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Litigation, Litigation

Freedom of Willing returns to Quebec, (a little bit, maybe)!

Mar 12th, 2018

By Barry Landy

The recent decision of the Quebec Court of Appeal in the case of Karam v. Estate of Yared[1] is extremely important for all spouses who are or may become subject to Quebec family patrimony law. In some circumstances, this decision has opened the door for spouses to own what would otherwise be considered a family patrimony asset through an inter vivos trust, thereby avoiding the legally mandated division of family patrimony assets on death.

A little background is needed to better understand the potentially remarkable implications of this case: 

In 1989, Quebec passed the Act to Amend the Civil Code of Québec and Other Legislation in Order to Favour Economic Equality Between Spouses. This law basically abolished the notion of total freedom of willing in Quebec.

Prior to 1989, one of the basic provisions of the civil law, inherited from the English common law, was the idea of testamentary freedom—the concept that each person was free to pass one’s property on death by will as one wished, and to whom one wished, and that one could be as foolish, unconventional or erratic as one chose, subject only to minimal legal limitations.

However, the family patrimony legislation was designed to be a bit of social engineering that changed all that by creating the concept of family patrimony for all married couples and by making major changes to the financial relationship between spouses. 

To better understand this, after 1989, if you were married and living in Quebec, then at the time of dissolution of marriage (for example, at death), the law provided that certain property formed part of a family patrimony. Essentially, the family patrimony consisted of the family homes, including secondary residences, objects furnishing or decorating the homes, such a furniture or artwork, motor vehicles, and money saved in a retirement account during marriage.

Regardless of whether you or your spouse was the owner of such assets, upon dissolution of the marriage at death, the market value of these assets would be calculated and then the spouse owning the assets would owe one-half of the net market value to the other spouse.

For example, notwithstanding the terms of a marriage contract or even the rules of a chosen matrimonial regime, after 1989 a husband (or wife) who passed away owning only a family residence with a value of $1 million could not leave the value of that asset outright to children born of the marriage by way of will, because the surviving spouse would have a family patrimony claim of $500,000 against the estate of the surviving spouse as a matter of law, without regard to issues of formal title.

Of course, this led to some creative efforts to try to avoid the imperative application of these rules, for example by using a corporation or a trust to acquire the family residence. However, these efforts were quickly dismissed by the Courts. In one decision where a spouse had transferred a family residence to a trust, the Superior Court of Quebec held that where an inter vivos trust had been created and a family residence transferred to that trust, it was appropriate to lift the “fiduciary veil” and consequently find that the creation of such a trust could not defeat the family patrimony rules. This was also the unanimous view of the doctrinal writers.

Prior to the Karam case, the popular wisdom was thus that even though from the strict legal point of view a trust patrimony, as opposed to one of the spouses, “owned” a family residence, where that trust was under the de facto control of one of the spouses, the existence of the trust could be disregarded. This view was further justified by saying that the family residence rules applied because each spouse had a right of use of the family residence, regardless of who owned it and the right of use itself had a value equal to the value of the family residence, which value could be partitioned.

The Karam case has rejected the popular wisdom.

The facts of the case were relatively simple. The Karams moved to Quebec and became subject to the family patrimony rules in 2011. They created an inter vivos trust for asset protection purposes and shortly thereafter, the trust became the owner of a multi-purpose building, including a portion of the building which became the family residence. Madame and the couple’s four children were the trust beneficiaries. Monsieur was the trustee. Monsieur was also named “elector”, which gave him the power at his discretion to appoint new beneficiaries, remove beneficiaries, or establish the value of each beneficiary's share. (Monsieur eventually signed another document renouncing these rights and powers.) When Madame died in 2015, her estate sued and made a claim for one-half of the value of the family residence, as if it had been purchased and belonged to Monsieur personally. Monsieur contested and argued that neither the trust nor the four (4) children as sole remaining beneficiaries of the trust, were subject to a family patrimony claim. He testified at trial that when the trust was created, it was for asset protection purposes, primarily for the benefit of the children and not to avoid the application of the family patrimony rules. This testimony was not contradicted.

The Court of Appeal unanimously decided that M. Karam was correct and that the trial judge had erred to speak about “lifting the fiduciary veil”, adding that the facts and circumstances of creation of the trust had to be considered in each instance. The Court of Appeal further found that there was no evidence that the couple had created the trust, or transferred the family residence into the trust, with a view to avoiding the application of the family patrimony rules, in short, that no subterfuge was involved.

The Court of Appeal was also troubled by what would have occurred had the heirs of the late wife prevailed. Monsieur would have found himself owing an amount of money to his wife’s estate equal to 50% of the value of the family residence, whereas title to the family residence itself would have remained vested in the trust, where the beneficiaries were the very children, who were also the beneficiaries under Madame’s will. Therefore, the children would inherit not only the cash amount of the family patrimony claim, but also eventually the house itself (or the proceeds from its sale when distributed out of the trust)!

Of course, one should not automatically conclude from this case that in all circumstances, married couples living in Quebec may opt to resort to using inter vivos trusts and thereby bypass the imperative application of family patrimony rules. Each individual situation of creation and use of a trust must be reviewed on its factual merits. For example: was the creation of the trust the joint decision of the spouses? Was the family residence owned by one of the spouses and then transferred into the trust? Who were the named beneficiaries, and so on.

However, subject to reviewing these types of considerations, it is true to conclude that the door for creative and legally justified planning is now more than slightly ajar.

For more information, we strongly advise that you obtain legal advice appropriate to your situation.

[1] 2018 QCCA 320