What happens to property when your spouse dies?

So you’ve signed a contracting out agreement (“agreement”) (commonly referred to as a “prenup”). What happens if the worst occurs and your partner dies? While the contracting out agreement will still apply, it may be limited. That is, other sections of the Property (Relationships) Act 1976 (“the Act”) may override the agreement. Let’s take a look at how this works.

An agreement operates under section 21 of the Act, which allows spouses, civil union partners, or de facto partners, or any 2 persons in contemplation of entering into a marriage, civil union, or de facto relationship to make any agreement they think fit with respect to the status, ownership and division of their property, including future property.

Section 21D provides that any property or class of property can be defined as relationship property, or separate property.

If property is defined as relationship property, this means that each party to the relationship is entitled to 50% of that property on separation, or death (assuming no exception applies). If the property is defined as separate property, this means that the ownership of the property resides solely with one party.

What does this mean if someone dies?

When a spouse or partner dies, section 61 of the Act comes into play. The surviving spouse or partner has to make a choice. In the Act, the choice is labelled as option A or option B.

Option A means that the surviving spouse is electing to make an application under the Act for a division of the relationship property. Option B means to elect not to make an application under the Act, to receive any property given to them in the deceased spouse or partner’s will, and to receive any beneficial interest on the intestacy or partial intestacy of the deceased spouse or partner that they are entitled to.

Every relationship, and every agreement is different. The amount of property involved differs, and the classification of the property in every agreement is different. This means that there will be differing reasons for every person to choose either option A or B.

For examples of how an agreement changes the choice that a surviving spouse would likely make, see the below examples:

1. John and Mary are married. They do not have a contracting out agreement. They own a house as tenants in common, as well as some shares. John passes away, and leaves his share of the house to Mary. He leaves his portion of the shares to their two children. In this situation, if Mary chose Option A she would keep her share of the house and the shares, but not gain anything extra. She would give up everything in the will that was left to her. If she chose option B, she would receive the entire house, and keep her potion of the shares. She is therefore better off to choose option B and take under the will.
2. John and Mary are in a de facto relationship. They do not have a contracting out agreement. John had purchased a house in his own name prior to entering the de facto relationship. At the time of his death, the title was in his sole name. He left a will, which gifted the entire house to his grown children from a previous marriage. They had no other significant property. In this situation, Mary is clearly better off to make an application under the Act (choose option A). If she chooses option A, she will likely receive half of the house, or the equivalent sum of money. If she chooses option B, she receives nothing.
3. John and Mary were married in 2012. They signed a contracting out agreement in 2015. They both owned property prior to getting married. The agreement stipulated that the property each party owned prior to the relationship was to be separate property of the person who owned it at that time. Any property acquired together since the beginning of the relationship was to be classed as relationship property, regardless of whose name was on the title. John has a will, but Mary is not a beneficiary. In this situation, if Mary elects option A, she would keep all of the property that was in her own name under the agreement, and would divide any relationship property. If Mary elects option B, she would keep all of the property in her own name, but have no claim against anything that was in John’s name solely (regardless of whether it was deemed to be relationship property by the agreement). She is therefore better off to choose option A.
4. John and Mary were married in 2012. They signed a contracting out agreement that separated all property previously owned as separate property. It also classified all future property as separate property. John’s will gives Mary 75% of his estate, with the remainder to go to his children from a previous marriage. In this situation, Mary may be better off to choose option B, depending on the amount of property acquired after the relationship started.

As you can see, each situation is different and requires an in depth analysis of your personal circumstances.

In certain circumstances, neither option A or option B are beneficial to the surviving partner/spouse. If you have signed a prenup designating the majority of property as separate property and there is no provision for you in the will, in a relationship where the other party brought most of the property to the relationship, but you have contributed in other ways such as caring for children, or contributing to separate property through the application of wages then the Courts may be able to assist you.

Section 21J of the Act allows the Court to overturn a prenup in very strict circumstances. It requires that the court to be satisfied that giving effect to the agreement would cause serious injustice. Serious justice is a very high bar to meet. In order to meet that bar, the Court has to look at:

1. The provisions of the agreement
2. The length of time since the agreement was made
3. Whether the agreement was unfair or unreasonable in the light of all the circumstances at the time it was made
4. Whether the agreement has become unfair or unreasonable in the light of any changes in circumstances since it was made (whether or not those changes were foreseen by the parties)
5. The fact that the parties wished to achieve certainty as to the status, ownership, and division of property by entering into the agreement
6. Any other matters that the court considers relevant

Each situation is very fact specific and therefore hard to say whether serious injustice would occur. However, a gross disparity between entitlement under the Act and entitlement under a prenup is a key indicator of injustice. This is because the Act provides for the equal sharing of property.

This article is not intended as legal advice. If you have questions about a contracting out agreement, or relationship property in general, we can help you. Give us a call on (09) 430 0509 or send us an email at [email protected].