Are assets only safe until death do us part?

Nearly 40% of marriages and civil unions in New Zealand each year are remarriages. Second, or even third, marriages and de facto relationships are becoming increasingly common, many involving children from previous relationships. Couples embarking on subsequent or later-in-life relationships are more likely to enter into contracting out agreements to give themselves certainty around division of assets in the event of a separation, particularly those wanting to ensure that their assets are passed down to their children. But can you use a contracting out agreement to prevent your partner getting a share of your assets when you die?

A recent High Court case awarded a de facto partner a 25% share in their deceased partner’s estate, despite a contracting out agreement which provided that separate property was to remain separate and that the agreement was to be binding in all circumstances, including death. During the relationship, the third for both, the parties had maintained separate bank accounts and had not intermingled income or assets but had lived in a house belonging to the deceased. The deceased’s will pre-dated the de facto relationship, so did not make any provision for his de facto partner. After his death, his de facto partner made a claim against his estate for provision under the Family Protection Act, on the basis that he had a moral duty to provide for her.

The deceased’s son, who was the main beneficiary under the will, accepted that the deceased had a moral duty to provide for the de facto partner and had failed to do so. The Family Court awarded her a 30% share of the deceased’s assets, which was reduced to 25% on appeal. The High Court stated that it was settled law that a contracting out agreement cannot settle or exclude future claims arising under the Family Protection Act, because it is contrary to public policy.

Better off in death than divorce?

The prohibition on excluding Family Protection Act claims from contracting out agreements means that a spouse or partner may end up in a better position if their partner dies than if they separate, as the Family Protection Act will allow them to circumvent the contracting out agreement. If parties want their assets to remain separate even after death, they may need to consider putting the assets in trust. This puts them beyond the reach of the Family Protection Act but can result in complications in the event of a marriage breakdown.

If you have concerns about the strength of your contracting out agreement or want to know how to keep your assets safe in a separation, our Advisme team can help.