The interplay between benefits under a trust and bankruptcy

By Daniel Waldman, assisted by Pulkit Sahi, Pallett Valo LLP

In a recent decision, the Ontario Court of Appeal held that the sale proceeds of a property held in trust can be applied to a beneficiary’s bankruptcy obligations.

Richards (Re), 2022 ONCA 216 dealt with a situation where real property was held in a trust during the lifetime of the beneficiary’s parents. The date of death of the second parent was designated as the “Time of Division” when the trustees were to distribute the trust fund to the beneficiary.

The father passed away in 2010 and the mother mid-2020. The trustees sold the property and held the proceeds of CAD 1,172,120 in trust.

At the Time of Division, the beneficiary was an undischarged bankrupt, facing an outstanding judgment by the bank for CAD 987,613, plus costs and interest. In October 2020, the bank obtained an order under s. 38 of the Bankruptcy and Insolvency Act and was assigned the rights of the beneficiary’s trustee in bankruptcy to make a claim against the proceeds of sale. It brought a motion to recover the amount owed from the sale proceeds which, they argued, constituted property of the bankrupt.

The beneficiary argued that his interest in the property would only vest upon his discharge from bankruptcy. The bankruptcy judge disagreed. It was held that the trust’s provisions during the parents’ lifetimes were overridden by the provisions that applied to the property after their death.

Ultimately, the bankruptcy judge found that the property vested in the beneficiary at the Time of Division, and thus in the bankruptcy trustee. The bank was therefore entitled to the proceeds of sale up to the amount owed by the beneficiary, who appealed. The Ontario Court of Appeal upheld the bankruptcy judge’s order. The court noted that to decide otherwise would offend the public policy that underlies the Act, as it would allow a person to place assets out of reach of creditors.

This decision serves as a reminder that beneficiaries in such situations cannot use the terms of a trust to shield their obligations from creditors.

You can read the full version of the article here.

Daniel Waldman

GGI member firm
Pallett Valo LLP
Law Firm Services
Mississauga (ON), Canada
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Pallett Valo LLP is one of Ontario’s Top 10 Regional Law Firms. The firm practices in the areas of business law, commercial litigation, commercial real estate, construction, employment and labour, insurance defence and wills, estates, and trusts.

Daniel Waldman is a commercial litigation lawyer. The article was co-authored by Pallett Valo's summer student Pulkit Sahi.

Published: Trust & Estate Planning Newsletter, No. 10, Autumn 2022 l Photo: Jonathan Dakin - stock.adobe.com