'The big rule after three years is that the home of those in the relationship has a special status.' Photo / Getty Images
'The big rule after three years is that the home of those in the relationship has a special status.' Photo / Getty Images
Opinion by Henry Stokes
THREE KEY FACTS
The Property (Relationships) Act 1976 sets out what should happen to a couple’s assets when they separate or one of them dies.
It affects how you should make your will, and you should also take it into account before receiving an inheritance.
The Act covers marriage as well as civil union and de facto relationships that last three years or more.
Henry Stokes is the group general counsel and company secretary for the Perpetual Guardian Group, which provides the full suite of estate planning services.
OPINION
A cluster of media reporting lately has put the spotlight on the financial consequences of divorce or separation.
By now,nearly four decades after its enactment, most New Zealanders will be at least vaguely familiar with the Property (Relationships) Act 1976, which was amended in 2013 and is concerned with how the property of a couple is divided up when they separate or one of them dies.
Most people also know the magic number of three years – that is, the relationship duration upon which a couple becomes subject to many provisions of the Act, regardless of their marital status.
The big rule after three years is that the home of those in the relationship has a special status. This means that even if it was owned solely by one party at the start of the relationship, if it has been used as the couple’s home and the relationship lasts beyond the three-year mark, the default is an even 50/50 division of the home – reflecting the fact that for most couples, the family home is their biggest asset.
The same applies to everything that is relationship property, but does not apply to anything that can be classed as separate property and has not been used in such a way that it has lost that status.
In some publicly reported cases, one person came into the relationship with a house of their own and found later that their ex-partner had a valid legal claim to a share of its value, even if they had never bought into it.
The recent case of “Roy Webster” is instructive. A self-employed worker, he put his home into a family trust to protect it from potential creditors and ringfence it in the event of a relationship breakdown.
However, that wasn’t enough to forestall a Family Court decision that upheld his ex-partner’s claim to a share of the property under the Act – because although he had bought the property years earlier, the court determined he was already in the early days of what became their relationship of long duration when he transferred its ownership to the trust.
One commentator, the lawyer Jeremy Sutton, noted that a prenuptial agreement (that is, a contracting out agreement) would have offered the specific protection the man was seeking.
So are contracting out agreements being overlooked by those who have a solid family trust in place? And can an agreement offer additional protection of assets to those offered by a family trust?
There are many scenarios in which a family trust is the right and necessary instrument, including for small to medium business owners and people who want to protect assets for beneficiaries for years to come.
However, there are many circumstances where a contracting out agreement would have saved a lot of expense and stress – and where trusts and agreements should run parallel. If you have assets to protect and other people to look after, keep in mind:
When it comes to setting up a trust and transferring a home into it, timing is critical to provide sufficient protection. Best practice for the settling of a trust and transferring property into it is to do it when you are single and in no hint of a relationship.
A contracting out agreement can record that your partner has no interest in the trust or the assets of the trust, and that any contributions made are in lieu of rent, expenses, and so on. Anything else that is specific to your situation should also be recorded.
A problem under the Act is that pinning down when a de facto relationship starts and ends can be difficult and can become a point of contention in legal proceedings. A contracting out agreement nullifies that risk because it records the date that both parties agree the relationship commenced.
The Property (Relationships) Act 1976 sets out what should happen to a couple’s assets when they separate or one of them dies. Photo / Getty Images
If you are looking to protect your assets generally, you need specialist advice from professional adviser/s who know the exact ins and outs of both trust law and the Property (Relationships) Act.
If you want to draw up a contracting-out agreement, each party to the agreement needs independent legal advice to ensure it is a fair and balanced process, there is no pressure or coercion, and each party fully discloses all relevant information.
The agreement will not be valid without the obtaining of independent advice and signatures being witnessed and certified by the lawyers who provided the advice.
The best time to do it is before the relationship reaches the three-year mark. And agreements need to be fair, or they will be more open to challenge.
Yes, there are costs to create a trust and a contracting out agreement. But a lot of people have learned the hard way, by losing significant wealth through a previous split, how an agreement could have saved them a small fortune, including in legal fees. They know that doing it properly is money well-spent, because they no longer risk having their assets halved if their current relationship should end.
Ongoing responsible management is part of the process. Just as a trust should be reviewed regularly and kept up to date, it is important to review a contracting out agreement at appropriate intervals, as what seemed fair at the start of the relationship may not be the case five or 10 years on. There may be children of the relationship, or one partner who did not have much at the beginning may have come into significant assets through inheritance.
The important thing is for people to take advice regarding their situation, and to do so sooner rather than later.
