Protecting Wealth with a Trust: Shielding Assets from Creditors and Family Law Claims in Canada

For high-net-worth individuals and business owners in Canada, asset protection is a crucial part of wealth preservation. One of the most effective legal tools available for protecting wealth from creditors — both current and future — is the use of a trust. A properly structured trust can, in many cases, safeguard assets against potential claims from creditors and create barriers against family law claims in case of marital breakdowns. However, it is important to understand that trust protection depends on many factors, and there are circumstances where courts may look beyond the trust structure. Understanding the nuances of how trusts interact with Canadian creditor laws and family law is essential to maximizing their benefits.

How a Trust Shields Wealth from Creditors

A trust is a legal entity that holds and manages assets for the benefit of beneficiaries. When assets are transferred into a trust, they are no longer considered the direct property of the individual who settled them (the settlor). Instead, they are legally owned by the trust itself and managed by a trustee.

In Canada, trusts can provide significant protection from creditors under the following conditions, though exceptions may apply:

• Properly Structured Irrevocable Trusts: In most cases, creditors cannot access assets that the debtor no longer controls. If an irrevocable trust is set up correctly, with clear separation between the settlor and the beneficiaries, the assets in the trust may be shielded from creditors. However, if the trust is seen as a sham or the settlor retains de facto control, courts may allow creditors to access the assets.
• Discretionary Trusts: These trusts often provide stronger protection because the beneficiaries do not have an absolute right to the assets—only a potential entitlement at the trustee’s discretion. However, in some cases, courts may examine whether a beneficiary has been relying on the trust as a regular source of income.
• Timing Matters: Transfers made into a trust shortly before a creditor claim arises can, depending on the circumstances, be challenged under fraudulent conveyance laws. If a trust is settled well in advance of financial difficulties, it has a better chance of withstanding scrutiny.

Can a Trust Protect Wealth in Case of a Beneficiary’s Divorce?

A significant concern for many families is whether a trust will be protected if a child (beneficiary) gets married and later divorces. In Canada, the answer depends on several factors, including the nature of the trust, how it is structured, and how the beneficiary interacts with the assets. While trusts often provide protection, they are not immune from scrutiny in family law disputes.

1. Common Law vs. Legally Married Spouses

Under Canadian family law, property division during divorce is largely governed by provincial statutes such as Ontario’s Family Law Act.

• For legally married spouses: The law provides for the division of property accumulated during the marriage. However, in many cases, trust assets that are not owned outright by a beneficiary (e.g., discretionary trusts) are typically excluded from equalization. That said, courts have sometimes examined whether a trust was used to fund the family lifestyle.
• For common-law spouses: There is no automatic property division. Instead, claims can be made under unjust enrichment principles, but success depends on proving that one partner was unfairly disadvantaged.

2. The Role of a Discretionary Trust in Divorce Proceedings

A discretionary trust, where the trustee has full discretion over distributions, provides the strongest layer of protection in most divorce cases. Since the beneficiary does not have a guaranteed right to trust distributions, the trust’s assets generally do not form part of the beneficiary’s divisible property.

However, Canadian courts have, in some cases, examined whether a trust was being used as a financial resource by a beneficiary. If the beneficiary regularly receives income or capital distributions from the trust and relies on it for living expenses, a spouse may argue that these distributions should be considered in support calculations.

3. Potential Claims by a Spouse

• Matrimonial Home Exception: If trust assets are used to purchase or maintain a matrimonial home, the home may lose its protection and become subject to division in a divorce.
• Tracing and Attribution: If a beneficiary receives funds from a trust and co-mingles them with personal or marital assets (such as a joint investment account), those funds may become subject to division.
• Constructive Trust Claims: A spouse may claim that they contributed to the value of the trust assets through their efforts, which could lead to a court order for compensation.

Best Practices for Protecting Trust Assets from Family Law Claims

To maximize the protective benefits of a trust, consider the following best practices:

• Use a Fully Discretionary Trust – Ensure that distributions to beneficiaries are made at the sole discretion of the trustee, limiting the beneficiary’s control over the assets. However, keep in mind that excessive reliance on a trust for personal expenses may reduce its protective effect.
• Avoid Direct Payments to Beneficiaries – Where possible, make distributions for specific purposes (e.g., education, medical expenses) instead of direct cash distributions to beneficiaries.
• Keep Trust Assets Separate – Beneficiaries should avoid mixing trust distributions with marital property, as co-mingling could expose the funds to family law claims.
• Use Loan Structures Instead of Gifts – If the trust provides financial assistance to a beneficiary (e.g., helping with a home purchase), structuring it as a loan rather than a gift can help prevent the spouse from claiming an interest in the funds.
• Regularly Review the Trust Structure – Given that laws and case precedents evolve, periodic reviews with a legal and tax professional can help maintain asset protection.

Conclusion: A Trust is a Powerful but Not Absolute Shield

A properly structured trust is one of the most effective tools for protecting wealth from creditors and family law claims in Canada. However, it is not a guaranteed shield. Courts have shown that they will examine whether a trust is being used in a way that benefits a beneficiary in a manner equivalent to personal ownership. Depending on the facts, creditors or ex-spouses may still have a legal basis to challenge the trust structure.

To ensure maximum protection, it is crucial to design the trust structure carefully, adhere to best practices, and seek ongoing legal and financial guidance. The effectiveness of a trust will always depend on the specific circumstances, applicable laws, and the way the trust is administered.

If you’re considering setting up a trust for wealth preservation and protection, our team can help structure it properly to maximize its benefits under Canadian law. Contact us today to discuss how a trust can fit into your overall estate and asset protection strategy.