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Family Trusts and Relationship Property _________________________________
What’s Mine Is Not (Necessarily) Yours
Married people and people who have been in a de facto relationship for three years or more face a difficult decision when they come to inherit property: should the inheritance be shared with their spouse or kept separate?
The law certainly does not require someone to share their inheritance with their spouse and, while some people may find it hard to imagine not doing so, others may wish to keep the money for themselves but worry about what their spouse would think if they did so.
Legally, spouses can keep their inheritance as their separate property. Under the Property (Relationships) Act, property acquired by way of inheritance is separate property, but for it to remain separate, it must be kept separate. An inheritance will become a relationship property if it is used for the benefit of both spouses or if it becomes so intermingled with other relationship property that it loses its character as separate property.
It is common for someone who inherits money to apply the money towards payment or part payment of the couple’s joint mortgage over their family home. The family home is relationship property though, and in the event that the couple separate, the equal sharing provisions of the Act apply, with the result that the person who did not inherit the money receives a windfall of half the inheritance.
If that inherited money had been kept separate though, the equal sharing provisions of the Act would not apply and the person who received the inheritance would be able to retain it in the event of separation.
There are various ways of keeping an inheritance as separate property. For example:
- Do not apply the inheritance for relationship purposes. If you keep the inherited money separate and do not apply it towards, or intermingle it with, relationship property, then it will not lose its character as separate property.
- Enter into a “contracting out” agreement. The Act allows couples to enter into a contract which determines between them the status and ownership of certain property. A contract could provide for example that inherited money will continue to be the separate property of the person who received it despite the use to which that money is put and that in the event of separation, the person who inherited the money would be paid out the amount of the inheritance before relationship property is divided.
- Set up a family trust. An inheritance that is received by a family trust will generally fall outside the regime of the Act. When a relationship ends, the trust property will continue to be managed by the trustees in accordance with the trust deed.
Sometimes a combination of a family trust and a contracting out agreement is necessary.
Similar issues arise with money that is gifted by parents to their child. If the money is gifted to the child who uses it for relationship purposes, then it is relationship property and in the event of separation the money is to the benefit of both the child and their spouse. If however, the money is loaned to the couple (or even just one of them) rather than gifting it, and the relationship fails, then the loan remains the asset of the lenders, the parents. The other partner cannot claim a share of the funds as the funds did not become relationship property. Indeed the loan would likely be classified as relationship debt that each of the couple are both responsible for repaying.
If you would like advice on relationship property matters, please contact our partner Cathy Fisher on (09) 915 2412.