AUGUST 5, 2012 ! SUNDAY STAR"TIMES D15

BUSINESS

Pre-nup will set the ground rulesTalk it over: The experts say it’s best totalk about a pre-nup at the beginningof a relationship. Illustration: Suzanne White

For business ownersand others a ‘‘pre-nuptial agreement’’can provide certainty,writes GraemeSmith and LyndaKearns.

SECTION 21 agreements, inwhich couples contract out of theProperty (Relationships) Act, cansave a lot of financial pain forbusiness owners and ambitiousprofessionals should therelationship fail.

While the act provides for astatutory regime of equal sharingafter a relationship of three years,there is a lot of scope fordiscretion by the court.

Contracting out of the act bymeans of a Section 21 Agreement(colloquially called a pre-nup)provides certainty and may beespecially important when thereare unequal contributions by thetwo partners, or when thepartners have children from aprevious relationship.

The general rules forapproaching the preparation of acontracting-out agreementinclude getting the timing right.

Don’t go to your lawyer to drafta Section 21 on the eve of yourwedding. It’s best done at the startof a relationship, when you can beless emotional and more clinical.

Avoid the too commonresponses: “Don’t you love me?”or “Don’t you trust me?”

Contracting-out agreements arecommon now and are notindicative of a personal issue. Thisneeds to be approached in abusinesslike manner. Talk to eachother first and work out the basicsof your agreement before you seekprofessional advice.

It can be easier to talk first to anexperienced accountant, who willhelp you to consider what you aretrying to achieve with anagreement, and to “do the maths”.Then talk to your lawyer. This isthe basis for a robust agreementthat considers both financial andlegal implications.

Couples need to understandthat unless it is a fair agreementthen the disadvantaged spouse’slawyer is unlikely to certify it andit won’t be signed.

Don’t simply agree and thinkyou can get it overturned in courtlater. It’s very hard to do that.

Review the agreementperiodically as you would yourwill – circumstances, intentionsand contributions can change,especially as we get older.

1. The first-time relationshipJack and Jill are young

professionals aged in their late 20sflatting together with others. Arelationship has developed andthey are thinking of moving outand buying their own home. Jillearns twice as much per annumas Jack, but Jack has $50,000 insavings. While they think they will

get married one day, at this stagethey are nervous aboutcommitting to an equal sharingfinancial regime. They want anagreement that will protect Jill’sgreater income earning power andJack’s savings. They also want torecord how they will each fundtheir new home and what willhappen if they break up.

The professionals say:Jack and Jill are correct that the

PRA will mean the home becomesrelationship property after threeyears, and possibly sooner if Jillbecomes pregnant. Some peoplebelieve equal division under thelaw applies after two years, butthis is not the case.

In today’s society, it is a muchmore common scenario for youngpeople to make “casualpurchases” of property. Perhapsthey start out as flatmates, as Jackand Jill did, or they may alreadybe in a relationship. In either case,it is the date that the de factorelationship begins that counts,not when the house is bought. Inthe event of a breakup, wesometimes find there can be a

disagreement over that date.It is common if a young person

is a beneficiary of a trust that thetrust deed will require him/her tohave a Section 21 agreement inplace with his/her partner.

2. Second time aroundMike is recently divorced and

has come out of his first marriagewith business assets. His formerwife retained the family homewhere she lives with their threeuniversity-aged children.

The business has beenunderperforming in the last fewyears, but has just brought tomarket a new product that is likelyto bring substantial growth. Mikehas met and fallen in love withMindy, also recently divorced.She’s 10 years younger and hastwo children at primary school.She lives in her own home, whichshe plans to sell so that the couplecan buy something bigger for theirblended family. Their plan is touse Mindy’s equity, which willentitle her to own 70 per cent ofthe home. Mike will raise amortgage to cover his 30 per cent

share of the home.The professionals say:The priorities of second-time

around couples are complicatedwhere there are children involved.Protecting assets for the childrenis usually the No 1 priority.

After three years, any homepurchased together will berelationship property. In the eventof a breakup, the PRA provides forthis to be shared equally. But aSection 21 agreement can allowfor a different scenario, as in Mikeand Mindy’s 70/30 agreement. It’salso important that theiragreement considers how costs ofthe home are shared, such asmaintenance and alterations.

For Mike, protecting thebusiness as part of a familysuccession plan is one of hisobjectives. A Section 21agreement enables him to ring-fence the business and have theincome he earns from it treated ashis separate property (eitherwholly or in part).

Mike should be mindful thatMindy might have a legitimateclaim to a portion of the gain in

the value of the business thatoccurs during the relationship.Where the relevant PRAprovisions apply, the law convertsthe gains that accrued to theseparate property as relationshipproperty. A Section 21 can coverthis too.

The act considers monetary andnon-monetary contributions. Tenyears is a long time in arelationship so care andforethought is required in puttinga Section 21 agreement together.The result is less fair if one personis excluded from assets becausetheir contribution, which may benon-monetary, is not recognised.“Mr or Mrs Wealthy” mightrequire their less well-off partnerto sign away rights to assets andinstead agree to a lump-sumcontribution. But what happens ifthe “wealthy partner” loses his/her health and the “spare cash” isused up in medical care, leavingnothing for the surviving partner?

3. The farming orintergenerational familybusiness

Terry and Beth have worked tobuild up the farm (or a familybusiness). Their two sons both liveand work on the farm. Both arerecently married and looking tobuild family homes on theproperty. Terry and Beth want tosee the farm pass on to their sonsand grandchildren. They get onwell with one of their newdaughters-in-law; the one thatgrew up on a farm and has helpedout with recent calving. The othergrew up in the city and isemployed in town as anaccountant (and doesn’t like thedesign of the home she and hernew husband are going to buildon the farm).

The professionals say:Farming and family businesses

are an area where there is a needfor very clear financialarrangements. Thosearrangements must address bothcommercial, succession andrelationship property objectives.Parents may want to keep theassets within the family. Truststructures can ensure the assetsare protected from partners ofbeneficiaries (children) who canbecome intent on seeking to sharein the value of the asset if theirrelationship fails.

Graeme Smith is an associate ofWilliam Buck. He assists family lawyersand their clients in claims underrelationship property legislation.Lynda Kearns is a family law barristerat Level 2 Shortland Chambers andspecialises in relationships and trustproperty issues.

27% The rise in the value of residential building consents in Junecompared with June 2011, according to Statistics NZ. The total valuewas $456 million, driven by a doubling of consents in Canterbury.