An inheritance is not always for sharing

By Andrea Manuel, barrister

Clients who have received an inheritance during their relationship usually feel disinclined to share it when the relationship ends. Whether or not they are obliged to do so will depend on what has happened to the inheritance in the meanwhile. The answers are found in sections 8 and 10 of the Property (Relationships) Act 1976.

Section 10 provides that an inheritance is not relationship property unless, with the “express or implied consent” of the recipient, it has become “so intermingled with other relationship property that it is unreasonable or impracticable” to regard it as separate property.

There is a proviso. Under section 10(4), the family home and family chattels are relationship property unless there is an agreement under part 6 of the Act in place. So, if the inheritance has gone into the family home or chattels, the position is relatively clear – unless there is an agreement to the contrary, your client will be obliged to share. 

If the inheritance has gone into property which falls into subsections 8(1)(e) (property acquired after the relationship began) or 8(1)(ee) (property acquired after the relationship began, for common use or benefit from pre-relationship property), which are expressly stated to be subject to section 10, then the position is still relatively clear: section 10 prevails over section 8. 

But if the inheritance has gone into property which falls into subsection 8(1)(c) (property owned jointly or in common in equal shares) or section 8(1)(d) (property acquired in contemplation of the relationship), the situation gets a bit trickier. These are not expressly stated to be subject to section 10. The question is: does section 8 prevail over section 10, or the other way around?

The case of S v W
Your client may, for example, have put an inheritance in a bank account held in joint names, used it to buy land in joint names, or purchased a herd of animals for a farming partnership.

This, in fact, was what happened in the High Court case S v W [2006] 2 NZLR 669 after the respondent, W, had received a substantial inheritance during a de facto relationship. S and W were American citizens who settled in the South Island in December 2000. W’s mother died in May 2001 and from his inheritance he made several deposits into the parties’ joint BNZ cheque account. From there, some funds were transferred to a joint BNZ term deposit account and used to buy a block of land at Darfield in joint names, a lifestyle block at Motukaraka in joint names, where the couple lived and farmed alpacas, and eight alpacas at a cost of $67,500.

W conceded that the lifestyle block and the progeny and profits from the alpaca farming operation were relationship property, but he maintained that the term deposit, the Darfield land, and the initial alpaca herd were his separate property. The Family Court upheld his position and S appealed.

The joint term deposit and jointly owned Darfield land fell within section 8(1)(c). S argued that section 8 prevailed over section 10, and W argued the reverse. It was a matter of statutory interpretation.

The Court reviewed the authorities, texts, and arguments each way at paragraphs [32] to [51] of the judgment. A similar conflict under the old Matrimonial Property Act 1976 had produced a line of conflicting decisions in the Family and High Courts. There was no Court of Appeal decision on the point, although that Court had commented, when declining leave to appeal in Waller v Hider [1998] 1 NZLR 412 at 414, that “the question of law now seems to be settled at High Court level in favour of the view that [section] 8(c) takes precedence over [section] 10… We should not be taken to have determined that question, but as at present advised, see no reason to doubt the soundness of the position apparently now accepted in the High Court: See Fisher on Matrimonial Property, para 14.7.”

The Court in S v W took the opposite view. The Judge acknowledged at [51] that “[t]he wording of the legislation is not capable of conclusively resolving the issue one way or the other and strong arguments can be advanced to support either interpretation”. However, he decided that “the interpretation most likely to reflect the text and purpose of the legislation is the interpretation that [section] 10 prevails over [section] 8(1)(c)” and referred to “the underlying statutory intention” (at [52]).

The Judge then considered section 10(2). Had there been intermingling? If so, did the intermingling take place with W’s express or implied consent? And if it did, was it unreasonable or impracticable to regard the property as W’s separate property? 

The Judge affirmed at [57] that it was appropriate to “concentrate on substance rather than form or technicality” and cited the comments at paragraph 11.62 of Fisher on Relationship Property with approval. He went on to comment that overemphasis of the question of whether the identity of the original separate property capital was still recognisable in its new form, however, tended to downplay the requirement that it must not only be impracticable but also unreasonable to regard the property as separate property.

Any intermingling of the funds in the joint term deposit had been of a purely technical nature. W had given his consent to the intermingling, but it was not impracticable to regard the funds as remaining his separate property.

As for the alpacas, S argued that it was illogical to categorise the alpaca business as relationship property, but the original herd as separate property. She succeeded with this argument. The Judge commented that although the surviving animals were still physically identifiable, he was satisfied in the circumstances that it would be unreasonable to regard the surviving animals as W’s separate property. 

That left the Darfield land. S argued that it was intended to be part and parcel of the farming operation, but the Court held that intermingling was based on what had in fact happened, not what the parties might have intended. It did not seem to the Judge that it was impracticable or unreasonable to regard the land as W’s separate property.

W was lucky to escape with his term deposit and the Darfield land intact. Had the High Court decided that section 8 prevailed over section 10 – an outcome which was entirely possible – he would have been obliged to share them. He was probably helped too, by the fact that the de facto relationship had been relatively short-lived. In practice, the longer a relationship lasts, the more likely it is that intermingling will take place. Clearly, practitioners whose clients receive an inheritance need to be alive to the consequences if the client’s relationship ends and advise them appropriately. 

Section 8
Relationship property defined

(1) Relationship property shall consist of—

(a) the family home whenever acquired; and
(b) the family chattels whenever acquired; and
(c) all property owned jointly or in common in equal shares by the husband and the wife or by the partners; and
(d) all property owned by either spouse or partner immediately before their marriage, civil union or de facto relationship began, if—
(i) the property was acquired in contemplation of the marriage, civil union or de facto relationship; and
(ii) the property was intended for the common use or common benefit of both spouses or partners; and
(e) subject to sections 9(2) to (6), 9A, and 10, all property acquired by either spouse or partner after their marriage, civil union or de facto relationship began; and
(ee) subject to sections 9(3) to (6), 9A, and 10, all property acquired, after the marriage, civil union or de facto relationship began, for the common use or common benefit of both spouses or partners, if—
(i) the property was acquired out of property owned by either spouse or partner or by both of them before the marriage, civil union or de facto relationship began; or
(ii) the property was acquired out of the proceeds of any disposition of any property owned by either spouse or partner or by both of them before the marriage, civil union or de facto relationship began…

Section 10
Property acquired by succession or by survivorship or as a beneficiary under a trust or by gift

(1) Subsection (2) applies to the following property:

(a) property that a spouse or partner acquires from a third person—
(i) by succession; or
(ii) by survivorship; or
(iii) by gift; or
(iv) because the spouse or partner is a beneficiary under a trust settled by a third person:
(b) the proceeds of a disposition of property to which paragraph (a) applies:
(c) property acquired out of property to which paragraph (a) applies.

(2) Property to which this subsection applies is not relationship property unless, with the express or implied consent of the spouse or partner who received it, the property or the proceeds of any disposition of it have been so intermingled with other relationship property that it is unreasonable or impracticable to regard that property or those proceeds as separate property.

(3) Property that 1 spouse or partner acquires by gift from the other spouse or partner is not relationship property unless the gift is used for the benefit of both spouses or partners.

(4) Regardless of subsections (2) and (3) and section 9(4), both the family home and the family chattels are relationship property, unless designated separate property by an agreement made in accordance with Part 6.]

NZLawyer, Issue 97, 19 September 2008