Benefits Of A Trust: Love is Blind - Julie and Grant's story
One of the biggest benefits of a Trust is the protection of your assets. Take the case of Julie and Grant: Whilst not all cases relating to the Property (Relationships) Act end up in court, there have been many relationship splits embittered by dividing up assets under the Act.
Julie and Grant*, both in their late forties, had been married for just over 8 years. Grant was a fitness instructor and part-time band member and Julie, who had a 19-year-old daughter from a previous relationship, had a senior management position with an international company. When they married, Julie was the main income earner and already owned her own home in a sought-after Auckland suburb. Grant, on the other hand, had debts of approximately $35,000.
One day Grant announced that he had met someone else and was leaving Julie. Within 18 months, Grant had left the relationship and was debt-free with half the substantial profit from the sale of Julie’s home to which he was entitled under the Property (Relationships) Act.
Losing half her asset base was bad enough, but Julie’s loss was compounded by the fact that her daughter had also lost half of her future inheritance to Grant. Now, approaching her fifties, Julie faced the prospect of having to rebuild hundreds of thousands of dollars of her equity.
What Can You Do To Protect Your Assets?
The sad reality is that not all relationships last forever, and for most of us, a break-up and asset splitting are not top of mind when entering into one. It’s important to look at ways to protect you and your assets to ensure you don’t end up in a vulnerable situation like Julie and her daughter in the above case.
- Option One: Contracting out of the Property (Relationships) Act.
In order to ‘opt out’ of the Act, you must be married or contemplating marriage, or be aware that you are in a de-facto relationship (as defined by the Act). Both parties must receive separate legal advice, and sign an agreement that stipulates the respective property rights that each partner will have in the event of a relationship breakdown.
Many people understandably feel uncomfortable about asking their partner to sign an agreement of this nature. And like Julie, few of us when entering a relationship, consider the potential consequences of its breakdown.
- Option Two: Establishing a Trust.
A Trust can be set up by an individual prior to entering into a relationship. To gain the most protection, it is recommended that a Trust is established sooner rather than later, to allow for gifting. If a situation was to arise where the Trust was challenged, it is extremely important to be able to show that the Trust is genuine, ie: has been managed properly and not used as an alter-ego by the Settlor(s). Appointing an impartial Trustee Company like Perpetual Guardian can help in this area by ensuring the establishment and ongoing management of the Trust meet all legal requirements.
It’s quite likely that you, or someone you know, has experienced the effects of the Property (Relationships) Act in some way. Some quick facts to keep in mind are:
- Those in de-facto relationships are treated in the same way as those who marry or enter a civil union.
- The general rule is that after 3 years relationship property is separated 50/50 if the relationship ends, or one of the partners die.
- If there is a child of the relationship, the 3 year period is generally reduced.
- All property is presumed relationship property at death unless it can be proved otherwise.
- For a relationship to be considered de-facto, the courts consider the following factors (note: the relationship does not need to have any or all of the factors for the court to consider it de-facto):
- the duration of the relationship
- the nature & extent of common residence
- whether or not a sexual relationship exists
- the degree of financial dependence or interdependence and any arrangements for financial support, between the parties
- the ownership, use, and acquisition of property
- the degree of mutual commitment to a shared life
- the care and support of children
- the performance of household duties
- the reputation and public aspects of the relationship
Why Have A Trust? Implications Of The Property (Relationships) Act:
- Any inheritance that children (or other beneficiaries) receive under a Will can easily become relationship property. For example, an inheritance is left to a child who then pays off the mortgage, or purchases a home. Their spouse/partner lives in the home with them. If the relationship fails, that partner may be entitled to a share of the home (which the child has put their inheritance into).
- A couple does not necessarily need to live together to be in a de-facto relationship.
- An elderly couple living together for convenience runs the risk of being considered to be in a de-facto relationship, even though they may not be in a sexual relationship.
- For a couple with children; If one partner dies and the other remarries or enters a new relationship, the property that they have built up together could potentially become relationship property in the new relationship. If the new relationship fails, the new spouse or partner could take 50% and the children would be disadvantaged.
Should I Have A Trust?
If any of the below apply to you, we highly recommend getting in touch with one of our experts.
- Are you a single person with significant assets? (house/ investments/business/etc).
- Are you concerned about your children’s current or future partners?
- Have you recently separated?
- Are you in a relationship but do not live with your partner? (The Act can still apply)
- Are you living with someone for convenience but do not consider to be in a relationship with that person?
*The names of the clients in this article have been changed to protect the privacy of the parties involved