Relationships later in life … how can you protect your property from a claim under the Property (Relationships) Act?

With the divorce rate being as high as it is, many people enter into a second or third relationship later in life.  Some people may also commence a new relationship after their partner has passed away.  This demographic has unique legal needs compared to younger people, because they usually have more assets (or debt), and may also have children from a prior relationship. 

What are the rules?

When a couple, (including de facto, married, or in a civil union) is in a relationship for at least three years, the Property (Relationships) Act ("the Act") will apply.  That means that when the relationship comes to an end, due to separation or the death of either one or both parties, the property which the couple acquired during the relationship will be divided equally (as a starting point). 

Property acquired prior to the relationship will typically remain the separate property of the party who owns it.  But beware, because this rule does not apply to the family home.  A family home will automatically be treated as relationship property which will be subject to division under the Act, regardless of when it was acquired. 

A Practical Example

This rule can have very serious, and often unintended, implications.  By considering a hypothetical example, the consequences are easier to appreciate. 

Let us assume Harry was married to Beatrice for 10 years.  Harry and Beatrice had two children before they separated.  Harry received the family home in the settlement of that relationship.  Ten years later Harry enters into a new relationship with Jane, and they move into Harry’s house.

If Harry passes away 5 years later, Jane can make a claim against Harry’s estate for a half share of the family home, even though Harry may have intended to leave that home to the two children from his previous relationship. 

If Jane succeeds in her claim, Harry’s children will only receive 25% of the home each, rather than 50% each.  As a dollar figure on a million dollar home, that equates to each child receiving approximately $250,000.00 less than they would have otherwise received.  Jane would receive 50% of the family home or approximately $500,000.00.

It is important to understand that this scenario could eventuate regardless of what Harry left to Jane in his Will.  This is because after Harry passes away, Jane can choose to inherit what she was left under Harry’s will; or Jane can elect to make an application for division under the Act.  The election is entirely up to Jane.  Equally, if Jane passed away, Harry would be entitled to make a similar election.

Furthermore, even if Jane passed away simultaneously or shortly after Harry, then such a claim could still be successfully made by Jane’s representatives.  For instance, if Jane also has children from a previous relationship, and Jane had a small estate, her children might be motivated to make a claim under the Act, in order to increase the size of Jane’s estate. 

If Harry’s children had to oppose the claim, they could face significant legal costs and delays before they would receive their inheritance from their father’s estate. 

How could this have been avoided?

Harry could have avoided this by putting in place an agreement with Jane about how their property would be divided after a separation (including by death).  This type of agreement is called a Contracting Out Agreement (often referred to as a ‘pre-nup’).

A Contracting Out Agreement allows the parties in a relationship to decide exactly what they wish to retain as separate property and what property they agree to divide under the Act. 

Typically, financially established parties prefer to leave the relationship with the property they have entered the relationship with, and to divide property acquired during the relationship in accordance with the Act (usually equally). 

To put in place a Contracting Out Agreement there are particular requirements set out in the Act which must be complied, including:

• The agreement must be in writing;
• Both parties must sign the agreement;
• Signatures must be witnessed by a lawyer; and
• The parties must each receive independent legal advice.

A Contracting Out Agreement can be put in place at any time: before, during or after the relationship becomes subject to the Act.  Once the agreement is in place, it immediately takes effect once the relationship becomes one which qualifies under the Act.

It is, however, wise to put a Contracting Out Agreement in place before the relationship becomes subject to the Act.  Once the relationship becomes subject to the Act, if either one of the parties refuses to sign a Contracting Out agreement, then the Act will automatically apply.