eCaseNote 2013 No. 03

Protecting family trusts by marriage contract

LeVan v. LeVan 2008 ONCA 388; Ludmer v. Ludmer 2013 ONSC 784

Marriage contracts, or prenuptial agreements as they are referred to in the US, are used where two people set out agreements about their upcoming marriage and what will happen in the event of marriage breakdown. The marriage contract may make reference to such matters as family assets and trusts, spousal support and child support. With the growing divorce rates, marriage contracts can be thought of as essential in certain circumstances.

Canadian courts have considered the effectiveness of marriage contracts in relation to existing family trust arrangements, with potentially surprising and conflicting results. The LeVan and Ludmer cases, decided in Ontario and resulting in quite differing outcomes, provide some insight into some of the issues that need to be considered to determine whether family trust assets are to be excluded from a net family calculation upon marriage breakdown.

Richard and Margaret LeVan were married for seven years. Richard and his family owned the majority of shares in a family business. Richard’s father wished to ensure that the corporate shares stayed within the family. Richard informed Margaret that a marriage contract must be signed before the wedding with its sole purpose being to keep these shares within the family. The contract was drafted by KB, a family lawyer, that excluded all of Richard’s business interests from net family property and severely restricted Margaret’s right to support. KB asked another lawyer, SH, to provide independent legal advice to Margaret. SH had acted for KB’s own family in the past and this information was not disclosed to Margaret. Following the eventual breakdown of the marriage, Margaret challenged the marriage contract, and the court set it aside under the Family Law Act (ON) stating that Richard did not disclose his entire assets and misrepresented the nature and terms of the marriage contract, and that Margaret did not understand the nature and consequences of the marriage contract. The court awarded her equalization payments of approximately $2.1 million, in addition to spousal and child support.

Brian and Lisa Ludmer were married in 1985. Similar to the LeVan case, Brian’s father created a substantial trust that named his three children as beneficiaries. The trust deed specified that all trust property must remain within the family and Brian’s father kept the details of his estate plan a secret. He finally informed Brian of his estate plan after a year into Brian’s marriage to Lisa and Brian and Lisa subsequently entered into a marriage contract. Upon marriage breakdown 20 years later, Lisa argued that she was under duress in signing the marriage contract, but the Court found that the marriage contract was enforceable since she obtained independent legal advice and concluded that she understood the nature of what she was signing. The Court held that the value of Brian’s assets, including the matrimonial home, were traceable to the family trust and exempt from Brian’s net family property calculation. Lisa’s entitlement was limited to those agreed to by her in the marriage contract, and she had no part in the trust.

The wives in both cases above had obtained independent legal advice. The court in LeVan took the position that the husband was fraudulent in not disclosing his entire assets to the wife and that the advice given to the wife was not completely independent. The outcome was that the marriage contract was set aside and resulted in the wife’s entitlement to the husband’s family assets. The wife in Ludmer also obtained truly independent legal advice, but was determined to have understood the full nature of the marriage contract and her entitlement was limited to what she had agreed under it.

The cases had different outcomes, but the one thing that is certain is that the creation of a family trust may not be sufficient in and of itself to exclude spousal benefits for beneficiaries on marriage breakdown. Additional planning should be carefully designed to protect the family assets identified in the trust as was done in the Ludmer case.

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