA’s intent to guarantee equal division of the matrimonial home. In support of this position he relied on Debora v Debora (2006), 83 OR (3d) 81, where the court pierced the corporate veil to find that a cottage owned by the appellant’s company was the parties’ matrimonial home for the purposes of property equalization.
The Court of Appeal distinguished Debora on two grounds. Firstly, section 18(2) of the FLA specifically provides for piercing the corporate veil to achieve fairness of property division:
“The ownership of a share or shares or of an interest in a share or shares, of a corporation entitling the owner to occupy a housing unit owned by the corporation shall be deemed to be an interest in the unit for the purposes of subsection (1)”
There is no comparable provision in the FLA in respect of trusts.
Secondly, the Court cannot ignore or conflate the separate roles of trustee and beneficiary without undermining the fundamental nature of a trust. A trust is a relationship and not an entity. It is a form of property holding premised on separate roles for the trustee and beneficiary; the trustee is the legal owner of the trust property and the beneficiary is its equitable owner.
There is no legal mechanism equivalent to “piercing the corporate veil” for trusts: if there is no separation between legal and equitable ownership, there is no trust. It is impossible to conflate the roles of trustee and beneficiary without terminating the trust. By contrast, if the court pierces the corporate veil, the corporation as a separate legal entity remains.
The judgment is a strong affirmation of basic trust principles. Like all statutes, the FLA takes trust law as it is. Trust fundamentals cannot be compromised to suit the policy goals of specific statutes or areas of law. Trusts are too widely used, too firmly established and too heavily relied on to permit that.
If the result in this case is truly objectionable, the remedy is to amend the FLA rather than change the nature of a trust. A provision could be added much like section 18(2) which allows the court to treat a beneficiary’s interest under a trust as an interest for the purposes of section 18(1) provided certain requirements are met. Drafters could look to the recent amendments to the division of pensions (many of which are structured as a trust) for guidance. A deeming provision such as this is far preferable to changing the nature of a beneficiary’s interest.[filed: List of cases]