All’s fair in love and war; when relationships fail, where go the spoils?

They say love is blind – but it’s time to take off the blinkers or it just might cost you more than a broken heart.

When you’re in a de facto relationship, marriage or civil union, you might be sharing more than you realised, such as assets, liabilities and inheritances.

Are you and your partner de facto?

So you and your partner live together, you share a bedroom and consider yourself a couple. If you’re both over 18 – congratulations, you could likely be deemed ‘de facto’.

What this means, is legally speaking, you’re pretty much as good as married or in a civil union when it comes to your finances. Should your relationship end, each of your assets and liabilities could be split.

An argument can be made that you are in a de facto relationship even if you are living separately, should other criteria be met.

Such as;

• Sharing a bedroom
• Joint bank accounts
• Financial dependence on each other
• Jointly owned assets such as property
• A mutual commitment to a shared life together
• Care and support of children (biological or not)
• Responsibility for home maintenance and household duties
• How friends and family view and deem your relationship

It all harks back to the Property (Relationships) Act 1976 and the Property (Relationships) Amendment Act 2001.

In general the Act applies to married, civil union or de facto couples once they have been together for 3 years or more, however the Act can apply to couples who have been together for less than 3 years in certain circumstances.

The purpose of the act reads “to provide for a just division of the relationship property between the spouses or partners when their relationship ends by separation or death, and in certain other circumstances, while taking account of the interests of any children of the marriage or children of the civil union or children of the de facto relationship.”

Generally the Act considers all contributions to a relationship are equal, including financial and non-financial contributions (such as childcare, homemaking and other unpaid duties) and in the event of separation (or death of one of the parties) the general rule is each party is entitled to a half share of the relationship assets.

Another point of note here is when a relationship ends by death; while it is common to assume a Will supersedes any claim to relationships assets – it does not. A Will can be challenged by a partner of the deceased, even if they have not been noted as a beneficiary of the estate, and they could be able take half, if not more, of the relationship assets.

Of course, for the court to decide on these matters it can involve substantial legal costs regardless of the outcome.

What are the financial risks?

Simply speaking, the financial risks when you are entering or are in a relationship fall into two main categories: loss of assets and liability for debts. There’s a whole other conversation to be had around opportunity cost when in a relationship that most often affects stay at home parents, but for the purpose of this article we will focus on assets and liabilities. 

Loss of assets.

If either person prior to the relationship, or during the relationship, acquires assets such as property, vehicles, business shareholding, investments or cash – these assets can become relationship assets. Relationship assets are jointly owned by both people in the relationship. All income earnt during your relationship is also considered a relationship asset, even if the funds go into a separate bank account.

Even KiwiSaver is up for grabs, although any money in the account prior to the relationship starting remains solely owned by that person. 

It can even go beyond the relationship parties – assets can be subject to claim by children of a deceased person, even if they are independent adult children. This can be quite important where a couple have children from previous relationships.

Again, the claim may not be ‘just’ but it could cost a lot of money to prove that.

The inheritance exception.

An inheritance doesn’t automatically become a relationship asset; at the date of receipt it is the sole ownership of the beneficiary noted. However, this can very quickly become a relationship asset once it is deposited into a bank account, used to pay down debt on relationship property or the like.

Some families create an inheritance trust for this very reason, to ensure in the case of parents leaving a child an inheritance, it remains solely theirs and is not shared with a partner in the case of a relationship split. 

But there’s a good chance you’re going to want to use that money, so a loan can be a helpful method. To retain ownership the partner in receipt of the money can lend it to the couple. With the right paperwork, the original capital or another agreed amount becomes repayable under certain conditions, for example death or separation.

Liability for debts.

There’s more to relationship finances than assets though – the often ignored but potentially even more financially damaging is the shared liability for debts. If you enter into a relationship with someone who accrues debt, such as personal loans, credit cards, or even student loans, you can be liable for payment if the debt was incurred for relationship purposes. And not just half – if they fail to pay you could find yourself coughing up the full amount or suffering a bad credit score and/or penalties. 

What can you do to protect yourself?

It all starts with an honest conversation. Couples need to talk about their financial expectations during the relationship. This can involve getting a few skeletons out of the closet too, if you have some debt or history with money. 

There are options available to set clear parameters around what you will allow, and not allow, to become a relationship asset. This generally takes the form of a legal document called a Contracting Out Agreement. This is a formal document and will require a legal professional to administer. 

An important note; the only way to finalise your separation in a binding agreement is to record your agreement to the division of all relationship property and relationship debt in a separation agreement certified by your respective lawyers or by getting an order in the Court.

It’s not particularly romantic, but these conversations are best held long before the faecal matter hits the oscillating device – because it is not all fair in love and war. 

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.