What is a pre-nuptial agreement?
When a relationship of three years or longer breaks down, property is usually divided amongst parties in accordance with the Property Relationships Act (PRA). However, it is possible to contract out of this default position by undertaking what is known as a pre-nuptial or “s 21” agreement. This allows parties to make their own property division arrangements that differ from those prescribed in the PRA. Pre-nuptial agreements are commonly used by a spouse to protect their existing property, as well as property which may be future acquired.
Samantha and Tom have been married and living together for 4 years until recently when they went through a very difficult break up. For Samantha the difficulty of this break up was exacerbated by the fact that Tom received half of the $1.2 million family home value, despite it belonging to her. She had purchased the house two years before she even met Tom using her own personal funds, including money gifted to her by her parents. Samantha views Tom as underserving of the $600,000, which he has not contributed towards. Is there anything she can do to remedy this unfairness? Unfortunately, for Samantha, her options are limited. Tom is unlikely to agree to any amount less than $600,000, which he is entitled to under the PRA. This situation could have been avoided if Samantha would have created a pre-nuptial agreement specifying that in the event of separation, she would receive the full value of the family home.
Tips on timing: A lesson to take away
Although pre-nuptial agreements can be entered into at any point during the relationship, it is recommended that it be done within its first three years as this is before provisions of the PRA begin to apply. The PRA will provide the less well-off spouse with a more attractive property settlement than what would be received through an s 21 agreement, therefore giving them little incentive to agree to this lesser option. Contracting out of the PRA in the early stages of a relationship will therefore help prevent the common situation where upon separation one spouse, such as Tom, is successful in acquiring half the value of certain property despite it being owned and paid for by the other spouse prior to the relationship similar to Samantha in the above example.
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