STEP Canada Estate Planning Issues Related to Divorce and Blended Families

Transcription

1 STEP Canada Estate Planning Issues Related to Divorce and Blended Families November 13, 2012 Valuation of Trusts Osgoode Hall, Toronto, Ontario Andrew J. Freedman, CA IFA, CBV, ASA Duff & Phelps Canada Limited duffandphelps.ca

2 Definition of Value in a Family Law Matter FLA preamble: the orderly and equitable settlement of the affairs of the spouses upon the breakdown of the partnership When is valuation required: 1.Date of marriage 2.Date of separation 3.Marriage contracts: value and disclosure 4.Value exclusion Trust interest gifted during marriage Value not defined in FLA: net family property means the value of all the property. Overriding objective in family law is fairness and equity Objective impacts definition of value selected Duff & Phelps November 13,

3 Definition of Value: Is There a Choice? Definition selected must align with objectives of FLA Generally an orderly, equitable and fair result Just and equitable rule will override specific legislated definition Fair market value the go to definition Pros: - Convenient - Familiar - Well understood - Precedent in income tax and expropriation law 3

4 Definition of Value: Is There a Choice? Cons: - Too rigid and restrictive not applicable to all assets commonly found in a family law case - Result may not be fair Propose that Fair Value be the standard of value adopted in a family law matter 4

5 Quest for Fair Value Not defined in Federal or Provincial legislation Generally interpreted by Canadian courts as fair market value without application of a minority discount Aim arrive at a just and equitable value Consider relevant financial circumstances No one definition or formula must be flexible Start with fair market value and adjust to accommodate Cont d 5

6 Quest for Fair Value Why use fair value? - Relevant surrounding circumstances - Specific purpose of valuation - Relationships and expectations of spouses vs. arm s length parties - Consider other alternatives to fair market value where market for asset does not exist or not broad enough to render a fair price - Examples: - Trust interests - Employee stock options - Restrictive agreements - Professional practices - Books of business 6

7 Trust interest is considered property for FLA purposes Very few decided cases for valuation guidance Brinkos v. Brinkos - valued income stream DaCosta v. DaCosta valued capital to be received (specific age distribution date) Black v. Black contingent interest had value at date of marriage Grove v. Grove contingent interest if and when Sagl v. Sagl divide value equally among all beneficiaries 7

8 Value of a beneficiary's interest depends on: Income: vested / unvested Capital: vested / unvested Trustee s powers: discretionary / non-discretionary First step is to value assets owned by Trust Shares in private companies Real estate Marketable securities Apply traditional valuation techniques 8

9 Income interest Present value of future stream of cash flow from the Trust expected to be received by the beneficiary over a specific period Factors:» Life expectancy» Nature of capital base of Trust» Estimated future income» Distribution dates» Anticipated annual rates of return 9

10 Capital interest Determine present value of the beneficiary s interest in the future capital of the Trust Factors:» Life expectancy» Expected distribution date» Expected rates of return» Anticipated capital contributions or distributions to others» Capital reinvestment plans» Expected growth rates 10

11 Example 1 30 year old spouse has a capital interest in a non-discretionary Trust Trust property $1M bond portfolio Entitled to 100% of Trust capital at age 40 $ Value of bonds at current date 1,000,000 Present value at distribution date in 10 years, discounted at 4% 675,000 Probability of Receipt of Trust Capital in 10 Years Capital Value Today Calculation 100% 675, % of 675,000 90% 608,000 90% of 675,000 75% 506,000 75% of 675,000 Conclusion: at valuation date, if beneficiary spouse is certain capital will be received in 10 years, then value = $675,000 (i.e., willing to accept a cash payment of $675,000 now rather than wait 10 years) 11

12 Example 2 Income interest Non-discretionary Trust Beneficiary entitled to Trust income until death. Life expectancy 10 years at valuation date Bond portfolio 1,000,000 Annual income 70,000 Annual after tax income 35,000 $ Present value of $35,000 per annum for 10 years at a 2% discount rate (4% after tax) =$314,000 Conclusion: at valuation date, if beneficiary spouse s life expectancy is at least 10 years then value of Trust interest is $314,000 (i.e., willing to accept a cash payment of $314,000 now rather than receive the distributions over 10 years) Value will change depending on mortality assumption 12

13 Valuation of capital and income interests in a Discretionary Trust Most subjective, valuation problematic and contentious Discretionary feature adds element of significant uncertainty Most cases value is Nil but need to examine specifics 13

14 Additional factors to consider: Number and ages of other beneficiaries Obligations of the trustees under terms of Trust Owner-spouse s overall estate planning Trustee s plans for Trust assets Obligation of trustees to maintain an even hand Value of Trust assets Expectations and legal rights of other beneficiaries Amount, timing and nature of any distributions prior to or after valuation date Beneficiaries ability to control Trust, if any What is likelihood of beneficial owner realizing value through a Trust distribution? 14

15 Sagl v. Sagl Husband both income and capital beneficiary Wife argued 100% of Trust assets should be included in husbands NFP Judge assumed a deemed realization of the Trust s assets, net of taxes and allocated an equal share to each beneficiary 15

16 Trust Disclosure in Marriage Contracts Full disclosure necessary to ensure contract not set aside LeVan v. LeVan Husband was a beneficiary of a Family Trust Husband did not disclose that he was both an income and capital beneficiary No attempts to value Contract set aside for many other reasons Court of Appeal indicated that failure to disclose value was not critical to disclosure analysis Caution: When in doubt, more is better LeVan Benchmark: the disclosure provided by the husband was insufficient to enable the wife to have a clear understanding of exactly what rights she was giving up by entering into the contract Borins J.A. 16

17 The End Duff & Phelps November 13,