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Good marriage advice

Planners need to be cautious when dealing with matrimonial property. Ian Watson explains the Matrimonal Property Act and its implications.

Wednesday, April 22nd 1998, 12:00AM

by Philip Macalister

The impact of the Matrimonial Property Act has been highlighted in a recent Consumer magazine survey. Planners need to be cautious when allocating income, making investments dealing with succession to property or estate planning as the law makes far-reaching presumptions that override the ordinary rules of ownership. Ian Watson explains.

Matrimonial property rules have existed in New Zealand since 1963 but were based upon the tangible contribution of each partner to a marriage. Prior to this the law saw marriage as a property contract and women pretty much as a chattel, the husband having conjugal rights and where the wife could be in desertion and where the fault principle applied in respect of maintenance and child custody.

The Matrimonal Property Act was passed in 1976 and follows trends set in California and New South Wales where conduct was less important and the intangible contributions were given equal weight. The principle being that the typical role of husband as breadwinner could only exist if the good wife kept the home and hearth running smoothly.

The Government is, this year, reluctantly preparing legislation to enfranchise de facto married couples. This may raise more issues than it may resolve and it will require advisers to become adept at giving advice in this area.

General principle

The contribution of spouses is deemed to be equal from the time when their marriage partnership has reached three years of age.

It is a scheme of deferred property ownership, the conventional rules of property ownership apply until either spouse invokes the Act by applying to the court or by agreement between them. The code then applies to the property existing at that time and it cannot be retrospective.

The conventional law applies unless a spouse invokes their rights under the Act during their lifetime as they cease on death. The rights under the Act do not exist unless exercised. The substantive rules operate in the meantime. After death the claimant must sue under the old 1963 Act. The survivor may sue the estate of their spouse or the estate may sue the survivor.

The Act classifies property and divides it upon the premise that property is owned equally unless you can show it is within certain narrow rules. It also divides the property into two groups.

Group A: Separate property from an inheritance, gift or owned before marriage which is not shared.

Group B: Property owned by both spouses or acquired by either after marriage. This is divided into:-

      1. the home and chattels and
      2. then all the rest such as business assets.

A financial planner needs to be diligent to ensure their advice only changes assets in Group A into Group B when this is desired by the spouse detrimentally affected.

An inheritance or family gift can easily become matrimonial property of both parties where it is used for the benefit of family or is intermingled with matrimonial assets.

Remember also that the converse partnership side of an asset is debt. A personal debt can be paid off from the assets or revenue of the other spouse. If the couple separate, the debts would be brought into account as the equity of the parties is what is divided in a global settlement.

Like assets these are personal debts and matrimonial debts.

Injustices can occur with any community property regime such as the Matrimonial Property Act. A spouse with an extra-ordinary talent for accumulating assets is likely to receive credit only where it is truly extraordinary. The partner who is a dutiful and economical to the point of personal hardship to help the other achieve a tertiary qualification is less likely to see recognition unless this is truly obvious.

The courts apply the clear principle of making a clean break without getting bogged down in detail. Unequal contributions are not given recognition unless they create a large injustice. The courts will not be daunted by difficulty of calculation but will take a robust approach.

The Act has worked remarkably well. The consistency of its application over 22 years means litigation is greatly minimised. Small differences are not argued. The certainty of a clear result overrides small injustices. The benefit of the regime is the near certainty in its application.

Court Discretions

The courts retain some discretions to avoid injustice and also in these cases:

  1. Where property owned before marriage is mixed with joint property
  2. Where no matrimonial home is owned at all
  3. Disproportionate contributions
  4. Extraordinary circumstances
  5. Re-opening an Agreement which is unfair and where independent and proper advice is not received
  6. Rights of creditors.

Matrimonial Property Contracts

Such a broad sweeping Act which grudgingly allows exceptions to equal sharing provides wide powers for parties contemplating marriage or who are married to enter into a written contract. They can agree that the Act shall not apply at all, or say how it shall apply to all or any part of their property.

Such agreements used wisely can provide opportunity for estate planning, gifting without duty and taxation benefits flowing from the altered ownership of income earning assets.

The Act is generous in allowing forestry, livestock business assets and debts to be transferred without duties and taxes provided the recipient does not receive an end result exceeding half of the assets of the marriage.

A Matrimonial Property Agreement can accelerate gifting into a trust. An asset is transferred one half to the spouse to enable both to utilise the duty free gifting allowance of $27,000 each.

Until recent years a court order was sought to vest the asset in the trust by agreement of the parties. This means of an instant reduction of an estate was quashed by a direction from Parliament to change judicial attitudes to the use of the courts to avoid estate duty. As we still live in the shadow of estate duty other means need to be used.

Estate planning

As so much of the application of the code is derived from a body of case law since 1976 legal advice is a necessity. Any advice in this area should be qualified with a strenuous direction to seek advice.

A planner needs to hear warning bells but advice is a matter of specialisation.

The Act sets out some presumptions but experience is needed to know how to use these presumptions. The advisor can keep the client clear of problems or use the Act to positive advantage as well.

The Act can be used for protection from creditors, gifting, income splitting, avoiding asset and income testing, taxes, child support, avoiding testamentary promises or Family Protection claims.

Advice to use the provisions of the Act for estate planning purposes needs caution as the transfer of assets will be upheld for all reasons upon a subsequent matrimonial separation. Once assets are matrimonial property they remain so without agreement to the contrary.

Consider the following situations:

  1. A spouse has an inheritance received in cash:
    1. If he or she invests it in a life insurance product or a superannuation fund, this may be matrimonial property.
    2. If it is invested in a Unit Trust separately administered with all income reinvested it will remain separate property.

      Superannuation and life insurance are assets dealt with in a particular way by the Act.

    3. If the Mortgage loan of the family home is repaid it will be lost into matrimonial property.
    4. If it is gifted to the other spouse, it will be owned by the other spouse as separate property and completely beyond any claim.
    5. If it is loaned to the spouse or their Trust it remains separate property but beware how any income from it is used.
    6. If he buys a boat or bach for the family it is matrimonial property.

Why not consider the use of a Trust or a company when in doubt and the size of the funds or asset concerned warrants this.

  1. Consider the position of debts again.
  2. In calculating the value of matrimonial property for division under Section 20(5) certain debts can be deducted first.

    If the spouse concerned borrows money for the family home but secures it totally on his or her own separate property then it will be his or her own debt and no credit for it will be given.

    Conversely, if the spouse borrows money for a completely personal reason this must be deducted from matrimonial property if the debt exceeds the value of that spouse’s separate property.

  3. The parents sell the beachhouse to their daughter and leave the purchase price as a debt owed to them. The parents gift the loan off over the years but the daughter’s marriage breaks down.

The beachhouse was purchased rather than gifted. It was the loan that was gifted. The beachhouse is matrimonial property and no credit is allowed for the gifts from the parents.

Valuation

The general rule is that all assets and debts are taken into account at the date of the court dealing with a dispute or when a settlement is reached. The courts have discretion. The assets generally are not valued at separation. Assets like superannuation, life insurance and homesteads have unique methods of valuation.

Finally

Explaining the matrimonial property regime is simple in that the law Act is only 57 Sections for such far reaching results. It is very complex to do so when it can be taken simply and applied to a complicated factual situation. To be readable to the lay person and yet useful a risk is taken in simplifying the Act as this article does.

For instance; when separate property is mixed with other property that is matrimonial property it is not necessarily lost. It is only lost into matrimonial property if after intermingling it has made designation as separate property unreasonable or impracticable. When this has occurred requires legal advice.

Ignore the warning and you may well become expert at the law of negligence.

Disclaimer: For these reasons this article is in no way to be construed as advice or to be relied upon by any person. No responsibility is accepted by the writer.

Ian Watson is a partner in Te Aroha-based law firm Gilchrist Burns and Johnston. To contact him by email click here

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