Law Commission recommends new Relationship Property Act

The Law Commission’s final report Review of the Property (Relationships) Act 1976 – Te Arotake i te Property (Relationships) Act 1976 was tabled in Parliament on 23 July 2019 and will now be considered by Government.  The Report proposes a new Relationship Property Act intended to better assist spouses or partners (spouses) to share in the fruits of the “family joint venture.”

The new law would refine the pool of relationship property available for division while expanding the availability of relief for economic disparity at the end of a relationship and broadening the court’s powers to divide trust property.  This may mean increased exposure for some trusts and for high-income earning spouses.

Forward planning the key to increased asset protection

Under the new Act, spouses would continue to be able to opt out of the statutory scheme provided the existing procedural safeguards which promote informed consent are satisfied. The changes proposed by the Commission highlight the need to consider arrangements for trust and personal property together. We recommend a combined approach of tailored trusts and a comprehensive contracting out agreement prepared by our experts, which may be ratified by the trustees where required. Wealth protection structures should be administered with care and updated as circumstances change with a view to maintaining relative fairness between spouses. Arrangements that cause “serious injustice” will continue to be vulnerable to attack.

Proposals include changes to the division of the family home, trusts and economic disparity relief

The recommendations include:

  • Family home – the value of the family home would no longer be treated as relationship property just because it was used by the spouses during the relationship. When the home was one spouse’s pre-relationship property, or was received by one spouse as a third party gift or inheritance, only the increase in value of the property during the relationship would be shared.  (This would not assist a spouse who purchased a family home during the relationship with separate property funds.)
  • Trusts – the court would have greater powers to grant relief where a trust holds property that was “produced, preserved or enhanced by the relationship.” The new provision would apply in three situations: (1) where one or both spouses have disposed of property to a trust since the relationship was in contemplation, with the effect of defeating the claim or rights of one or both of them under the new Act; (2) where trust property has been sustained by the application of relationship property (such as income) or by the actions of one or both spouses; or (3) where any increase in the value of trust property, or any income or gains derived from trust property, is attributable directly or indirectly to the application of relationship property or the actions of one or both spouses.
  • Family Income Sharing Arrangements (FISAs) – to address the economic advantages and disadvantages arising from a relationship or its end, some spouses would be required to share their income for a period of up to five years after separation. FISAs would replace lump sum economic disparity awards and spousal maintenance.  They would be available in three situations: (1) when the spouses have a child together; (2) when the duration of the relationship was 10 years or longer; or (3) where the relationship was less than 10 years and there are no children, but there is evidence of specified career sacrifices and contributions which demonstrate a division of functions in the relationship.  Spouses would be able to contract out of a FISA before or during a relationship.

Other proposed measures would give the court greater powers to promote children’s interests, including setting relationship property aside for the benefit of minor or dependent children, and improve the just and efficient resolution of disputes, including imposing costs and other consequences for delaying behaviour.

The Commission’s recommendations include some positive changes which are needed to modernise existing relationship property law.  We consider that reform of relationship property law as it applies to trusts and economic disparity is required, however the recommendations in these areas go further than is necessary to achieve just outcomes.

The trusts provisions could capture a range of transactions and trusts which would not have been subject to relationship property claims before.  The broad scope of the provisions may result in more frequent challenges to trusts set up for legitimate purposes and increased litigation concerning when a relationship is “in contemplation”, the types of contributions that may justify relief and the principles determining the amount of relief.  In relation to economic disparity, reforming the existing section 15 by clarifying the method for valuing lump sum awards would be more conducive to facilitating a clean break between separated spouses than the proposed FISA scheme.

Other changes affecting Trusts – Trusts Act 2019

Trusts will continue to be an important asset management tool for many New Zealand families, with benefits including increased protection from business risk and the ability to transfer wealth between generations.  Trust law has changed with the enactment of the Trusts Act 2019.  The new legislation will affect most existing and new trusts.  Our further comment can be found here.

It is a good time to review your trusts and your wealth protection plan.  We welcome the opportunity to answer any questions you have about relationship property claims, trust claims and asset protection.

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