When an estate faces bankruptcy there are obvious emotional and financial stresses that can arise, including the potential loss of a family home or property. One way that a home can be protected from bankruptcy is if it’s not actually owned by the bankruptcy party or their estate, but instead owned by a trust. However, it is illegal to move property into a trust in order to shelter it from a pending bankruptcy. A recent case before the Ontario Superior Court of Justice highlights the consequences of doing so.
When a couple was facing bankruptcy, they claimed that their home and their cottage were actually held in trust for their children, and as such were excluded from the estate, which was being managed by a trustee through the bankruptcy process. The trustee claimed the bankrupt parties had created “sham” trusts for the purpose of defeating the estate’s creditors.
The bankrupt individual had been faced with a court-ordered obligation to repay over $5 million stemming from a breach of fiduciary duty to a company for whom he had once served as CEO and director. He entered bankruptcy on December 12, 2017, The trustee of the bankrupt estate sought to realize his assets for the benefit of his creditors. It was a this time that he indicated a farm and cottage were held in trust for his children.
To prove the two properties were held in trust, the bankrupt individual produced two documents, alleged to have been created in 1995 and 2004 respectively. The 1995 document referred to a property known as The Ledge Lodge, which was the couple’s principal residence. The document stated:
We agree that it is our understanding that Ledge Lodge:
1. is not a marital asset
2. will be classified as our principal residence
3. will be held in trust for my three children, Drew, Jordan and Linsey
4. we have the right of use
5. we are obliged to pay the operating costs
The 2004 document was for a cottage. This document stated the following about the property:
1. Is not a marital asset
2. Will NOT be classified as our principle residence
3. Is financed by advances from (wife) as evidenced by a promissory note from (husband).
4. Will be held in trust for our five children,
5. We will have the right of use
6. we are obliged to pay the operating costs
The husband testified that he created the documents on his own, without the benefit of accounting or legal advice.
Were the documents a sham?
The court described a sham as a,
“transaction or instrument designed to give the appearance of creating legal rights or obligations that are different from what the party actually intended to create. In the context of a trust, a sham trust is usually created for a fraudulent, deceitful or illegal purpose, such as avoiding a creditor. However, deceit is not a necessary element of a sham trust. The trust need only be presented by the parties as being different from what they know it to be, Sangha v. Reliance Investment Corp Ltd, 2011 BCSC 1324 (CanLII) at paras 346 – 347.”
The court found the documents to be shams after it was revealed they were created using fonts that were not available at the time the documents were alleged to have been created. The 1995 document used a font known as Cambria, which was not created until 2002, and not made available to the public until 2007. The 2004 document used a font known as Calibri, which was also invented in 2002 and only made available to the public in 2007. An expert witness testified that only an employee of Microsoft, who created the fonts, could have created the documents in question.
The dates at which the documents were created were not enough on their own to determine the transaction to be a sham, but the conclusion they were was reached after looking at the context of the case, particularly the bankrupt parties’ motivation for creating the trusts.
Issues involving estate planning can be emotionally and financially stressful. The knowledgeable and experienced lawyers at Borden Family Law can help with the most complex estate litigation issues.
At Borden Family Law, we have been helping clients with their family estate planning needs for over 17 years. We are aware of the challenges and pitfalls that people can stumble into and help our clients through these confusing areas of law. We have the experience and knowledge necessary to help you plan for the future, and to protect your assets and the people most important to you. Call us at 905-576-6090, or contact us online. Ask about our flat fees and how we can help with your estate planning needs.