We are seeing more and more clients in relationships wanting certainty around the assets they own. These clients are at different ages and stages of life. They want to know what they would walk away with if the relationship was to end, either by separation or death.
Clients could be purchasing their first property with a partner and contributions are not equal. They might be in a second relationship and bring significant assets with them. Or they may be in a long-term relationship but both parties want to set out who owns what to avoid problems down the track.
What the law says
The Property (Relationships) Act 1976 (“the Act”) defines what is:
“relationship” property – subject to equal sharing
“separate” property – belongs to just one of the partners.
People are often surprised to find out that their Kiwi Saver balances are relationship property. This means they are subject to equal sharing, as are their salary or wages. If one party has saved some of their income in a separate bank account, it is likely that money is relationship property too.
Inheritances are separate property if they are kept segregated from relationship property. However, if an inheritance is applied towards a relationship asset (such as the family home) or is intermingled with other property, then it loses its status as separate property. Enter into a Contracting Out Agreement to preserve the separate nature of the inheritance. This can be useful, for example, If you want to use an inheritance to reduce a mortgage on the family home – which is relationship property.
Contracting out
A Contracting Out Agreement sets out each partner’s respective separate property. The parties can decide together which items are their separate property. For example, their respective KiwiSaver balances, income, inheritances, jewellery, shares and investments in their personal name, their interests under a family trust, certain items of furniture etc. The agreement also sets out relationship property. This usually comprises the family home and the furniture and chattels in that home.
In order for the agreement to be binding, both parties to the agreement must receive independent legal advice. The lawyers advising each party must understand the value of the assets that are the subject of the agreement. Therefore, they may request valuations so that they can discharge their obligations under the Act.
Both parties must fully disclose all assets and liabilities in order for a Contracting Out Agreement to be valid. Neither partner must be under any duress. You cannot make threats to force someone to sign such an agreement. These include refusing to get married or threatening to leave the relationship if they do not sign. The agreement can be set aside and is of no use if duress is applied, or it is seen to be unfair due to non-disclosure.
Including a review clause, is a good way to provide for changing circumstances. Set out a time period (maybe 5 years) or an event, such as having a child together, which triggers a review. If the agreement is not reviewed at that time or changes cannot be agreed upon, then the original agreement stands.
Our thoughts
In summary, a Contracting Out Agreement is a good way to achieve certainty. It defines what is separate property and what is relationship property. If both parties in your relationship are keen to have this clarity, I would be happy to help. Please contact my assistant, Jo Wardrope, who will arrange a suitable time for us to discuss your situation.
