February 18 2020
Law Commission to review conflicting inheritance laws
In late 2019 the Law Commission reported back to the government on its review of the Property (Relationships) Act 1976 (PRA). Discussion on Part 8 of the PRA that deals with the division of relationship property on the death of a spouse or partner was specifically excluded from the scope of that review.
Acknowledging the issues that could arise by not addressing the division of property when a spouse/partner dies, in December last year the government asked the Law Commission to review the law of succession – that is, the law that governs who inherits a person’s property when they die.
A particular focus of the Law Commission’s succession project will be the conflict between two statutes – the PRA and the Family Protection Act 1955 (FPA).
Property (Relationships) Act 1976
The PRA provides that when a spouse or partner dies, the surviving spouse/partner must choose ‘Option A’ or ‘Option B’.
Option A requires the survivor to apply to the Family Court for a division of the relationship property which means:
All the property that the deceased spouse owned is presumed to be relationship property, and the onus is on the executor to prove that property is not relationship property, and
Unless a contrary intention is expressed in the will (or a court orders otherwise), the survivor forfeits any benefit they would have received under the will or on an intestacy (that is, when there is no will).
In Option B, the surviving spouse or partner receives what they have been given under the will or what they are entitled to if there is an intestacy.
An example of how both options could work is below.
Jack and Jill had been in a relationship for 10 years when Jack died. They did not have a pre-nuptial/contracting out agreement. The family home, worth $750,000, was owned by Jack, and he and Jill had joint savings of $150,000. Jill also owned a rental property in her sole name (her previous home) worth $500,000. In his will, Jack left Jill a life interest in the family home, with the home going to his children after Jill dies.
If Jill elects Option A, she must file proceedings in the Family Court for a division of relationship property. If successful, she could receive half the value of the family home and half the money in the bank account. She runs the risk, however, that the increase in value of her rental property could be found to be relationship property, and she would also have to move out of the family home.
If Jill elects Option B, she may keep her rental property, all the cash, and she can keep living in the family home.
Family Protection Act 1955
The FPA allows spouses and children who have not been adequately provided for in their late spouse or parents’ wills to make a claim on their estates. (We have an article on page 4 on the recent Carson case where disinherited children claimed under the FPA.)
Conflict between the PRA and the FPA
A conflict that commonly arises is when a parent in a second or subsequent relationship leaves their entire estate to their surviving spouse or partner, and nothing to their children from previous relationships. There is currently no ability for financially independent stepchildren to make a claim against a step-parent’s estate; this means they must either reach agreement with their step-parent, or they must file a claim under the FPA against their deceased parent’s estate.
Another problem is that the surviving spouse or partner is commonly appointed as the executor of the estate and, worse, the couple’s property is often held jointly, meaning its ownership passes by survivorship to the surviving spouse.
The effect of this is that there is often no estate against which to claim, and so the children must first ask the executor to apply for a division of relationship property.
This could be even messier where, as is common, the surviving spouse is also the executor. He or she may be reluctant to make that application and, therefore, a preliminary application must be made to replace them as executor. The three-stage process therefore involves applications:
To replace the executor
For the classification and division of relationship property, and then
For a share of their parent’s portion of the relationship property.
All of this makes for very expensive litigation for families. We hope that the Law Commission reviews both the ability of stepchildren to apply for provision from their step-parent’s estate, and ways in which the process may be simplified to make it more accessible and cost-effective.
It is also timely to review the 20 or so disparate statutes (such as the Law Reform (Testamentary Promises) Act 1949), some of which stretch back 100 years, that currently deal with succession in New Zealand.
New Zealanders may want to take part in a discussion about our society’s belief as to who should be entitled to inherit property. Themes to consider could include:
Whether the rights and needs of the surviving spouse or partner should take precedence over a deceased’s children from prior relationships. If so, to what extent?
The expectations (or rights) of financially-stable adult children to any inheritance.
Claims on an estate being limited to those in ‘need’.
An ability to ‘claw back’ assets that have been gifted to a trust during the deceased’s lifetime with the intention of defeating a spouse or children’s ability to claim.
If you would like to contribute to the discussion, click here.
In the meantime, however, if you have any queries on the current succession laws, please don’t hesitate to contact us.