A common question we hear from concerned parents is: how can I protect my adult child’s inheritance (specifically from their partners or spouses – current or future, and especially in the event of a relationship breakdown)?
In New Zealand law, the starting position is – inheritance is separate property.
On separation, inheritance would be classified as your child’s separate property and not divided 50:50 with the relationship property that belongs to your child and their ex-partner.
However, the status can change. If Inheritance is intermingled with relationship property (such as income in a bank account), it can become relationship property too. This means your children’s current or future partner could be entitled to half of it.
We recommend that your child seeks legal advice before they receive their inheritance so the merits of the following approaches can be discussed.
Three approaches that may help protect inheritance:
- Prevent intermingling; and
- Having a contracting out agreement; and/ or
- Leave your child’s inheritance to a trust in which their partner is not a beneficiary.
Preventing “intermingling”
Intermingling occurs when certain separate property, or its proceeds, become so entangled with relationship property that it is unreasonable or impracticable to regard that property or those proceeds as separate property, and so it becomes relationship property.
Examples of intermingling may include repaying a mortgage, paying for renovations on the family home, putting the inheritance in a joint account, or using it to buy a shared asset like land in joint names.
The courts look at many things to determine whether intermingling has taken place, such as the actions taken to keep the property separate and whether there was express of implied consent to intermingling. It is a question of “fact and degree” whether intermingling has resulted in separate property losing its character. Case law in this area is very fact specific to each case and so you should seek advice for your specific situation.
To prevent an inheritance from intermingling, it is best to keep it in a separate bank account in your sole name, not in a joint account. Or, if possible, use inheritance for something clearly separate, identifiable and traceable, like a term deposit in the child’s sole name. However, term deposits and separate accounts should be more than just separate in name. You need to be careful that they are intended to be and treated as separate property, not for the common benefit of the relationship.
Contracting Out Agreement
We strongly suggest that your child and their partner enter a contracting out agreement, often called a pre-nuptial agreement, confirming that each of their inheritances will remain separate property.
The agreement can be entered into at any time before or during the relationship. It sets out how the inheritance would be treated at separation, regardless of whether it had been intermingled or used for the relationship.
Some parents require their adult children to enter a contracting out agreement with their partner before giving their child any gift or loan, for example funds to assist with purchasing a property.
Keep inheritance in trusts
Trusts are a structure where you give up personal ownership of property to trustees who look after it for others, the beneficiaries. By giving up this ownership, it is not your separate property and so is less likely to intermingle with relationship property. This degree of removal means that on separation, trust property does not usually form part of the relationship property pool.
However, Courts can bust assets out of trusts after a relationship has ended in certain circumstances, so the timing of the trust creation, who the trustees are, and their powers is important. There are many conditions that need to be met for trusts to help protect inheritance, so it is best to seek legal advice to ensure a trust is best for this purpose.
If you would like to discuss the best legal protection for an inheritance in your specific circumstances, contact me or another member of Lewis Lawyers’ experienced Relationship Property Team.
This article is current at the date of publication. It is intended to provide general comments only. The information contained herein does not constitute legal advice and should not be relied upon as such. Readers should seek personalised legal advice for their specific circumstances.
