In the context of a relationship under the Property (Relationships) Act (“PRA”) once you have been together for 3 years or more property owned by either or both parties will generally be classed as relationship property. And the starting point is 50:50.
But some property is not relationship property. Some property will be the separate property of one partner or the other. And some property which they might use is neither relationship property nor separate property.
How does that work?
If property is separate property it should be easy enough to identify. Separate property includes:
any property acquired by either partner before they started living together;
income earned from separate property;
any increase in the value of separate property, unless it is the result of something the partner contributed or unless the increase arose from the use of relationship property;
family heirlooms;
gifts received or property inherited by one or other partner during the relationship.
All good so far. Or is it?
Yes and no. If that separate property is kept separate, fine. But there are instances where separate property can change its character and become relationship property. The word is “mingling”.
If the separate property of one partner gets mingled with relationship property or gets used for the purposes of the relationship it can become relationship property. This happens all the time:
you receive an inheritance and put it in a joint bank account;
the other partner has done something which has led to an increase in the value of the other’s separate property;
joint funds have been used to refurbish a property that one partner inherited;
We have all seen things like this, possibly even done them ourselves??
But that’s not all
Some property won’t be relationship property and it won’t be separate property either. Property owned by a Trust formed before the relationship began fits into this category.
If someone has come out of a relationship and been sufficiently stung that they “don’t want to have to go through that again” they can form a Trust to own their appreciating assets at that stage before they barge on into their next relationship where, if they are not careful, they can snooker themselves a second time.
Because a Trust is a separate legal entity it is harder to get to if things turn sour in the relationship. The Property (Relationships) Act generally applies to relationship property not property that is owned by a Trust that was in place before the relationship began. If the Trust was formed before the relationship began there is every chance that the new partner is not even a potential beneficiary of the Trust. It was probably set up by the partner with his or her children in mind. Remember, his or her new partner wasn’t even on the scene then.
Is this fair?
For the most part, yes. Everyone knows the score when they enter a relationship. But that is not to say that such a Trust can’t be challenged.
If the “non Trust” partner has contributed to a property owned by the other partner’s Trust, and done so with a reasonable expectation that they would gain an interest, he or she can challenge the Trust. The argument is that even though the property is owned by the other’s Trust, because he or she has contributed to it, whether by sharing mortgage payments, tipping money in for maintenance and other costs, doing work to add value to the property or suchlike, he or she has a “constructive trust” over that property which entitles him or her to a share of it.
A Trust can also be challenged if it can be proved to be a sham or alter ego trust. That essentially means that the Trust is not operating as a separate legal entity at all but is really just a slush fund for the partner who set it up. Hence the need for people who have formed a Trust to realise that it is in fact a separate legal entity and administer it with that in mind. If they don’t it can become unstuck when push becomes shove.
If you feel any sense of tension about what you have just read I urge you to contact us at Queenstown Law. Get it sorted now. Trust me, you don’t want to have to spend money arguing the toss in court later if things turn bad.
Contact Russell on russell@queenstownlaw.co.nz or Claire on claire@queenstownlaw.co.nz. Or call us on 03-4500000.
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