Whatever happened to a 'clean break' ?

Most of us treat our partners as equals. We expect to share responsibility for bringing up children, to share finances and to divvy up the domestic workload, whether that means going outside the home to earn money, or taking care of children at home. But that doesn't necessarily mean you will be treated equally by the law if you split up!

When couples break-up, the division of property between them is covered by the rules set out in the new Property (Relationships) Act 1976. With some exceptions, de facto couples, including same-sex couples, will have the same rights as married couples under the new law. The rules will also apply when a partner dies.

In general, if the marriage or relationship lasts for 3 years or more, the couple's property is divided equally between the partners, but not if the economic situation of the individuals after a break-up isn't equal. This might happen in a traditional marriage when one partner has put his or her career on hold to look after children, while the other has increased his or her earning power. A simple 50/50 division of the couple's property might not actually deliver an equal outcome for the non-earning partner. A new exception to the principle of equal sharing allows for compensation to be paid to even-up the economic positions of the couple on separation, in the form of a lump sum payment or transfer of property. This could even apply if the relationship lasts less than 3 years.

De facto couples, should consider the legal and financial implications of continuing their relationships after the 3-year mark. For some it will mean reviewing their commitment to each other and even taking the drastic step of breaking up the relationship. But people who have "contracted-out" of the Property (Relationships) Act will see very different outcomes compared with those who are covered by its provisions. Under the new regime, couples can "opt-out" - ie, choose not to be covered by the Act - by signing a contract about how they want to divide their property if they separate or one of them dies. In New Zealand, many people consider making an agreement about property before a relationship begins to be tacky and undesirable. But, given the consequences of the new law, which some say "marries" people against their wishes, this attitude is likely to change.

Pin-pointing when a de facto relationship begins and ends will always require some analysis. There are several elements that need to be present before a couple even qualifies as "de facto". There is the raising of children together, financial commitments, and the length and quality of the relationship, among other things, before the new law will apply to the couple. The law will also only apply to de facto relationships of less than three years if there is a child or if one partner has made a substantial contribution to the relationship and to do otherwise would result in serious injustice.

So what can you do if you want to protect your property against a future claim? Keeping property in your sole name is not the answer if the relationship lasts 3 years or longer. And, gone are the days that getting married could erase contributions made by each partner during a prior de facto period.

Transferring your property into other ownership - eg, to a trust or a company - is one way to safeguard assets you have accumulated. Because property transferred to a trust or company is no longer owned by you, it can't be split up and shared. But there are no easy answers. If the transfer deprives one partner of a rightful share in joint property, the law will deal with the situation to right the imbalance. A valid trust or company structure, which is not open to challenge, requires an in depth understanding of what trusts are and how the new law affects them. You will also have to keep in mind any disadvantages of divesting yourself of assets to a trust, such as some loss of control or greater record keeping demands.

The most obvious safeguard is a watertight contracting-out agreement. A new provision of the Property (Relationships) Act makes it harder for one spouse to challenge an agreement made between two people at the start of their relationship or during it. Courts will keep in mind that the couple wanted certainty when they signed the agreement and will only disregard contracts that are "seriously unjust".

Another important mechanism of asset protection is your will. People should always review their wills when they enter into a de facto relationship, as well as when they separate. Bear in mind that the new property sharing rules of the Property (Relationships) Act can override the deceased partners' will, if the surviving partner feels he or she would be better provided for under the Act. This could have major implications for those in second and subsequent marriages (or relationships) and want to provide for children of an earlier marriage.

Whether you are already in a relationship or just contemplating one, you can make an informed choice about how to protect your property. Unless you do, the end of your relationship could impact on your personal wealth to a far greater extent than you ever imagined.

  • Maria Konings, LLB