Buying property with a partner – whether partner by marriage or otherwise – is not a decision to be made lightly. On the one hand, it can signal the start of a really exciting new chapter in your lives. On the other hand, the stress of it all, or just the stress of life in general, can, sadly, see couples drift apart. Break-ups are hard enough without throwing a huge asset, such as property, into the mix. One way people safeguard themselves is to put property into a trust. But is it the right option for everyone? And is it the only option to financially protect yourself in the event of a split?
In this Canstar guide, we’ll take a look at how – and why – trusts may be used when it comes to property and relationships, and whether or not there are other alternatives.
Property and relationships: Tapping into the Bank of Mum and Dad
Supply not meeting demand, skyrocketing house prices and wages not keeping up with property inflation have all contributed to a perfect storm for would-be first home buyers. Jokes aside of forgoing extravagant brunches, there are few New Zealanders who would deny it’s a challenging time to get on the property ladder. One of the ways New Zealanders overcome this challenge is to tap into the Bank of Mum and Dad. Borrowing money from parents and in-laws can make the impossible property dream a reality for Kiwis who long to own their own stretch of white picket fence. But while establishing a trust can be a viable solution to a tricky property problem, it presents its own set of costs and challenges.
What does putting your property in trust actually mean?
A trust is a legally binding arrangement between three main parties and is documented in a trust deed. The three parties are the settlor, the trustee and the beneficiary. Here’s how each of the parties is involved:
- The settlor creates the trust and transfers the first assets to the trust.
- The trustees administer the trust – i.e. make decisions over whether to sell trust property, and consider distributions.
- The beneficiaries are those who stand to benefit from the trust – either income, capital, or the use or enjoyment of assets.
The settlor does not own the assets in the trust. Rather, the assets belong to the trust. You can employ professional trustees, whose role it is to look after the beneficiaries.
On the back of the Trusts Act 2019, which comes into effect next January, the obligations of those involved in a trust will be tightened, and more information will be made public. Compliance duties will also increase the time and cost of administering some trusts, so make sure you do your homework before choosing the trust option. A key reason for the law change is to provide more clarity around when trustees are required to provide information to beneficiaries, so that beneficiaries can enforce their rights.
About 325,000 New Zealand properties have trusts involved in their ownership structure. And per capita, New Zealand has four times as much real estate in trusts than comparable countries, such as Australia and the UK, according to the NZ Herald.
Property ownership in a de facto relationship
If you and your partner live together in a de facto relationship, thanks to the Property (Relationships) Act any property that you share during that time is liable to be evenly split on separation. According to New Zealand law, a de facto relationship is defined as being between two people – regardless of gender – who are both over the age of 18, are not married or in a civil union with each other and who have lived together as a couple for three or more years.
After those three years are up, unless you’ve entered into a legally binding agreement with your partner concerning property/asset ownership, a 50/50 split of assets will apply. This means if you’ve tapped into the Bank of Mum and Dad to buy a house (regardless of whether it was before or after you entered your de facto relationship), your ex will be eligible for half of the home your parents helped buy.
This is where a trust can help. If a house is owned by a family trust, and the ex partner is not a beneficiary, then it’s unlikely that they’ll have a claim on the house after splitting up. So this is a good way for parents to safeguard that their investment in their family’s future remains in the family. However, there is a caveat: if a trust is formed after a relationship begins, it may be the case that some or all of that trust is then regarded as jointly owned “relationship property“.
What are the costs associated with trusts in New Zealand?
While there are some good reasons for choosing to put a property in a trust, it does incur costs. For example, legal fees to set up a trust can be upwards of $1000. On top of this, there are ongoing accounting costs, which vary depending on the complexity of the arrangement, and additional costs should you decided to wind up the trust. To reduce some of these costs, you can appoint a friend or other independent person as a trustee but, if they don’t know what they are doing, there’s a potential the trust will become invalid.
Is there an alternative to putting property in a trust?
If the idea of putting a property in a trust doesn’t sit well with you, you can create a Relationship Property Agreement or a Contracting Out Agreement, instead. This allows a couple to agree on their own terms the status and ownership of their property, and how it should be divided should they split. A couple can enter into one of these agreements at any time during the relationship, although it’s preferable (and perhaps easier) if it’s arranged before the three-year mark. These types of pre-nup agreements are typically used when one partner brings substantially more assets to the relationship and wants to protect them.
What should you consider when setting up a relationship agreement?
According to the NZ Law Commission, here is what you should include in your relationship agreement:
- What property is intended to be owned together, and in what shares (equal or some other proportion).
- What property is to remain the separate property of each party.
- Whether or not any property should no longer be classed as separate property because it has been, or will be, used jointly.
- Who owns any gifts made by one party to the other, or any gifts from third parties.
It’s important to note that to be legally binding each party needs an independent lawyer, otherwise the agreement will not be binding or enforceable. It’s not something you can knock out over a couple of glasses of wine at your kitchen table!
Don’t forget about your home loan
Trust and relationship agreements are just part of the key financial aspects to think about when buying a home, no less crucial than working out how to secure the best home loan and provider. Canstar recognises how mind-boggling this process can be and is here to simplify things. To help you compare home loan rates, fees and features, including for first home buyers, we’ve a range of comparison tools.