If you’ve heard the term ‘Contracting Out’ you’ll probably know that it refers to ‘contracting out of the Property (Relationships) Act 1976’, and is sometimes referred to as a pre-nup.
Concerningly, only around 10 percent of Kiwis have one.
Otago University carried out a study last year and found 63 percent of couples with a formal Contracting Out Agreement (COA) followed it as opposed to 21 to 29 percent of couples who tried to create their own without going through a lawyer.
While it may seem counterintuitive early on, to talk about the breakdown of your relationship and what happens if it ends, having the conversation up front can save you heartache and devastation down the line.
No one has a crystal ball. We can’t predict the future, but a COA can provide you with the peace of mind that comes from knowing you’ve got a plan in place if things do go wrong.
How does a COA work?
The Property (Relationships) Act 1976 kicks in after three years together and if you separate, you’re typically required to divide the assets you’ve acquired during the relationship 50/50. A COA allows you to contract out of any default rules that don’t work for you and your relationship.
Life isn’t always straightforward, and neither are relationships. A COA enables you and your partner to agree on a different division of your assets to better reflect your own unique circumstances.
It’s not just about protecting wealth. A COA creates clarity and fairness, no matter what your financial situation, and helps to ensure you’re both on the same page.
The benefits
- Avoid conflict: When emotions are high, having a clear and pre-agreed plan can make a tough situation a little easier. By sorting out the details in advance, you can reduce the risk of long stressful disputes if the relationship does end.
- Flexibility: It’s common for partners to bring different financial situations and assets into the relationship. Creating your own COA can start open conversations about these differences and allow you to tailor the agreement to fit both of your specific needs and goals.
- Safeguarding your assets: Whether it’s a home you owned, a business you built from the ground up, or savings you diligently set aside, before you got together; a COA can draw a line under what is yours and remains yours. It can also help you plan how your property will be shared as your relationship develops.
It’s not a set and forget
It’s important to revisit your agreement every three to five years or after life changing events, to ensure it still makes sense and reflects the current reality.
- Life changes: Major events such as getting married, having children, or even a significant career step, can all affect the fairness and relevance of your COA.
- Legal updates: Laws change, and what was once a watertight agreement might need a few tweaks over the years to remain enforceable. It’s important to keep up with any changes to avoid any nasty surprises down the line.
- Fairness and relevance: An outdated agreement can be challenged and overturned in court if it’s considered it could cause serious injustice. When deciding, the court will consider the length of time since the agreement was signed and if circumstances have changed that make the agreement unfair.
How do you update your COA?
As with your initial Contracting Out Agreement, you’ll need to record the agreed changes in writing and both get independent legal advice from your respective lawyers, and they’ll need to witness your signature.
Takeaway
A COA is a valuable tool for safeguarding your assets and putting a plan in place for both of you if your relationship fails, but, as your life changes, so too should your agreement.
If it’s been a while since you last reviewed your agreement, now’s the time to take another look.