Pre nup will set the ground rules

Section 21 agreements in which couples contract out of the Property (Relationships) Act, can save a lot of financial pain for business owners and ambitious professionals should the relationship fail.

While the act provides for a statutory regime of equal sharing after three years, there is a lot of scope for discretion by the court.

Contracting out of the act by means of Section 21 Agreement (colloquially called a pre-nup) provides certainty and may be especially important when there are unequal contributions by the two partners, or when the partners have children from a previous relationship.

The general rules for approaching the preparation of a contracting-out agreement include getting the timing right.

Don’t go to your lawyer to draft a Section 21 on the eve of your wedding.  It’s best done at the start of a relationship, when you can be less emotional and more clinical.

Avoid the too common responses: “Don’t you love me?” or “Don’t you trust me?”

Contracting-out agreements are common now and are not indicative of a personal issue.  This needs to be approached in a businesslike manner.  Talk to each other first and work out the basics of your agreement before you seek professional advice.

It can be easier to talk first to an experienced accountant, who will help you to consider what you are trying to achieve with and agreement, and to “do the maths” Then talk to your lawyer.  This is the basis for a robust agreement that considers both financial and legal implications.

Couples need to understand that unless it is a fair agreement the disadvantaged spouse’s lawyer is unlikely to certify it and it won’t be signed.

Don’t simply agree and think you can get it overturned in court later.  It is very hard to do that.

Review the agreement periodically as you would your will – circumstances, intentions and contributions can change, especially as we get older.

1. The first-time relationship

Jack and Jill are young professionals aged in their late 20s flatting together with others.  A relationship has developed and they are thinking of moving out and buying their own home.  Jill earns twice as much per annum as Jack, but Jack has $50,000 in savings.  While they think they will get married one day, at this stage they are nervous about committing to an equal sharing financial regime.  They also want to record how they will each fund their new home and what will happen if they break up.

The professionals say:
Jack and Jill are correct that the PRA will mean the home becomes relationship property after three years, and possibly sooner if Jill becomes pregnant. Some people believe equal division under the law applies after two years, but this is not the case.

In today’s society, it is a much more common scenario for young people to make “casual purchases” of property. Perhaps they start out as flatmates, as Jack and Jill did, or they may already be in a relationship. In either case, it is the date that the de facto relationship begins that counts, not when the house is bought. In the event of a breakup, we sometimes find there can be a disagreement over that date.

It is common if a young person is a beneficiary of a trust that the trust deed will require him/her to have a Section 21 agreement in place with their partner.

2. Second time around

Mike is recently divorced and has come out of his first marriage with business assets. His former wife retained the family home where she lives with their three university-aged children. The business has been underperforming in the last few years, but has just brought to market a new product that is likely to bring substantial growth. Mike has met and fallen in love with Mindy, also recently divorced. She’s 10 years younger and has two children at primary school. She lives in her own home, which she plans to sell so that the couple can buy something bigger for their blended family. Their plan is to use Mindy’s equity, which will entitle her to own 70% of the home. Mike will raise a mortgage to cover his 30% share of the home.

The professionals say:
The priorities of second-time around couples are complicated where there are children involved. Protecting assets for the children is usually the No1 priority.

After three years, any home purchased together will be relationship property. In the event of a breakup, the PRA provides for this to be shared equally. But a Section 21 agreement can allow for a different scenario, as in Mike and mindys7/30 agreement. It’s also important that their agreement considers how costs of the home are shared, such as maintenance and alterations.

For Mike, protecting the business as part of a family succession plan is one of his objectives. A Section 21 agreement enables him to ring-fence the business and have the income he earns from it treated as his separate property (either wholly or in part).

Mike should be mindful that Amanda might have a legitimate claim to a portion of the gain in the value of the business that occurs during the relationship. Where the relevant PRA provisions apply, the law converts the gains that accrued to the separate property as relationship property.  A Section 21 can cover this too.

The Act considers monetary and non-monetary contributions.  10 years is a very long time in a relationship so care and forethought is required in putting a Section 21 agreement together. The result is less fair if one person is excluded from assets because their contribution, which may be non-monetary, is not recognised.  “Mr or Mrs Wealthy” might require their less well-off partner to sign away rights to assets and instead agree to a lump sum contribution. But what happens if the “Wealthy” partner loses his / her health and the “spare cash” is used up in medical care, leaving nothing for the surviving partner?

3. The farming or intergenerational family business

Terry and Beth have worked to build up the farm (or a family business). Their two sons both live and work on the farm. Both are recently married, and looking to build family homes on the property. Terry and Beth want to see the farm pass on to their sons and grandchildren.  They get on well with one of their new daughters-in-law; the one grew up on a farm and has helped out with recent calving, but the other grew up in the city and is employed in the local town as an accountant ( and doesn’t like design of the home she and her new husband are going to build on the farm). Beth’s brother lives elsewhere and went through a relationship breakup and she is worried about the future succession of the farm.

The professionals say:
Farming and family businesses are an area where there is a need for very clear financial arrangements. Those arrangements must address both commercial, succession and relationship property objectives.  Parents may want to keep the assets within the family. Trust structures can ensure the assets are protected from partners of beneficiaries (children) who can become intent on
seeking to share in the value of the asset if their relationship fails.

Written by Graeme Smith & Lynda Kearns
Published in the Sunday Star Times, 5 August, 2012.