Ex-files: I am nervous about going through another divorce. What can I do to financially protect myself and my children?
Q: A few years back I went through a messy divorce. I had to take out a significant loan to pay out my ex-wife for our property settlement. I have finally paid it off and feel back to a secure financial position. Recently I met a woman I could see a future with but I am hesitant to get into a serious relationship as I do not want to jeopardise my financial safety again. My ex-wife and I share four kids between 16 and 23. I want to make sure that my children are protected if anything happens to me. What can I do to protect myself and my children?
If you separate after a marriage, civil union or de facto relationship that lasts more than three years your relationship property will be divided according to the Property (Relationships) Act 1976 (“the PRA”). Your relationship property will be divided equally between you and your new partner. According to the PRA your partner would also be entitled to claim half of the relationship property pool if you passed away.
It is common for people who have been through a difficult separation to be cautious when considering a new relationship. There are options available to protect your financial position if the relationship ends.
Contracting out agreement
When you begin a new relationship, you and your partner could enter into a contracting out agreement (sometimes referred to as a prenuptial agreement).
What is a contracting out agreement?
A contracting out agreement allows you to contract out of the rules of the PRA. You and your partner can agree what property will remain your separate property and what property will be considered relationship property.
How do I make one?
There are some strict requirements that must be met in order for your agreement to be legally binding. The agreement must be in writing and signed by both parties. Each party must have received independent legal advice. You cannot share a lawyer. The lawyer will explain the consequences of the agreement to you.
Each party must disclose all their assets to each other before entering the agreement. This includes any interests in trusts. Non-disclosure of assets can be ammunition to have the agreement set aside at a later date.
You can save time and money in two ways. Firstly, if you and your partner have disclosed information on their assets and liabilities. Secondly, if you agree on at least the main points before you meet with your lawyers.
When is the right time to make one?
A contracting out agreement can be entered into at any time. It is best to enter into the agreement as soon as possible. Preferably before you have been in a de facto relationship for three years. After three years, your partner is entitled to half of your relationship property. If they have moved into a home that you own they will be entitled to half its value as the family home is relationship property whenever acquired. If you enter a contracting out agreement after this three-year mark your partner will need to waive the rights they have acquired.
Will it protect me for ever?
The contracting agreement cannot be signed and then forgotten about. The Court has a wide jurisdiction to set aside an agreement. One reason is if there has been a material change in circumstances that would make enforcing the agreement unfair. You will need to update it as the circumstances of your relationship change. A change in circumstances would include events such as the birth of children, marriage or one party obtaining significant assets. A good rule of thumb would be to review the agreement every three years.
Set up a trust
Family trusts are very popular in New Zealand. Family trusts are designed to protect your assets and benefit family members, during and after your life.
What is a trust?
When you settle a family trust you transfer legal ownership of your assets to the appointed trustees of the trust. Those trustees hold the property for the benefit of specified beneficiaries. Those beneficiaries would probably include you and your children.
What are the advantages of a trust?
There can be advantages to a trust properly established. There are benefits in not owning the property in your personal name.
1. Protection from the PRA
Relationship property is only property owned by the parties in their own name. Trust property is not considered relationship property. Therefore it falls outside of the rules of the PRA.
However, section 44 of the PRA allows the Court to set aside a disposition (of property to a trust) which was intended to defeat the rights of a spouse or partner. You cannot place relationship property in trust for the sole purpose of removing it from the relationship property pool.
2. Protection from claims against your estate
Trusts can protect against claims brought against your estate after you die. Commonly these are brought by family members who feel they did not receive adequate provision under the will or by someone who claims they were promised a share of the estate. Trust property is protected from these claims as they are not part of the estate.
3. Creditor protection
A trust can also protect against future claims by creditors. For example, creditors cannot claim against the family home when a business fails if the home is owned by the trust. There is a risk that your trust may not protect the property if it was created for the sole purpose of avoiding claims by creditors. If this has occurred the trust is at risk from a challenge by creditors. It is important that assets are transferred at a time when the settlor is not under any immediate threat by creditors and is not likely to be in the foreseeable future.
Good trust management is critical to helping protect against creditors. You will need to keep the trust records up to date. This will likely require help from your accountant or lawyer.
What are the disadvantages of having a trust?
A trust requires a significant cost to establish and maintain. These costs will be higher if a professional trustee is appointed or the trust owns incoming earning assets requiring tax returns and annual accounts. Initial start-up costs can range anywhere upward of $3,000 depending on the complexity of the trust.
2. Loss of control
When property is transferred to the trust you no longer own the property. The property is owned by the trustees of the trust. The trustees decide how to manage the assets in the best interests of the beneficiaries. There are significant duties and obligations for trustees so who you appoint is important. These obligations have recently become more burdensome with the enactment of the Trusts Act 2019. Any decision made about trust property usually requires a joint decision by all trustees.
You can enter a new relationship with peace of mind. These safeguards are available to protect the financial position of you and your children if your new relationship is unsuccessful. Most importantly you should enter a contracting out agreement with your new partner, preferably before you have been together for three years. It may also be appropriate to set up a family trust. However, you should obtain legal advice if you are already in a relationship to ensure the trust is not labelled a sham. These are the best steps you can take but there is no guarantee that there will be no challenge.
• Jeremy Sutton is a senior family lawyer, specialising in divorce cases where there are significant assets, including family trusts and complex business structures.
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