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Stan Rule: Is use of a trust to avoid a WVA claim a fraudulent conveyance?

Estate planning in British Columbia may involve structuring the affairs of a client to avoid potential claim by a spouse or child under the Wills Variation ActRSBC 1996, c 490. This legislation permits spouses, common-law spouses, and children, including independent adult children, to make a claim varying the will of a deceased spouse or parent if adequate provision has not been made for the claimant. If it finds adequate provision has not been made, the Supreme Court of British Columbia may order such provision “that it thinks adequate, just and equitable in the circumstances be made out of the testator's estate for the spouse or children .”

Because the Wills Variation Act only applies to wills, and does not contain any anti-avoidance provisions, one way people planning their estates have sought to avoid claims by their spouses or children is by employing will substitutes. For example, a parent wishing to disinherit a child may transfer substantially all of his or her wealth into a trust, which will provide the parent with income and access to the capital during the parent’s lifetime, with provision for the favoured beneficiaries on the parent’s death. Because the trust is an inter vivos trust, the assets will flow outside of the parent’s estate, rather than under the parent’s will. The Wills Variation Act does not give the court jurisdiction to vary the trust.

But might the court set aside a transfer into a trust to avoid the Wills Variation Act as a fraudulent conveyance? 

Section 1 of the Fraudulent Conveyance Act, RSBC 1996, c 163 says:

If made to delay, hinder or defraud creditors and others of their just and lawful remedies
(a) a disposition of property, by writing or otherwise,
(b) a bond,
(c) a proceeding, or
(d) an order
is void and of no effect against a person or the person's assignee or personal representative whose rights and obligations are or might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to the contrary.

In a decision released on February 28, 2012, the British Columbia Court of Appeal confirmed that a person whose only valid claim arises under the Wills Variation Act is not a “creditor or other” on whose behalf the court will set aside a transfer as a fraudulent conveyance. In Mawdsley v. Meshen, 2010 BCSC 1009 affirmed 2012 BCCA 91, the trial judge, Madam Justice Ballance, held that when Joan Meshen transferred substantial assets into a trust, she did not fraudulently convey assets. After her death, Ms. Meshen’s common law spouse, Dennis Mawdsley applied to vary Ms. Meshen’s will under the Wills Variation Act, and he applied to set aside the transfer to the trust of which he was not a beneficiary. Although Mr. Mawdsley was successful in his Wills Variation Act claim, the trial judge in dismissing his Fraudulent Conveyance Act claim found that Ms. Meshen did not intend to delay, hinder or defraud Mr. Mawdsley when she transferred assets to the trust. In affirming the trial judge’s decision, the Court of Appeal held that Mr. Mawdsley was not a “creditor or other.” Madam Justice Newbury held that to be a “creditor or other,” a person must have a legal or equitable claim when the transfer was made. It is not sufficient for the person attacking the transfer to do so on the basis that he or she may have a claim under the Wills Variation Act after the transferor’s death.

British Columbia courts have interpreted and applied the Fraudulent Conveyance Act in a manner that permits a fair amount of latitude for estate planning. The legislation will generally not be an impediment to using will substitutes for choosing who to benefit on death or in contemplation of death.

But it should be noted that it is still open for someone who did have a legal or equitable claim during the transferor’s lifetime to apply as a “creditor or other” to set aside a transfer as a fraudulent conveyance. For example, if one spouse gratuitously transfers property on a marital breakdown, the other spouse may be successful in an application to set aside the transfer as a fraudulent conveyance even after the transferor’s death.

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