Can a Family Trust Protect Your Inheritance If Your Marriage Ends?

You may have heard of the terms “family trust” and “estate freeze” – especially if your family owns a business that’s been passed down through generations.

These concepts are part of a common tax planning tool, the goal of which is to defer taxes. It’s particularly useful where an older family business owner wants to hand a successful enterprise down to an adult child.

But people might assume that this structure will protect a family’s wealth in all circumstances, including where that adult child’s marriage breaks down. An important recent decision from Ontario’s Court of Appeal shows that this isn’t always true.

What Is an “Estate Freeze”?

To understand the impact of Lang-Newlands v. Newlands, 2026 ONCA 530 (CanLII), it’s helpful to understand the basic structure of an estate freeze.

The first step is for the owner of a business to “lock in” the current value of their shares. Then, the owner sets up a new family trust – which holds the new shares in the business – and names a beneficiary.  Those new shares capture all of the business’ future growth, sheltered in the trust vehicle.  That sheltering allows the tax liability on that growth to be deferred to a later date.

The tax benefits of an estate freeze are well known. What happens to the trust on the separation or divorce of the trust beneficiary is much less obvious.

Why the Timing of a Gift Matters

In Ontario, when your marriage ends, the Family Law Act (FLA) generally requires you and your spouse to share the growth in your net worth during the marriage. Importantly, gifts and inheritances are treated differently depending on when you receive them:

• If you received a gift before you married, you can deduct its value as of your wedding day, but any growth in its value during the marriage is shared.
• If you received a gift or inheritance from someone else during the marriage, it’s generally excluded, and so is any growth in its value.
• The family home is an exception to both rules and is treated differently.

So in your separation or divorce, the timing of a gift can make a very large difference to what you may owe your spouse.

What Happened in Lang-Newlands v. Newlands

This is where the Lang-Newlands case is significant.  The facts featured a wife whose father had given her shares in the family business, held through a trust, before she married. On her wedding day, those shares were worth about $16 million.

Years into the marriage, her father arranged an estate freeze. He set up a new family trust with a mere $100. The wife sold her existing shares to a newly-formed company in exchange for shares with a fixed value of about $24.5 million. The new trust (of which she and the couple’s four children were beneficiaries) received all of the future growth.

That growth turned out to be enormous. By the time the wife and husband separated, the shares held through the trust had grown in value to about $670 million. The wife’s one-fifth interest in the trust was valued at about $134 million before discounts.

Upon her separation from the husband, the wife argued that her interest in the new trust was a gift from her father made during the marriage, so under the FLA it should be excluded entirely. The trial judge agreed, but only because he felt bound by an earlier Court of Appeal decision. On that basis, the husband was entitled to an equalization payment of only about $1.2 million. The trial judge went on to explain that if he weren’t bound by that earlier decision, he would have decided the case differently.

The Court of Appeal disagreed with the trial judge’s conclusion. It looked at the substance of the arrangement rather than its form.

The value in the new trust came from the wife’s own shares, which she already owned (through her earlier trust) before the marriage. Apart from the initial $100 used to set up the trust, her father hadn’t given her anything new, nor did he divest himself of anything beyond that token amount. The wife had sold the shares knowing she was a  beneficiary of the trust set up by her father, and knowing that she would retain a beneficial interest in their growth value.

Treating her whole interest as an FLA-excluded “gift after marriage” simply because the father had seeded the trust with $100 would, in the court’s words, “allow form to overwhelm function.”

As a result, the wife’s interest in the trust was included in calculating her net family property, minus the $16 million value of the original shares on her wedding day.

(The husband didn’t receive a full equal share, though. The court can reduce an equalization payment where a full payment would be “unconscionable.” Here, the wife had received only a small share of the trust’s distributions when it was reorganized after separation, which reduced the value of her property by over $11 million. She had also paid more than her share of the family debt, while the husband had mismanaged the family finances. A full payment of nearly $26 million would also have left him with a higher net worth than hers. The payment was reduced to $18 million, payable over eight years. That is still about 15 times what he was awarded at trial).

What This Means for You

If an estate freeze might be something that applies to your circumstances, there are a few things to keep in mind, based on Canadian law and the Lang-Newlands ruling:

• A family trust doesn’t automatically protect wealth from a spouse’s separation- and divorce-related claims.
• Courts will look at where the value really came from, not just when the trust was set up.

If your family has an estate freeze in place, it may be worth having it reviewed with the Lang-Newlands decision in mind.  Pro tip: A properly-drafted marriage contract is still the most reliable way to protect family wealth.  Also, estate planning and family law go hand in hand, so it’s wise to involve a family lawyer early.

If you have questions about how a family trust or business interest might be treated if your marriage ends, give us a call at one of our offices. We’re happy to help.