Estate Freezes and Potential Family Law Issues

Last week, we reviewed how estate freezes can be used to help a family business survive multiple generations and mitigate potential estate and other litigation. This week, we explore the intersection of estate freezes and family law.

Division of Property and Gifts

Under the Ontario Family Law Act (FLA), all property and other assets accumulated during the marriage must be shared equally between former spouses following a marital breakdown.

There are specific assets that are excluded  from this division of property, including gifts from third parties received over the course of the marriage.

In order for a gift received during a marriage to be considered a gift for family law purposes:

  • The person giving the gift must intend to make a gift without expectation of remuneration;
  • The person getting the gift must accept the gift;
  • There was an act of delivery/transfer of the property.

Shares Gifted Through an Estate Freeze

Shares gifted through an estate freeze will be considered gifts where the transfer is done without consideration (i.e without the person granting the shares receiving something in return) and the above conditions of a gift exist.

For instance, think about a situation in which a woman who owns a business decides to carry out an estate freeze and transfer shares in her company to two adult children. One child is married, the other is engaged at the time of the estate freeze.

If the married child later separates from their spouse, the child can exclude the value of the shares (and any growth in value of those shares that was kept separate from joint assets) from the child’s net family property. If the married child had paid consideration for the shares received, the value of the shares would be included in the net family property after separation.

If the engaged child gets married, and then later separate from their spouse, the child will be able to exclude the value of the shares on the date of the marriage (since they received the shares prior to getting married). However, the child would have to include the growth of the value of the shares from the date of marriage to the date of separation in their net family property. Essentially, the situation would be akin to the child having paid for the shares rather than receiving them as a gift. This could be avoided by waiting to do the estate freeze until after the child is married.

Neither child would have to divide the base value of the shares with their former spouses.

Practical Impacts

Business owners who are contemplating succession planning and continuation of their business are wise to consider the impact that potential separation can have on the future of their venture. Their own potential breakdown of marriage should be considered, as should the potential breakdown of the marriage of any children to whom the business is intended to be passed to.

A business owner seeking to continue their family business and mitigate any potential family law or estate litigation problems down the line can shield things like shares in a business from a child’s spouse.

Whether you want to ensure the continued success of your family business, need to ensure that business income is properly calculated, or have to divide business assets fairly, Financial Litigation has experience assisting with complex family law matters on behalf of high-income clients and their spouses.

We can help our professional clients prepare prenuptial agreements and marriage contracts that address their company assets. We also advise high-income clients regarding separation, divorce, spousal support, and child support obligations.

Call 416-769-4107 x1 or contact us online to schedule a consultation