Recently, we were working with a group of tax and estate advisors executing an estate freeze of an Opco, together with the creation of a Family Trust (the “Trust”) to hold new Opco shares.  When considering the terms of the Shareholders Agreement, the question was raised:

In addition to asking direct Opco shareholders, what if we asked the beneficiaries, trustee and protector of the Trust to sign a prenuptial, marriage or cohabitation agreement?

Imagine the reactions.  Read on…

The conditions were quite simple, but again the devil is in the details.  Essentially, before anyone could become a beneficiary, trustee or protector they had to:

  • Enter into an enforceable prenuptial, marriage or cohabitation agreement (the “Agreement”).
  • The Agreement would prevent their spouse/partner from obtaining any Opco shares or interest in the Trust.
  • They must produce a copy of the Agreement to Opco’s directors to ensure its meets the criteria.

If an acceptable Agreement is not entered into, they are unable to be a beneficiary, trustee or protector.

The family discussions were interesting and went along the lines of “you can never anticipate what happens in life, we are doing this to protect you and the Opco family legacy”.  Different reactions came from:

  • Single children beneficiaries who thought it was a workable idea (although none were currently in a relationship).
  • Divorced children who thought it was a great idea as they reflected on their past experiences.
  • Married couples had a variety of emotions including “what are you giving me instead”, “are you sure you want to start this negotiation” and “absolutely not”.  No married couple immediately jumped on the band wagon.
  • The non-family individual trustee had a change of heart in helping the family plan their legacy affairs.  (note: this would not apply to a corporate trustee).

The father always had to come back to the point that the children were getting something they didn’t have before – an interest in Opco.  Eventually after much discussion, a suitable arrangement was reached.

As part of this blog we asked Jesse Desilets, a family lawyer with Schuman Daltrop Basran & Robin, to provide his general comments.  Jesse said:

  • In British Columbia typically assets in a discretionary trust (to which a beneficiary did not contribute) are not “family property” and would not be divisible.  What is divisible is the increase in value of the beneficiary’s interest. This can be very difficult to value if there are multiple beneficiaries.
  • When the Trust receives the Opco shares, they typically are of nominal value due to the estate freeze.  Without a marriage agreement, the increase in value of the new Opco shares would be divisible. Most likely the non-beneficiary spouse should be eligible to get their fair division from assets other than an interest in Opco or the Trust.
  • There may be some benefit to requiring a trustee to obtain a marriage agreement to protect trust shares, as this is to the benefit of Opco (and beneficiaries) to ensure the shares do not fall into the hands of the trustee’s spouse upon a breakdown of the trustee’s marriage.
  • A trust requiring a beneficiary to sign a marriage agreement seems more along the lines of attempt by the father to protect his children in the event of a marriage breakdown, rather than an attempt to protect the shares.  Corporate/Trust counsel should consider vetting any such agreement with a skilled family lawyer to ensure the proposed agreement does not exceed the scope of what is necessary to protect the corporation/trust.

When planning for the future, one can never predict what will happen.  Having an Agreement in place may provide for protection of the family legacy that under the right circumstances, might work.  Be prepared for interesting family dinners…

 

Our estate planning posts consider estate planning issues at a high level.  Before you commence any form of estate planning, please consult with tax and legal advisors.