Protecting Your Inheritance: Safeguarding Against Relationship Property Claims

Managing an inheritance within a relationship can be challenging, especially if one partner wishes to ensure that their inheritance remains protected in case the relationship ends.

Pursuant to the Property (Relationships) Act 1976 ("the Act"), if you are in a qualifying de facto relationship for at least three years and the relationship ends through separation or death, relationship property is typically divided equally, while separate property remains with its original owner.

Inheritance received from a third party - whether through succession, survivorship, gift, or as a beneficiary under a trust - is generally considered separate property and is not subject to equal sharing. However, separate property can become relationship property if it has been so intermingled with other relationship property that it is unreasonable or impracticable to regard it as separate property. 

In PJC v HMC[1] a wife’s separate property inheritance became relationship property when it was paid into the main operating bank account used by her and her husband for all purposes. Conversely, in Fraser v Buxton[2] a wife’s inheritance used to reduce the mortgage on the family home was still deemed her separate property on separation. 

There are several strategies to consider when protecting your inheritance from becoming relationship property:

Contracting Out Agreement: The most effective method is to enter into a contracting out agreement pursuant to the Act. This agreement can clearly define the inheritance as separate property and establish that it remains so, regardless of how the inheritance is used during the relationship. You can set up this agreement at any time, including upon receiving the inheritance.

Separate Bank Account: You could keep your inheritance in a bank account (including term deposits or investment portfolios) solely in your name. To ensure that this method helps preserve your inheritances’ status of separate property, you would need to ensure no other funds are deposited into the account and avoid using it for joint purposes.

Deed of Acknowledgement of Debt: You could record in a deed of acknowledgment of debt that the inheritance is a loan to the relationship. This deed would outline the terms of the loan, including when it is repayable, which may only be upon the end of the relationship.

Even if you are comfortable with your inheritance becoming relationship property, knowing your options will help you make informed decisions. If you are expecting to receive an inheritance, or have already received an inheritance, we recommend getting in touch with us to understand the potential implications and explore the best protection strategies based on your specific circumstances. You can contact us by email at reception@dtilawyers.co.nz or by telephone on (07) 282 0174.