Relationship property is a complicated and ever-evolving area of the law. The key legislation in New Zealand, the Property (Relationships) Act 1976 (‘the act’), is currently under review and many fundamental elements of the law may change in the near future.
We will report on the review’s outcome in due course, but in the meantime, we thought we’d discuss some of the current methods for protecting against relationship property claims.
Firstly, what is relationship property?
Every asset that a couple owns, whether jointly or individually in their personal names, is either categorised as relationship property or separate property. As a general rule, under the act, relationship property is divided equally in the event of separation or death.
In most circumstances, a qualifying relationship (being either a marriage, civil union or de facto relationship) falls under the jurisdiction of the act after a duration of three years.
We could write an entire article about the definition of relationship property, however, very generally speaking relationship property consists of all assets acquired during the relationship or acquired in contemplation (and for the common use) of the relationship. Some assets (such as a family home, family vehicles, furniture and pets) are automatically classified as relationship property, regardless of when the assets were purchased or who paid for them.
Any property that a couple owns which isn’t relationship property is considered separate property.
Assets received by way of an inheritance or gift is separate property, although it is necessary to deal with those assets carefully to retain their separate property classification.
How can you protect your assets against relationship property claims?
There are various mechanisms that are used to protect assets from being considered relationship property.
One of the more popular methods is the use of trusts to ‘remove’ assets from the pool of potential relationship property. However, the effectiveness of using trusts for this purpose is currently being eroded by the courts. In addition, the use of trusts in this manner will likely be limited after the review and subsequent amendment of the act.
Therefore, the most effective way to protect against such claims is a comprehensive agreement under section 21 of the act, commonly referred to as a ‘contracting out agreement’ (also known as a ‘prenup’).
Section 21 of the act allows a couple to opt out of the provisions of the act (essentially opting out of the ‘equal sharing rule’) by way of an agreement recording that certain property owned by one or other of the couple is separate property rather than relationship property.
There are very strict rules around the completion of these agreements, including the requirement for both parties to have independent legal advice.
Trusts can still be used effectively for relationship property purposes, but they should be used in conjunction with a robust and comprehensive contracting out agreement.
How do you know if a contracting out agreement (a.k.a. a ‘prenup’) is necessary for your relationship?
Every relationship is different, so we recommend seeking legal advice if you have any concerns about what would happen to your property in the event of separation or death.
However, there are some common situations where it may be advisable to consider a contracting out agreement, such as:
- A young couple buying their first home and they have contributed unequal amounts to the purchase
- Parents who wish to gift money to their child (for example, to buy a home) and they want to ensure the money is preserved for their child, in the event of the child’s relationship with their partner ending
- A couple with their own children from previous relationships who wish to keep their affairs separate and protect their children’s inheritances
- One party has entered a relationship bringing with them substantially more valuable assets (or liabilities) than the other party
This article is brief and general in nature. You should not treat this article as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this article. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this article.