My adult daughter - my only child - has been living with her partner for nearly four years in a relationship that may or may not last - it seems to be up and down.
In my will, I've left most of my estate to my daughter. When I die, she's likely to use the inheritance to buy a house, or upgrade her house if she has bought one by then. There's likely to be enough in the estate for her to buy a house without a mortgage.
I'm concerned that she and her partner might break up after the house purchase, and that he would get half the house. I like the young man, but I don't want to see him walk off with half my hard-earned money at the expense of my daughter.
I'm not keen to set up a family trust, with all the complications that seem to go with it. Is there another way I could set things up - a stipulation in the will or something - so that my daughter could buy a house with her inheritance and keep it if she and her partner split up?
Also, would the same suggestion apply if she did something else with the inheritance, such as set up a business?
Ask a simple question or two and - well let's just say you don't get simple answers.
Under the Property (Relationships) Act 1976, if one partner receives a gift or inheritance, it generally remains separate property unless it has been "intermingled" with relationship property, says Deborah Hollings Chambers QC, who specialises in this area of law.
But there are exceptions, including the home and chattels the couple were living in before they separated. "After three years of living together as a couple it becomes relationship property, and the equity in it will be divided 50/50 between the couple regardless of the source of the funds having been inherited," says Hollings Chambers.
However, she says, there are three ways of keeping your daughter's inheritance as separate property:
Your daughter and her partner could sign an agreement under which the property has been "designated separate property" under section 21 of the act. Each partner would need their own lawyer.
Hollings Chambers adds, though, that "these contracts are subject to the same rules as any other contract, for example if there is misrepresentation or duress they can be challenged". Furthermore, a court can set aside an agreement if it "would cause serious injustice". A challenge is more likely if a couple separate "after many years together, there are children, and her partner is financially vulnerable as a result of the separation".
Still, she says, these agreements are increasingly being upheld, particularly since the act was extended and expanded in 2002.
Your daughter could spend the money on something other than a family home. "She could do this without an agreement, for example buying a rental property or commercial building or other investments and not letting her de facto partner be involved at all in regard to that business." No intermingling!
You could set up a family trust. "If the trust buys the property it is not relationship property under the act because it is not owned by your daughter even if it is used as the family home."
"Because the trust would effectively be what I call a 'separate property' trust and it does not have relationship property being transferred to it, it is far less likely to be attacked under the legislation," says Hollings Chambers.
But, again, your daughter would have to make sure she didn't intermingle relationship property. "For example, if she were to buy a house in the name of the trust and use income from either her or her partner's earnings during the relationship to pay a mortgage on the property, then her partner will have a claim for compensation. "Understandably they have applied the fruits of the relationship to the benefit of the trust, and it would be unfair not to recognise that."
Hollings Chambers adds, "If you do decide to use a trust I suggest the best option is both a trust and a section 21 agreement setting out that the trust interests remain your daughter's separate property. This gives double protection and the best available protection to her, particularly if she is going to use her inheritance to buy a family home.
"It also means her partner is made clearly aware of the consequences of the financial relationship and can make decisions without being consciously or unconsciously financially exploited."
If - sigh - you decide a trust is the way to go, how much would it cost? Hollings Chambers says a colleague tells her "a trust for this purpose would not be difficult and would cost about $480 plus disbursements to establish".
And after that? "Assuming the trust is only a landholding trust with no rental income, it will not have to file tax returns. However, a lot of people prefer to have a professional trustee to make sure the trust is run properly and cannot be challenged on the basis that it is a sham. That costs money and also there is a certain amount of work in making sure that trust minutes and trustee decisions are made properly and in accordance with trustees' obligations. Usually that involves fairly regular professional input, which incurs fees."
She adds, "Of course, your daughter could just try and run the trust herself. The risk of a poorly run trust is that it is challenged in the court and as a consequence does not offer the protection that it was designed to achieve."
Overall, says Hollings Chambers, "these are somewhat complex issues and often difficult because of potential adverse impacts on loving relationships".
Quite. It's not easy to say to your beloved - especially in the week of Valentine's Day - "if we split, you're not getting my stuff".
Hollings Chambers' final word: "In my view seeking early legal advice to make sure the matter is dealt with properly by both you and your daughter is well worth the cost, to make sure the option you choose best suits your family."
My final word: What a tangled web we weave when first we practise to look after partners in de facto relationships. I've always supported the property relationships act, and still do. But it does complicate life.
Just a quick note re reverse mortgages. You mentioned recently that ASB was the only game in town for this type of product.
I thought you might like to know that SBS Bank (sbs.net.nz) also offers a reverse mortgage product called Advance.
Another example of the collective wisdom of readers! Thanks.
Tenant in own home
Just thought it was about time to add my comment on reverse mortgages, as my wife and I looked at this some six to seven years ago.
We got all the brochures but felt a little uneasy about aspects of the deal - namely we would no longer have a say in any alterations that we may want to do later. Also the lender has the right to drop in and inspect "our" property at any time! We expressed these concerns to our solicitor, and when asked if he thought it was a good idea, his emphatic answer was "No!"
It looks like you become a tenant in your own home and your equity dwindles with time. I feel sorry for the couple in your January 26 column who would appear to not have had good advice from their solicitor.
When we retired three years ago, we sold our family home, which was mortgage free, relocated south of Auckland and downsized. This gave us a bit of surplus cash to enable us to do alterations to the "new" home.
Moving to a cheaper town is a great solution for many - as long as you can still see plenty of those who matter to you.
I agree that those aspects of reverse mortgages sound really unappealing. Other people considering taking out such a loan should check that they wouldn't find themselves under similar restrictions.
On the other hand, the next letter points out some positives of reverse mortgages - albeit from someone in the industry.
I enjoyed my normal Saturday morning ritual of reading your column a little more than usual recently with some references to the reverse mortgage sector - in which I work.
Engagement with the family is critical - especially before they make this decision to take a reverse mortgage out. We encourage all our borrowers to do this - 75 per cent do - the remaining have no dependants or are not close to them. The family can often provide a far better solution. Avoiding compounding interest is certainly wise and making sure there are no surprises with the family is also prudent.
However, one additional point I wanted to make was the complications of a varied number of heirs. It gets complicated - and where one can help, others may not be able to, further complicating an already stressful time. And it's in those circumstances a reverse mortgage can help simplify things.
The couple are looking after themselves - that's an achievement when they started out thinking the state would be able to help look after them, and they wouldn't outlive their savings! Plus, inheritances are much less relevant these days, with aged care costs eating into reserves and increased longevity meaning, at time of passing, the kids are likely to be retired in any event.
Our view is that people should feel proud of the fact they are not a burden to their children, rather than feel guilt about eroding their inheritance. (And the negative equity guarantee - which means the loan can never be bigger than the proceeds from selling the house - protects the heirs of course.)
Indeed, if a family can come up with an alternative to a reverse mortgage, that can work well. We've had a couple of letters along those lines in recent columns.
However, as you say, if some heirs can help and others can't, that can lead to problems. The ones who can't help are likely to be worse off. Later on when the parents die, it might be hard for them to accept that they receive a smaller inheritance than their siblings.
On inheritances, I could add that, with most baby boomers having fewer children than their parents had, it's not so bad if estates are smaller. They are usually split among fewer heirs. At least that gives us some justification to SKI - spend the kids' inheritance!
Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.