Why Have a “Pre-Nuptial” Agreement?
- The Property (Relationships) Act 1976 sets out the law that applies to the division of property when a couple in a marriage, civil union or de facto relationship separate, or when one of them dies. If the couple have lived together for at least three years, the family home, vehicles, and the household furniture and appliances will usually be shared equally between the couple. It does not matter if one of the partners owned this property before the couple were in a relationship.
- It is not uncommon for separated partners to be surprised to discover from their lawyer, that property that they considered to be their separate property is in fact relationship property. Furthermore, as relationship property it will usually be shared equally between the couple when they separate.
- People wishing to avoid the property sharing rules of the Property (Relationships) Act are able to enter into an agreement to provide how their property will be divided in the event of separation or death. Such an agreement is commonly known as a “Pre-Nuptial Agreement” but is also called a “Contracting Out Agreement”. By making a Contracting Out Agreement, spouses or partners are able to decide how their property will be divided and protect any assets that they wish to keep as separate property.
- If spouses or partners do not have a Contracting Out Agreement, the usual relationship property law will apply to them if they separate. Outlined below is a brief overview of some aspects of relationship property law. If any matters outlined below are of concern to a spouse/partner, they may consider entering into a Contracting Out Agreement to make their own arrangements about the division of property.
Relationship Property Law
- The family home (the property that the couple usually live in together) is always relationship property. It does not matter, for example, that one partner purchased the property before the relationship or that the mortgage was repaid using money inherited from one partner’s deceased relative. The family home cannot be classified as one partner’s separate property, except by way of a Contracting Out Agreement.
- Similarly, the family chattels (household furniture, household appliances, ornaments, tools, motor vehicles and so on) are always relationship property. Also, all property acquired by either or both of the partners while they are in a relationship will usually be relationship property.
- Some property may be classified as one partner’s separate property. For example, property owned by one partner before the parties’ relationship is often separate property. The property will usually stay with the person who owns it and will not be taken into consideration in the division of the couple’s relationship property. However, it is possible for separate property to become wholly or partially relationship property. In fact the status of separate property is easily lost.
- Gifts and inheritances are classified as separate property, but if that property is mixed up with relationship property it may loose its separate property status. For example, inherited money may be used to pay for renovations on the family home and the whole property, including the renovations, will still be classified as relationship property.
- The increase in value of separate property may become relationship property. In relation to farm land, for example, this may occur when relationship property money is used to make improvements to the property, or the non-owning partner does work on the property which increases the property’s value.
- Property acquired out of separate property can be classified as relationship property if the property was acquired for the common use or common benefit of the partners. For example, money from an inheritance is used by a husband to purchase plant and machinery to set up a car repair business. This business will provide income for the husband and his family. As the plant and machinery was acquired for the common benefit of both the husband and the wife, it is relationship property. This is despite the fact that inheritance money was used to purchase the plant and machinery.
- If a partner transfers assets into a trust or company, the disadvantaged partner is able to apply to the Court for compensation (provided that certain requirements are met). Therefore, transferring assets to a trust or a company will not necessarily protect assets from a claim by a spouse or partner.
Requirements of a Contracting Out Agreement
- A Contracting Out Agreement must meet certain requirements to be valid. These requirements are:
(a) The Agreement must be in writing;
(b) The Agreement must be signed by both spouses or partners;
(c) Each spouse or partner must have had independent advice from a lawyer before they sign the Agreement; and
(d) The signature of each spouse or partner must be witnessed by a lawyer and that lawyer must certify that they have explained the effect and implications of the Agreement to the spouse or partner.
- If a Contracting Out Agreement does not meet the requirements set out above, it will be invalid. This means that the usual relationship property law will continue to apply to the relationship. Therefore, it is crucial that anyone considering entering into a Contracting Out Agreement meets with their lawyer for legal advice.