I want my children to have all the things I couldn’t afford. Then I want to move in with them.
- Phyllis Diller

While we don’t all want to move in with our children once they are grown adults as Phyllis Diller quips above, we do want to ensure that our children enjoy an abundant, comfortable adult life.

One way to accomplish this is to create an estate plan that protects our children’s assets. Such protection becomes even more important when our children get married. Although we hope that our children’s marriages will stay strong and happy, matrimonial bliss doesn’t always last forever. To safeguard your children’s future, it is imperative to create an estate plan that provides maximum asset protection in case of divorce.

In Ontario, the Family Law Act (the “Act”) outlines the type of property that is included when a divorcing spouse calculates the value of his or her net family property. Once calculated, the spouse with a higher net family property value must pay the other spouse an equalization payment to alleviate any difference in values.

Property acquired by gift or inheritance from a third person after the date of the marriage does not need to be included when calculating net family property under the Act. Income from such property is also excluded. However, these exclusions do not extend to what the Act defines as the “matrimonial home.”

The Act defines a matrimonial home as “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.”

It follows that if you buy a home for your child to occupy with his or her spouse and children as their primary family residence, that home will be defined as a matrimonial home that must be included as part of your child’s net family property value under the Act.

How, then, can parents who purchase a home for their adult children protect that asset in the case of divorce? Recent case law in Ontario suggests that using a trust may be part of the solution.

The Ontario Court of Appeal found in the 2012 case of Spencer v. Riesberry that a family home held in a trust was not a “matrimonial home” under the Act.

Sandra Spencer, her children, and her husband lived in one of four homes owned by a trust that was settled by her mother. Sandra was a trustee of the trust, as well as one of the beneficiaries. The court found that neither Sandra’s role as trustee nor her role as a beneficiary meant that she had “an interest” in any specific trust property, including the home she and her husband lived in during their marriage. This finding allowed Sandra to exclude the calculation of that home from her net family property value.

Moreover, Sandra’s mother’s intention that trust distributions should not be included as part of her beneficiaries’ net family property was expressly stated in the trust agreement. While the trial judge struck this part of the trust agreement down as void, the Court of Appeal expressly stated that it was not approving the trial judge’s decision on that point.

Therefore, as the law stands, your child may not have to pay an equalization payment to a divorcing spouse based on a beneficial interest in trust property even when that trust property includes a family home.

However, this law may be changed in the future in order to avoid blatant sidestepping of the Act. The Ontario Superior Court’s 2013 decision in Ludmer v. Ludmer is illustrative.

After being married for one year, Brian and Lisa Ludmer signed a marriage contract. The impetus for the contract was that Brian’s father, Irving, told his son that he was a beneficiary of a trust with substantial assets. The trust was governed by the laws of Quebec.

A provision in the trust agreement stated that all trust property and any property purchased in replacement of or derived from the trust property was to be considered the “private and separate property” of the beneficiaries. Irving’s intention was to ensure that trust assets were distributed to his beneficiary children and not their spouses.

The marriage contract that Brian and Lisa signed was similar. It excluded any trust assets distributed to either spouse after the date of marriage, as well as any assets or income acquired as a result of the sale of such trust distributions, from being calculated as part of that spouse’s net family property.

The trial judge determined that the value of Brian’s assets that could be traced back to distributions of trust property from the trust Irving had settled had to be excluded from Brian’s net family property value pursuant to the marriage contract. This finding meant that the portion of the proceeds of the sale of the Ludmers’ matrimonial home that could be traced back to distributions of trust property were rightly excluded from Brian’s net family property valuation.

Note that this decision was not based on the provision of the trust agreement described above. Rather, the decision was based on the judge’s determination that the marriage contract governed Lisa’s rights in the divorce proceeding. The Quebec trust agreement only governed the relationship between the trustee and the beneficiaries and had no bearing on Lisa’s rights in Ontario matrimonial proceedings.

Thus it is ideal to not only protect your child beneficiary’s assets in a trust, but to have your child and his or her spouse sign a marriage contract that explicitly excludes all trust property – and any funds derived from trust property to purchase a matrimonial home – from being counted as net family property.

Although Spencer v. Riesberry seems to stand for the proposition that holding family property in a trust for your child can afford adequate protection upon marriage breakdown, it is possible that this law will change over time.

When the decision in Ludmer v. Ludmer is taken into account, it appears that the safest way to plan for your child’s future is to create a comprehensive estate plan. Such a plan should include both a well-constructed trust agreement that addresses the concerns of family property valuation as well as a marriage contract signed by your child and his or her spouse.