Jan 21st, 2020
Jan 28th, 2020
By Barry Landy
On March 12, 2018, I published a short article on the Spiegel Sohmer Blog where I wrote:
The recent decision of the Quebec Court of Appeal in the case of Karam v. Estate of Yared 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.
The facts of the case were relatively simple. The Karams moved to Quebec and became subject to 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 held that the property in question did not have to be taken into account in calculating the value of a family patrimony claim made by the heirs of Madame.
Unfortunately for Mr Karam, the Supreme Court of Canada disagreed. In a decision rendered December 12, 2019, the Court held that family residences kept in a trust are not, in principle, outside the scope of the composition of the family patrimony, because by referring to the rights which confer use of a family residence, the legislator intended to include in the family patrimony the type of living arrangements where spouses, without being owners in title, nonetheless are in control of the family residence. What was important, said the court, was to look at the circumstances and determine the level of control exercised by either spouse with respect to the residence.
So consider the following scenario: Assume a second marriage. The husband and the wife have children from the first marriage. The husband has a friend settle a trust and that person becomes the sole trustee. The trust acquires a condominium. The terms of the trust are that the beneficiaries, namely the husband and wife, have the same and equal rights of use of the condominium during their lifetimes. At the death of the first spouse, the surviving spouse has a continuing right of use until his or her death. Upon the death of the last to die of both spouses, the trust capital automatically vests in the children of the husband.
Unlike the facts in Yared, in the above example, it is not immediately apparent nor is it intended that in fact the husband is exercising any control over the family residence.
Accordingly, it may well be that this type of trust arrangement be entirely viable and legitimate, especially where it is motivated, for example, by asset protection considerations.
While the court does have some discretion to deal with potential inequities created by the operation of the trust, in the above fact pattern, those inequities are not readily apparent.
All of which is to say that notwithstanding the decision of the Supreme Court of Canada in Yared, it certainly remains arguable that in the right circumstances, a properly structured trust may be a useful vehicle for holding residential immovable property.