When 'mine' becomes 'ours' - keeping assets separate
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Articles by The Professional Trustee Team
It is a common misconception that you have to live with someone for three years or more, and they have to make a direct contribution to the assets acquired during the relationship, before they're entitled to bring a relationship property claim. Possibly this mistaken belief occurs because the legislation itself is misunderstood.
Under current law, assuming a contracting out agreement (often referred to as a "pre-nup") isn't in place, a presumption exists that in a marriage, de facto and civil union relationship of three years or more duration, assets owned personally are split 50/50. Relationships can, however, be much shorter in duration and the presumption can still apply.Sometimes people wish to avoid the 50/50 equal sharing presumption. It may be that one party is contributing more financially to a relationship than the other. Or possibly a party has children from a prior relationship and wants to ensure the assets they owned prior to their current relationship are protected for their own children. Whatever their reasons, a trust can help avoid assets being lost through a relationship property claim. This is especially so when, additionally, a relationship agreement is entered into by the parties which notes clearly what is to be considered separate property.
Generally, gifts (possibly from parents to children) and inheritances are not considered relationship property but rather are classified as the separate property of the individual receiving the gift/inheritance. Unfortunately, this classification can soon become blurred when the gift/inheritance is intermingled with relationship property. For this reason, we advise our clients to keep the gift/inheritance separate and if it is to be used for joint purposes (e.g. to purchase a property) that they ensure full legal documentation is implemented (e.g. loan agreements) so it does not lose its character as separate property.
The above scenario is becoming more common as parents help children onto the property ladder and into their first home. In such a case, it is vital parents loan funds with adequate documentation in place to both parties rather than simply writing a cheque. If this occurs, a gift of the funds is deemed to have been made to the children rather than a loan. This can have enormous consequences if the children separate, as the parents may find it extremely difficult to retrieve their contribution. As one parent expressed, "I like him, but I don't want to see my hard earned money go sideward should my daughter's relationship split".
In addition to loan documentation, it may be sensible to loan funds to a trust set up for the children. We call this an inheritance trust at GRA. The trust would then purchase the property rather than the children themselves. This is not always possible (e.g. where KiwiSaver is involved) but we do advocate it as a means of asset protection at GRA. This has the advantage of protecting the inheritance the child has received from the parents where a claim by a creditor of the child arises. In such a case, the Official Assignee would take the inheritance if the funds were received by the child directly. Imagine how demoralising this would be for the parents and the children.
The Professional Trustee Team
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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