Clawing back Assets into an Estate

Section 88(2) of the Property (Relationships) Act 1976 (PRA) - New Zealand

Section 88(2) of the Property (Relationships) Act 1976 (PRA) allows the personal representative (executor or administrator) of a deceased person to apply for a division of relationship property with the court's permission (leave).

This provision is significant because it enables the estate to claim assets that may have otherwise passed directly to a surviving partner under joint ownership or other arrangements, such as survivorship.

How Can s88(2) Be Used to Claw Back Assets into the Estate?

If a deceased person owned property jointly with their spouse or partner (e.g., a house held in joint tenancy), that property would automatically pass to the surviving partner. This can result in a smaller estate, which may leave inadequate provision for beneficiaries such as children from a previous relationship.

Under s88(2), the executor or administrator can seek court permission to apply for a division of relationship property. If successful, this can bring some of those assets back into the estate, making them available for distribution under the deceased's will or intestacy rules.

Steps to Use s88(2) to Bring Assets into the Estate

Step 1: Determine Whether the Estate Needs to Apply

Assess whether the deceased owned assets jointly with their spouse or partner.
Consider whether failing to bring assets into the estate would result in serious injustice to other beneficiaries.
Common situations where s88(2) is used:
- A surviving partner inherits most/all assets via joint ownership, leaving little for children or dependents.
- The deceased’s will intended for certain assets to be shared among multiple beneficiaries, but joint ownership overrides this.
- A claim under the Family Protection Act 1955 requires a larger estate to ensure fair provision for dependents.

Step 2: Apply for Leave (Permission) from the Court

The estate’s executor or administrator must apply to the Family Court or High Court for permission under s88(2).
The court will only grant leave if failing to do so would result in serious injustice.
Factors the court considers include:
- Whether the deceased intended for the surviving partner to receive all joint assets.
- The financial needs of the surviving partner and other beneficiaries.
- Any potential hardship caused to either party.

Step 3: If Leave is Granted, File a Relationship Property Claim

If the court grants permission, the executor can apply for a formal division of relationship property under the PRA.
This claim will be assessed under relationship property laws, considering factors such as contributions to the relationship.
The estate may seek equal sharing of relationship property, or in some cases, claim a greater share if justified.

Step 4: Transfer Clawed-Back Assets into the Estate

If the relationship property division is successful, assets (or a portion of them) are transferred into the estate.
These assets then become part of the estate’s pool for distribution under the deceased’s will or intestacy laws.
Beneficiaries, including children or dependents, may now benefit from the increased estate assets.

Example Case: Public Trust v Whyman [2005]

The deceased had most assets jointly owned with their de facto partner.
Their children had a strong claim under the Family Protection Act, but there were few assets in the estate.
The court allowed the Public Trust (executor) to apply under s88(2) to divide the relationship property.
This brought more assets into the estate, allowing for a fairer distribution to the children.

Key Takeaways

✅ s88(2) of the PRA allows estates to claim relationship property after death, but only with court permission.
✅ The court will only grant permission if denying it would cause serious injustice.
✅ If successful, assets that would have gone directly to a surviving partner may instead be included in the estate.
✅ This can be critical for ensuring proper provision for children, dependents, or other beneficiaries.

Legislation Link

The difference between joint property and tenants in common and why it is important in deceased estates

1. Joint Property (Joint Tenancy)

Joint property is owned under a joint tenancy, meaning:
✅ Equal ownership – Each owner (tenant) has an equal share in the whole property.
✅ Right of survivorship – When one owner dies, their share automatically passes to the surviving owner(s), regardless of what their will says.
✅ No separate shares – Each owner does not have a defined percentage of ownership.

Example:

If Alice and Bob own a house as joint tenants, and Alice dies, Bob automatically becomes the sole owner.
Alice cannot leave her share in the house to anyone else in her will.

2. Property in Common (Tenancy in Common)

Property in common is owned under a tenancy in common, meaning:
✅ Defined shares – Each owner holds a specific share (e.g., 50/50, 60/40).
✅ No right of survivorship – When an owner dies, their share goes to their estate and is distributed according to their will or intestacy laws.
✅ Owners can sell or transfer their share independently.

Example:

If Alice and Bob own a house as tenants in common (50/50), and Alice dies, her 50% share goes to her estate (not to Bob).
If Alice’s will says her 50% goes to her daughter, the daughter will now co-own the house with Bob.

Why Does This Matter for Estates?

Joint tenancy avoids probate because the property automatically transfers to the surviving owner.
Tenancy in common allows control over inheritance, making it useful for estate planning, especially in blended families.
If an executor wants to claw back assets into an estate under s88(2) of the Property (Relationships) Act, they usually need to sever a joint tenancy first to prevent the surviving owner from automatically receiving the asset.

1. Key Factors in Estate Planning in New Zealand

a) Wills & Intestacy Laws

✅ Having a will ensures your assets are distributed according to your wishes.
✅ Without a will, your estate is distributed under the Administration Act 1969, which may not align with your preferences.
✅ Updating your will is essential, especially after major life events (marriage, divorce, having children).

b) Relationship Property & Claims on the Estate

✅ Under the Property (Relationships) Act 1976 (PRA), a surviving spouse or partner can choose to:

Accept what is left to them in the will; OR
Apply for a division of relationship property, usually a 50/50 split.
✅ This means assets in a joint tenancy or relationship property may not be distributed as intended.

c) Family Protection Act 1955 (Claims by Family Members)

✅ Certain family members (spouse, children, dependents) can challenge a will if they believe they were not adequately provided for.
✅ Even if you intentionally exclude a child or spouse from your will, they may still have a claim.

d) Inheritance Protection & Avoiding Risk

✅ Inheritances received personally by beneficiaries can be at risk from:

Divorce settlements (if inherited assets are mixed with relationship property).
Creditors or bankruptcy (if the beneficiary is in financial trouble).
Future tax law changes (such as capital gains or wealth taxes).

e) Taxes & Financial Planning

✅ New Zealand does not currently have inheritance tax, but future tax policy changes could impact estates.
✅ International tax exposure – If you or your beneficiaries have overseas assets, there may be foreign tax obligations.
✅ Capital gains tax risk – While NZ has no formal CGT, there are rules for taxing gains on property sales (Bright-Line Test) and investment gains.

2. Do You Need a Trust for Estate Planning?

Trusts can be useful for:
✅ Protecting assets from relationship property claims – If properly structured, assets in a trust may not be included in a relationship property division.
✅ Shielding assets from creditors – If a beneficiary is facing financial issues, the trust can protect assets from being seized.
✅ Providing for future generations – Trusts allow assets to be managed over time, rather than given as a lump sum.
✅ Protecting vulnerable beneficiaries – If a child has a disability, addiction, or financial irresponsibility, a trust can provide controlled distributions.

However, trusts are not always necessary because:
❌ The Trusts Act 2019 has increased compliance requirements and transparency.
❌ If not structured properly, trusts can be challenged and treated as personal property (e.g., in relationship property disputes).
❌ Costs of maintaining a trust (legal, accounting, and administration fees) may outweigh the benefits for smaller estates.

3. When is a Trust Most Useful?

✅ Business owners – Protecting personal assets from business risks.
✅ High-net-worth individuals – Safeguarding assets from future tax changes or disputes.
✅ Blended families – Ensuring children from a previous marriage inherit specific assets.
✅ Farmers & multi-generational wealth – Keeping land or assets within the family.
✅ Special needs beneficiaries – Protecting assets for vulnerable dependents.

Conclusion: Estate Planning Without a Trust

If a trust isn’t the best option, alternatives include:

Clear will & estate planning – Ensuring assets are structured correctly.
Memorandum of wishes – Providing guidance on distributing assets outside a trust.
Gifting & ownership structuring – Transferring assets before death to reduce estate risks.
Relationship property agreements – Contracting out of the PRA to protect assets.