Q: Things have been rocky with my fiancé over the last couple of years and I’m not certain that we’ll stay together. I’ve just inherited around $350,000, which I could use to pay off some of our mortgage – but if we separate down the track, would I get to keep this? How would the rest of our assets be divided? My other concern is our dog. I am his main caregiver, and I can’t imagine him not living with me.

A: Issues like yours arise frequently in a separation. The answer to your inheritance question is no – if you pay off some of the mortgage with your inheritance, then the amount becomes your joint relationship property. However, it is possible to make sure this stays your separate property and owned solely by you if you split up. I have outlined a couple of ways to do this below.

Your dog is part of your relationship property, I’m afraid, and is owned equally by you both. You will need to work out an agreement regarding who will own him if you separate.

Relationship property

Assets you own together are your “relationship property”. Generally, when a couple separates, relationship property is divided equally unless there is a legal agreement that says otherwise. On that list are:

  • the family home
  • vehicles
  • holiday homes
  • investmentsr
  • retirement funds earned during the relationship (including KiwiSaver)
  • furniture and other chattels
  • bank accounts, if the funds in the account have been earned during the relationship, even if the accounts are in separate names
  • debts incurred during the relationship
  • loyalty programmes like Airpoints, Hotpoints and Fly Buys
  • iTunes
  • family pets

Often in a separation, you will need external valuations for bigger items such as property, investments and cars. With furniture and chattels, you can allocate agreed values to them, or just divide them between you, item by item, on a practical basis.

Family pets

Family pets, as I said, are considered a “family chattel” and are therefore part of relationship property and subject to the equal sharing rule in a separation.

Custody of your dog would form part of your relationship property negotiations. You might also wish to discuss how vet expenses or other care costs will be handled going forwards.

In some circumstances, much-loved pets can continue to be jointly owned, and have scheduled time with both parties.

If you can’t come to an agreement on elements of your relationship property, including your dog, then ultimately you can end up with a family court hearing.

Trust me, it will save you time and money if you can both be civil to each other and find common ground without going to court.

Be aware that pets are sometimes used as leverage; one party “concedes” ownership of the cat or dog in exchange for a greater amount of the relationship property.

Separate property, including inheritances

There are some types of property classed as separate, which means one partner alone has legal entitlement to the asset. This includes inheritances.

But… separate property can become jointly owned when it is intermingled with relationship property.

If you used your inheritance to pay down the mortgage, which is what concerns you – the money would be classed as intermingled and become relationship property. This means you would need to halve it with your partner if you separated.

Using inheritance to reduce the mortgage principal

If you want to pay down some of the mortgage, my advice is to reach agreement with your partner as to how all your assets will be divided if you split up, including the fact that you want to retain sole ownership of your inheritance.

Make that official; get a lawyer to document what you both agree to in a Contracting Out Agreement (COA).

This then governs how your property will be divided if you separate.

Without a COA in place, the Property (Relationships) Act dictates what you are legally entitled to in a separation, which is generally an equal division of property.

I can’t stress enough that it is not sufficient for you and your partner to agree this between yourselves, even if you put it in writing.

People’s good intentions can vanish, to be blunt. Only a legal agreement will be legally binding if you separate.

Keeping the inheritance separate

You may need this inheritance money to be untouched during the relationship.

The alternative for you is to invest or bank the money in your name, in specific accounts that are completely separate from any other accounts used by you or your partner.

There are a few other types of property which are considered separate and not divisible in a separation:

  • bank accounts which existed prior to the relationship, that are kept separate and do not contain income earned during the relationship
  • the portion of retirement funds you amassed prior to the relationship
  • gifts for the sole use of the recipient, such as jewellery; these would include engagement and marriage rings
  • family heirlooms and taonga
  • debts incurred before the relationship started e.g. student loans or credit card debt.

Summary

Any property acquired while you are together in a recognised relationship, no matter how big or small, is jointly owned.

You need to think carefully about your inheritance (and your dog).

What you do with the money will determine whether it stays yours or becomes partly theirs.

Even when relationships are going downhill it can still be difficult to think ahead to a time when they might fall off the cliff.

Think of forward planning this way – it will give you peace of mind to have your financial position as strong as possible when you start your new life; and sometimes reducing that stress can improve things between the two of you, as you confront a reality that so often stays undiscussed. Good luck!

This article first appeared on NZ Herald.