The Property (Relationships) Act 1976 sets out how relationship property is divided in New Zealand when a relationship ends, either upon separation or death. Complexities can arise when dividing relationship property, especially when assets are owned by a trust. The best way to safeguard assets from a future relationship property claim is to enter into a contracting out agreement with your partner, regardless of whether or not the property is held in a trust.
There is a common misconception that property is safe from a relationship property claim if it is held in a trust. However, claims for compensation can be pursued in court if property is disposed of or gifted to a trust.
Section 44: Dispositions of Property and Intention
Section 44 allows the court to set aside a disposition of property to a trust if it is made with the intention of defeating the rights of a partner under the Act.
A disposition refers to the transfer, gifting or disposal of property. For instance, if partner A transfers a property into a trust, this is considered a disposition. Even if partner A was a trustee of a trust that already owned the property before the relationship began, certain financial contributions made by partner A during the relationship (including mortgage repayments or maintenance) could also be seen as dispositions into the trust.
Importantly, property doesn't have to be "relationship property" at the time of its disposition to the trust. Even if separate property is transferred into a trust, partner B may still be eligible for compensation. The deciding factor is whether Partner A intended to defeat partner B’s rights under the Act when transferring the property. Partner B is responsible for proving this intention, whether through direct evidence or by inference from surrounding circumstances.
If a claim under section 44 is successful, the court may order compensation be paid from partner A to partner B or, order that the property is transferred out of the trust. This could result in the property being returned to the relationship property pool and then subject to equal division rules.
Section 44C: Dispositions of Relationship Property without Intention
If section 44 did not apply, then section 44C becomes relevant. Unlike section 44, where intention to defeat a relationship property claim is crucial, section 44C only requires that the property disposed of was relationship property at the time of transfer and that this had the effect of defeating the other partner’s rights under the Act. The timing of the start of the relationship then becomes important.
A qualifying relationship under the Act is a marriage, civil union or a de facto relationship of three or more years (or less if there is a child of the relationship or one partner has made a substantial contribution to the relationship).
These are just a few common ways that trust property can be considered within the division of relationship property. There are further ways in the law that can affect trust property at the end of a relationship. This is why it is important to enter into a contracting out agreement if you intend to protect any property, including trust property, from a relationship property claim.
Contracting Out Agreement
A contracting out agreement (sometimes known as a pre-nuptial agreement or “pre-nup”) allows parties to opt out of certain provisions of the Act. This allows parties to make their own rules as to the status, ownership and division of their relationship property and separate property.
For a contracting out agreement to be effective, both parties must receive independent legal advice and have their signatures witnesses by their respective lawyers.
A contracting out agreement can be entered into at any point during a relationship, but it is best to consider entering an agreement before relationship property entitlements crystallise under the Act.
If you would like to discuss any relationship property implications relating to a trust or talk further about whether a contracting out agreement is appropriate for your circumstances, please get in touch with the family law team at Corcoran French.