What is a contracting out agreement and why might you need one?

Tuesday 10 December, 2024

A contracting out agreement, also known as a pre-nuptial agreement (pre-nup), is a legally binding agreement signed by the parties to a relationship in the presence of lawyers. A contracting out agreement outlines the property owned by the respective parties and whether it will be classified as one party’s ‘separate property’ or ‘relationship property’. Contracting out agreements can also protect trust and company interests and property (despite this not being personally owned by the parties to an agreement).

Relationship property is any property that is:

• Connected to the relationship.
• Owned jointly or in shares by you and your partner.
• Acquired during the relationship because of the joint efforts of the parties (whether by way of financial or non-financial contributions).

Relationship property can be the home you and your partner reside in habitually together, household chattels such as furniture, income earned during a relationship, vehicles, bank accounts, Kiwisaver, and life insurance policies.

Relationship property is generally divided equally between the parties to a relationship if that relationship ends.

Separate property is any:

• Property owned prior to a relationship and kept separate from that relationship.
• Inheritances (if not mixed with relationship property).
• Gifts.
• Property protected as separate property in a contracting out agreement.

If a relationship ends, separate property is retained by the party who owns it.

Entering a contracting out agreement is the only way to protect assets that you wish to keep separate from being divided equally between you and your partner in the event of separation or death. Simply coming to a verbal agreement or drafting your own contracting out agreement will not be legally binding or enforceable. For a contracting out agreement to be binding, each party needs to receive independent legal advice, have their signature witnessed by the lawyer advising them, and the agreement certified by the witnessing lawyers.

I want to protect my assets but my partner refuses to talk about a contracting out agreement. What can I do?

The only way to protect your assets is by entering a contracting out agreement. In this circumstance, your best option is to ringfence your assets from the relationship by keeping them completely separate from your relationship. This could include not residing with your partner in a property purchased by you prior to a relationship,  and keeping gifts and inheritances in bank accounts in your sole name. However, taking these measures will not guarantee that these assets remain your separate property and will not prevent your partner from being able to bring a relationship property claim against them.

It is possible for separate property to be intermingled with relationship property to the extent that it is converted into relationship property, in whole or in part.  For example, receiving an inheritance and paying this into a joint bank account then applying it to the mortgage secured over the family home will transform that inheritance into relationship property.

If your partner is refusing to talk about a contracting out agreement, you need to be mindful that, after living in a de facto relationship for three years or entering a marriage or civil union, you will start accumulating relationship property and the presumption of equal sharing will apply to any assets deemed to be relationship property.

I’ve received an inheritance. How do I keep it separate?

To keep an inheritance separate it needs to be paid directly from the estate into a bank account in your sole name.  However, if the inheritance is intermingled with any relationship property funds (i.e. funds from joint account or sale proceeds from joint ventures) then the inheritance will no longer be separate property.

Similarly, the inheritance should not be spent on relationship property, for example, on paying down a mortgage secured over the family home shared with your partner as once this happens, the inheritance loses its separate property status and becomes relationship property to be shared. 

If you want to be 100% sure that your inheritance will be protected, the best way of doing so is to enter a contracting out agreement which protects the inheritance as your separate property. Our experts can help, get in touch below.