Contracting out agreements, commonly referred to as “pre-nups”, can be an awkward topic to raise with your partner, but they are an essential tool in your asset planning and protection toolbox. Contracting out agreements provide clarity to both parties (or their survivors) in the event that they separate or one or both of them dies. Just like an insurance policy – hopefully you will never need to use it, but it is there if the worst happens!

The Property (Relationships) Act 1976 (PRA) is the principal act that governs relationship property in New Zealand. The general presumption under the PRA is that a couple’s relationship property will be divided equally between them. While there are some exceptions to this rule, generally the equal-sharing presumption applies. This can have unintended consequences for parties who find themselves in challenging situations when their relationship comes to an end.

Contracting out agreements are agreements where a couple chooses to contract out of the PRA. Contracting out agreements are great tools to avoid unintended outcomes and limit conflict in the event of separation or death.

Property (Relationships) Act 1976

The general presumption under the PRA is that, if a couple is in a qualifying relationship, their relationship property will be divided equally between them (although there are exceptions to this rule).

“Relationship property” generally includes property such as the family home, family chattels, vehicles, all income earned during the relationship, Kiwisaver and other assets acquired during the relationship or used for family purposes. The family home is always relationship property, regardless of whether it was owned prior to the relationship or acquired from separate property. Parties are often surprised with just how many of their assets are considered relationship property under the PRA.

Any property that does not fall into the definition of relationship property is known as “separate property”. This includes property that was acquired:

• • before the relationship began (and not in contemplation of it beginning); or
  • by way of gift, inheritance or as a beneficiary of a trust.

Separate property can sometimes become relationship property if it is mixed with relationship property. Similarly, the increase in value of separate property can sometimes be considered separate property if the non-owning spouse has made a contribution to it (including both financial and non-financial contributions).

Trust property is not governed by the PRA. However, there are claims that can be made under the PRA where property that would otherwise be relationship property is transferred to a trust or equitable claims that can be made on various grounds against trust property. There are also claims which can be made against a trust under the Family Proceedings Act 1980 when a couple is married. In the past, parties have used trusts to attempt to shield property from relationship property claims. However, we are seeing parties “attack” trusts more regularly and they are no longer an effective way to protect your assets from relationship property claims.

How do I know if I am in a qualifying relationship under the PRA?

If you have been married or in a civil union for more than three years, then your relationship will be captured by the equal sharing presumption in the PRA. If your marriage or civil union is shorter than three years, a different set of rules apply.

A qualifying de facto relationship is a relationship where the parties have lived together as a couple for more than three years. There is a list of factors in the PRA that need to be considered to determine whether a couple is in a de facto relationship. It is not essential that you actually live together. If you have been in a de facto relationship for less than three years, but you have a child together or one party has made substantial contributions to the relationship, then your relationship may be captured by the PRA, although a different set of rules apply in these circumstances.

Contracting out agreements

The prescriptive way in which the PRA determines how relationship property should be divided does not always reflect the realities of people’s lives or result in a fair outcome. A couple can choose to share their property differently than how the Act sets out by entering into a contracting out agreement

Contracting out agreements offer asset protection by setting out exactly how your property will be divided in the event that you separate from your partner or one or both of you dies. This greatly reduces the chances of conflict over asset division during a separation or, in the case of death, by the parties’ survivors.  As you will appreciate, it is much easier to have these conversations when you are still in a relationship and getting along with each other.

We often see people entering into contracting out agreements in the following circumstances:

• • if one party enters the relationship with considerably more assets than the other;
  • if one party wants to keep certain assets separate from the relationship property pool; or
  • if one or both parties have children from previous relationships and want to ensure that they are sufficiently provided for in the event of their death.

For a contracting out agreement to be valid, it needs to meet certain legal requirements. An important requirement is that both parties need to seek independent legal advice as to the effects and implications of the agreement before it is entered into and those lawyers need to certify the agreement. As you are contracting out of your legal entitlements, it is important that you fully understand the consequences of what you are doing. You cannot opt out of this requirement.

Key takeaways

The PRA creates the presumption that, subject to some exceptions, all relationship property will be divided equally. The definition of relationship property is broad, and people are often surprised with how many of their assets are captured under the equal sharing presumption.

A contracting out agreement allows you and your partner to have control over how assets will be divided on separation or the death of one or both of you. It is an effective form of future proofing and asset protection.

As you are contracting out of your statutory entitlements, it is important that each party receives independent legal advice prior to entering a contracting out agreement.

If you have any questions or would like some advice in relation to a contracting out agreement, please reach out.