Agreement eases the pain of a break-up

01:43, Jan 31 2009
BITTER FEELING: When the wheels fall off a relationship, partners often end up fighting over assets.

Should your financial planning include the question of what happens if your relationship breaks up? An unromantic thought. But John McCrone finds 'contracting out' can prevent greater heartache.

Breaking up is never easy – emotionally or financially. And despite the apparently simple 50-50 split now guaranteed under the Property Relationship Act, there are still money traps for the unwary.

Take the second wife who did not feel happy with how much she was left in her rich husband's will.

Taking advantage of the act, she elected to go for a 50-50 division of all relationship property.

It is a still little-known provision that unless an explicit opting-out agreement has been signed, the act can now override the wishes of the deceased.

Well, the dead husband had a pot of assets worth $6 million. But this turned out not to be relationship property because the money was accumulated before the relationship and successfully kept separate.

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The only joint asset was the house, worth $500,000. Furthermore, the wife had come into the relationship with $2 million of her own. And this had been mingled with his finances, so was deemed relationship property.

The upshot? The wife ended up owing money to the estate under a 50-50 split of relationship property! And, having made her election before realising the situation, she could not go back and take the original deal in the will.

Family law experts are full of tales like these.

Auckland QC Anne Hinton says that for young couples and those with little wealth, the five-year-old Property Relationship Act does work quite well.

"Like all systems, it works best for the average."

But she says for those in second relationships, with blended families, or with any money worth fighting over, the new legislation just means there is new set of legal games that people will need to learn about.

Or discover once it is too late.

Andrew Watkins, a family law specialist with Duncan Cotterill in Christchurch, says where there is any uncertainty, or where any trusts are involved, it has become essential to make "break-up planning" part of your financial planning.

Couples may protest this is unromantic. But Mr Watkins says it is better to get everything out in the open from the start with a prenuptial agreement, or "contracting-out agreement" as it is now called under the act.

The clarity created by a frank discussion is invaluable compared with the cost and heartache lawyers are seeing at the other end of a relationship.

The Property Relationship Act was overhauled in 2002.

The headline change was its extension to cover all couples – gay, de facto or married – who had been together longer than three years.

A relationship was clearly taken to exist if two people were living together, supporting each other, and were sexual partners.

But Mr Watkins says courts' interpretation of a relationship can be broad.

For example, a common misunderstanding is that a couple have to be sharing a roof. However, he says it only needs to be shown they are accepted publicly as a couple and are financially entangled to some degree.

One recent court case involved a man who lived in Guam and visited a woman in Hamilton only occasionally. Yet she was living in one of his properties and had a claim.

Mr Watkins says the courts can also recognise multiparty relationships – where both a man's wife and his mistress are treated as long-term partners.

There is then the tricky question of when the three-year clock starts ticking.

For example, there may have been a long period of casual dating before a couple decided to live together.

"When does a friendship or a flatting relationship turn into a qualifying relationship? There is no right or wrong answer. It is a matter of perception. And this creates real problems," Mr Watkins says.

The other vexed matter is what qualifies for relationship property. Mr Watkins says this can be less than people think.

The family house, its contents, cars and other jointly used property are automatically shared.

Any assets bought or income earned during the relationship must also be shared. This includes increases in the value of superannuation policies.

But a share portfolio, business shareholding, or rental property acquired before the relationship can be kept out of the equation, so long as it has been strictly treated as separate property.

If a woman's caring for the children was a factor in allowing her partner to build up a company, or if a new husband was helping out with the DIY at a rental property, then the courts can decide there is a claim under the Property Relationship Act .

Mr Watkins says the same is true of gifts and inheritances. These can be kept as separate property even if they come in once a relationship is established.

He says they are safe if they go straight into a bank account or share fund in a single name and get left alone.

But use any money to pay off the mortgage, or in other ways contribute to the common pot, and it becomes relationship property.

Section 15 of the act allows for stay-at- home partners to claim more than 50 per cent.

Mr Watkins says the act recognises that there can be cases like a wife of a high flier giving up her career to bring up the kids.

A fairer asset division might be 60-40 or even 70-30 because, after the split, he can still earn big money while she has to start from scratch.

However, Mr Watkins says, so far the courts have been reluctant to make significant awards and wives have ended up with little advantage after paying the legal fees.

He says that little by little, as case law builds, the realities of the act are hitting home. The way the act can override a will is another of the biggies.

People are also learning how to fight dirty.

Sheryl Sutherland, of Christchurch financial planner Women's Financial Strategies, says if partners want to avoid a 50-50 split, they may try to hide their assets. Or simply stonewall till the other person tires or runs out of money to fight.

"The stalling tactics employed can be very effective. I can think of one case where the woman has been waiting for settlement for three-and-a-half years.

"There are millions of dollars involved and whether she'll ever get anything or not, I don't know," Ms Sutherland says.

Mr Watkins says the other side can also play hardball, particularly with trusts, many of which are weakly administered.

Where there is a weakness, it is the new Property Relationship Act rather than the old trust system that is getting the benefit of the doubt in court.

Mr Watkins says for this reason, any couples who have cause to worry about a 50-50 property split ought to negotiate their own contracting-out agreement. And this is doubly so if trust structures need to be protected.

Contracting out from the act involves both sides taking independent legal advice and reaching their own view about what would be fair in any future settlement.

Mr Watkins says an agreement can be negotiated at any time, but the earlier the better. He says it is also a good policy to limit the life of the agreement to five years or so.

To cover the first few years of a relationship – while fears of getting involved with a gold-digger may still lurk – the agreement might be less generous. But after that, it would be only natural to build in a progressive relaxation.

Kirsty Robertson, a clinical leader with Relationship Services, says a contracting- out agreement is a good idea.

"My view is we should talk about the things we're scared of. Then they're less likely to happen," she says.

Ms Robertson says where there is financial inequality going into a relationship, a forthright negotiation creates certainty. One partner will not be wondering if there is a risk of being left high and dry – and the other, of being taken to the cleaners.

Ms Sutherland agrees, saying there is no reason why "break-up planning" cannot be a positive step, especially if it is broadened to talk about all of a couple's goals.

"I'd put in quite a lot of detail in a prenuptial (agreement), like how much money you can spend without consulting the other person. Also I would include how you're going to operate your accounts and your future financial goals, like how you're going to plan for having children."

Mr Watkins repeats that for many couples – those starting out on an equal footing in first relationships – the act undoubtedly works well. But everyone else needs to make sure they know what the new rules are and how they would apply in a break-up.

The Dominion Post