The days of hiding assets in trusts to stop children inheriting or ex-spouses from claiming relationship property are numbered as a result of changes proposed by the Law Commission. Jane Phare reports on what's in store for New Zealand's inheritance laws.
Trusts may be rendered useless in terms of keeping property out of the hands of spouses and children if recommendations by the Law Commission are adopted by the Government.
Parents who dislike their children, or are estranged from them after a falling-out, have successfully used trusts for years to keep property out of the grasp of their offspring, effectively cutting them out of the will. And trusts have long been a stumbling block for ex-spouses and partners battling to get their fair share of a property settlement after separation.
But the Law Commission has trusts in its sights, recommending in two weighty reviews - one of the inheritance laws and one of the Property (Relationships) Act 1976 - that the courts be given greater powers to access trusts in cases where they have been used to prevent a person from getting their fair share.
Currently property that falls outside the estate, including assets in trusts and co-tenanted family homes, can't be contested under the inheritance laws. In the case of a co-tenanted family home, when one partner dies the property automatically goes to the surviving partner, often preventing children from a previous relationship from inheriting a share.
Estate-planning lawyers spoken to by the Herald say it's relatively common for parents to cut a child, or their children, out of their will, often as the result of an argument or because they hadn't spoken for years. Sometimes estrangements happen after a parent or an adult child gets a new spouse or partner, and tensions in the family unit escalate.
To make sure their offspring can't get their hands on any of the estate, will-makers set up trusts so that children can't claim under the Family Protection Act. Now 'claw-back provisions' recommended by the commission mean once the new Inheritance (Claims Against Estate) Act becomes law, trusts will no longer be secure. And the same applies to the commission's recommendations for the proposed Relationship Property Act.
Nicola Peart, emerita professor at the University of Otago, says the inclusion of claw-back provisions will be important.
"That's going to be quite dramatic because a lot of people are putting their property into trusts to avoid the Family Protection Act. Up until now that has been a 100 per cent perfect defence."
Peart, who specialises in succession law, trusts, and relationship and family property law, says it is common for people to set up trusts to make sure their children "don't get a bean".
"In some cases they can't stand their children, believe it or not," Peart says.
Once courts have the power to access trusts under the new act, the question will be what is an appropriate amount for children to be left. The issue can become extremely complicated when blended families are involved, Peart says.
A common scenario under current laws is for a father/husband to die, the second wife inherits the estate, and she leaves all the property to her children from a previous marriage, leaving children from the husband's former relationship with nothing.
Emailed responses from the Herald's story last week on the inheritance laws outlined similar stories, some years old but still hurting. One woman said her mother had died in 1967 and her father remarried a year later. He died six years later, leaving the family home to his new wife.
"The day after the funeral I started gathering my personal belongings and sentimental items belonging to my mother. She refused to allow me to take my mother's items (china mostly, my father had always verbally said they were mine). Her comment was, 'they are mine, the house and chattels were left to me'."
The stepmother, who had no children, died two years ago and left the house to her sisters.
"I had a brother," the writer said. "He was cut out too."
Another said he was one of five siblings and that his parents divorced in 1976. His father remarried and had another son with his second wife. His father died in 2006 and, never having seen a copy of the will, he assumed his half-brother would eventually inherit the estate.
One woman wrote to say her grandfather left a large family farm to his son in the 1970s but only a small amount of cash to his daughter, the woman's mother. Two years later the son sold the farm for $1.2 million, bought more property and made money off that. Meanwhile the woman's mother was working part-time jobs to make ends meet.
"She sadly passed away some time ago but was extremely disappointed and sad how things played out. She also warned us as well about wills in the future," she said.
"We believe that people should have the right to contest a will, no matter at what age, if they believe they've been unfairly or purposely left out."
Out with the old laws, in with the new
The new Inheritance Act will get rid of all the old statutes, some of them nearly 70 years old, in an effort to simplify the laws of succession and to reduce the number of cases going to court.
But some lawyers doubt that will be the outcome. They say on the one hand the commission's contentious recommendation that children aged 25 and over will not be able to make a claim against the estate will drastically reduce the number of legal challenges. But on the other, recommendations such as the ability for stepchildren to claim under the family provision awards will lead to increased claims, as will the claw-back provisions against assets outside the estate.
Peart suspects that adult children aged 25 and over will also argue under the 'contribution' claim, citing financial or practical contributions made to the estate, and care of parents. And she expects courts will be sympathetic based on the Family Protection Act, which dates back to 1900, that says parents should provide for their children.
"It's so much part of the expectation in New Zealand society that you cannot disinherit your children," she says. "And if you do, they've got a jolly good chance of challenging your will and getting a share of the estate."
"It's not about the bricks and mortar. It's about the value of the inheritance in a much more sentimental, personal way that is important."
Solicitor Juliet Moses, with TGT Legal, favours moving away from the notion of moral duty and sees advantages in the commission's emphasis on clarity and certainty. But she thinks the cut-off age of 25 is too severe, arguing there should be exceptions such as the case of a child who was abandoned by a parent at a young age, and had received no financial or emotional support.
Moses and other lawyers involved with succession planning and wills advise clients who want to cut out a child to leave them a nominal amount, something like 10 per cent of the estate, to mitigate the chances of a legal challenge in court.
"Even if that child is very well off they will still be successful in court," she says.
Grievances about the will are often not only about the money, says barrister John Stirling of law firm Turner Hopkins. It's more about hurt and resentment.
"Often it's nothing about the dollar value, it's the perception or feeling that for some reason 'Dad loved my sister more than he loved me.' And unfortunately, that may have been the reason why the will-maker has done what they've done," Stirling says. "It's a terrible situation. People are grieving and then they see the will and go, 'What the hell?'"
He too thinks it's better to leave a nominal amount to the child, plus a note explaining the reasons behind the decision to make it clear to a judge if the matter later went to court.
Another issue that Stirling sees regularly is when a second spouse or partner has been left a life interest in the estate, with the balance left to children from the will-maker's previous relationship.
"But often there's very little left. And when you're in your 40s or 50s and the new partner is not much older than you, you're not going to see very much potentially."
He's seen cases where the will-maker appoints the new partner as executor of the will and also a life tenant.
"That's just not transparent or independent enough in my opinion."
Lawyers also warn that it is better to treat children equally to prevent family fallouts after the will-maker has died. And they warn against giving one child more power over another in terms of the will - for example making one child the executor - which can cause tension and suspicion.
Moses says that although many inheritance claims are settled before going to court, the damage done to family relationships is often irreparable.
"It becomes incredibly personal and emotive, incredibly destructive. I don't know if any family manages to repair themselves afterwards and start talking again."
Selling the family home could be a wrong move
Peart is troubled by another aspect of the commission's reviews of both the inheritance laws and the Property (Relationships) Act 1976. The commission has recommended that if one partner brings a family home into the relationship, only the increased value of that property is shared in the event of separation or death.
But if the original home is later sold and another property is bought during the relationship, that becomes relationship property. Peart thinks that's problematic.
People replace their homes for different reasons, she says, including fire or earthquake, changing jobs and cities, or that the property no longer suits them. But they lose their separate-property status if they buy a different house with the new spouse.
The Law Commission wanted to encourage good education around both inheritance and relationship property laws. It reasoned that people would consult a lawyer during the process of buying or selling a house.
"That's usually too late," Peart says. "Most people will be signing the sale and purchase agreement before they consult their lawyers and they're already bound."
The commission has also aimed to tidy up other anomalies that for years have made no sense. One is that if a couple are separated but never got round to getting divorced, the surviving partner can still claim against the estate even if they haven't been together for years.
On the other hand, de facto partners lose their entitlement to claim the moment they separate. The commission wants to rectify that, recommending that surviving spouses and de facto partners have up to two years to claim from the date they last lived together.
However de facto couples have been treated differently in another recommendation. Surviving partners in marriages and civil unions will be able to claim against an estate, and relationship property in the event of separation, even if the union is of short duration (less than three years).
But de facto couples will still need to be together for three years before they can claim, unless there is a child from the relationship or they can prove they have made a significant contribution.
Public Trust NZ estimates that just over half of adult New Zealanders have made a will. Stirling says everyone with assets, and aged 18 and over, should have a will and, ideally, discuss the terms with family members beforehand so there are no surprises.
Young people in their 20s and 30s often don't think they own much but they might have a car, chattels in a flat, and savings, he says.
"They've got KiwiSaver and they don't think about that, and for some it's a reasonable amount. If you don't have a will and you die intestate, the Government determines who gets what."
Parents, siblings and any partner are likely to get a proportion but a young person might have wanted his or her entire estate to pass to a long-term partner rather than parents.
The Law Commission noted that more education was needed around succession laws and wills, and Stirling agrees. For instance, many people do not realise that a will made before a marriage becomes void afterwards, risking a person dying intestate.
Tips for succession planning
• If you're aged 18 or over, consider making a will
• Update it regularly (every two to five years), particularly after a life event – marriage, the birth of a child, a separation, a beneficiary dying, or if the nature of your wealth has changed
• Treat all children equally if you can
• If you do decide to cut children out, at least leave a nominal amount to head off future legal claims
• Avoid giving one child all the power by being executor of the will. Consider also having a close family friend or a lawyer as executors
• The more open consultation and transparency beforehand the better. Shocks and surprises don't help family relationships
• Apart from a will, consider including your wishes in a relationship property agreement