Contracting Out Agreements for Relationships Late in Life

A wise move as financial affairs are more complex

You may think that a ‘pre nup’ is most commonly used when a young couple begins a relationship and there is a significant difference in their financial position. However, these agreements, formally known as contracting out agreements (COAs), can be entered into at any time during a relationship. They are particularly useful for couples entering into a de facto relationship, or marrying later in life, as both parties are more likely to come to the relationship with more complex financial affairs.

Why have a COA?

One of the couple may have been through a previous separation or the loss of a spouse. They may have children – dependent or adult. They may also have trust or company structures that make their overall asset profile less straightforward from a relationship property perspective than younger couples who are just getting started with their lives together.

In these cases, a COA can give both parties (and their families) clarity about what will happen to their assets if one of them dies, or if they decide to separate.

A COA is a way of opting out of the default rules as to how the division of property is dealt with under the Property (Relationships) Act 1976 (PRA). Without a COA, the default approach would apply; this generally means that relationship property assets are divided 50:50. An equal split, however, is not always appropriate. In complex cases, parties can end up in protracted court cases trying to figure out how the PRA applies to their particular situation.

While the default rules are a helpful fallback position where people cannot agree how property will be divided, the PRA does not necessarily reflect what all couples would regard as ‘fairness.’ The legislation also does not take account of fact-specific or unusual cases. COAs allow couples to set in place clear and bespoke rules that apply to their particular circumstances, and their specific assets, in the event their relationship or marriage breaks down.

Opens up discussion

One of the benefits of considering a COA is that it opens up the discussion between a couple as to what they would like to happen to their property, or what they might consider fair, in the event that one of them dies or they separate. Often we find that couples have never had this conversation, but have made assumptions about what will happen or what their partner thinks should happen.

In particular, these assumptions can be harshly tested and shown to be wrong when a partner dies unexpectedly. The surviving partner may find that they have radically different expectations about what will happen compared with the deceased partner’s children and any other parties involved in such an estate.

The same issue can arise if a couple separates. Efforts to resolve relationship property issues may be made in circumstances where the partners’ perceptions of fairness have changed over time. There may have been unequal financial contributions made during the relationship or owing to events, such as infidelity, that have occurred during or which ended the relationship. 

Complex finances

Where a couple has a complex financial situation, including trust and company structures, a COA should be supported by documents between the parties and the trusts or companies, so that no assets fall through the cracks or fail to be taken into consideration. It is important for couples to seek independent advice about the types of documents required, and their effect.

Review a COA regularly

It is also critical that couples review their COA as life changes. When properties are bought and sold, home improvements funded or other big changes happen, the COA may become out of date and difficult to apply. A new agreement, or an amendment to an existing agreement, can ensure that everyone has clarity about what the changes mean and what their effect will be if there is a death or separation.

A COA can only be enforced if both parties have received independent legal advice and both lawyers certify the agreement. This requirement ensures that both parties are fully informed about the effect of the agreement.

DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.