The Vulnerable Trust?
A recent decision of the Ontario Court of Appeal , Duca Financial Services Credit Union Ltd. v. Bozzo, sent estate planning solicitors into a frenzy in a short, two page, decision which purported to set aside a trust. To understand the fear that gripped these lawyers, the role and purpose of trusts must first be considered.
Trusts have long been the vanguard of the estate planner. As mentioned in previous posts, trusts are an extremely useful tool that effectively satisfies a number of planning objectives. One of the trust’s greatest benefits is the difficulty adverse parties experience in challenging them. This protection is used by estate planners for a number of reasons.
For example, in British Columbia will makers are typically prevented from unevenly distributing their estate to their children because of the equalizing provisions of the Wills Variation Act. Frequently there are good reasons to disinherit one child or provide a larger gift to another, but within a will such distributions can be challenged and are frequently set aside by the courts. Many estate planners, when faced with instructions that contravene the objectives of the Wills Variation Act, will recommend that a trust be established. A well drafted trust provides individuals more freedom to distribute their estate in accordance with their desires and without the fear of court interference.
After the Bozzo decision some estate planners began to question whether such trust planning had been jeopardized for the future as the trust was determined void. More alarmingly lawyers were left considering the dozens of trusts they had drafted in the past and wondering whether they were subject to attack in the future.
While lawyers should always question whether the planned trusts will withstand a challenge, a closer reading of Bozzo reveals that the panic was not merited. The Court actually did not set aside a valid trust exposing the assets to the creditors; instead, the Court determined that the trust never came into existence. This is an important distinction. The Bozzo decision would have been much more interesting had the Court found that a valid trust had been settled and then chosen to set it aside at the request of the creditors. But this decision does provide solicitors an important reminder. When drafting trusts, the bare elements of the trust must be in existence or the plan is at considerable risk. Trusts are still a valuable mechanism but they can only be implemented in certain circumstances and only add value when properly drafted.
