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Court action over DIY accounts - a mishmash of personal and partnership items

11 February 2019

During a couple’s 54 years of dairy farming, the wife took great pride in keeping the farming partnership books even though she had no formal training. She completed the financial tax and GST returns and filed them with IRD as partnership tax returns. All personal and farm transactions went through one personal joint bank account On advice from IRD, the wife included all personal and farming income in a partnership tax return. There was no written partnership agreement.

The husband died in 2013. Under his Will the wife had the use of and income from his estate for her life. On the wife’s death the couple’s three children (or their trusts) were to receive the husband’s assets.

At the time of his death there was a term investment worth $331,000 and a loan to the couple’s son of $600,000 included in the financial accounts for the partnership. When the wife realised the inclusion of these assets in the partnership accounts meant they would not pass to her by survivorship under her husband’s Will (which was her understanding of what should happen), but would form part of his estate and pass to the couple’s children on her death, she took professional advice. As a result of that professional advice she arranged for the accounts to be changed to show the loan and term investment were the couple’s joint assets and not partnership assets. As joint assets would become the wife’s on the husband’s death.

Daughter sues mother and father’s estate[i]

The daughter took legal action against her father’s estate and her mother claiming the assets were partnership assets. If successful the loan and term investment would be subject to the terms of the husband’s Will and benefit the daughter and the other two children when the wife died.

Court finds parents’ intention to own assets jointly

The judge accepted that the partnership accounts were a “mishmash of personal and partnership items” and stated that the decision on whether the assets were partnership or joint assets would depend on the couple’s intention. He noted that the inclusion of the assets in the partnership accounts did not necessarily mean they were partnership assets. Although the judge found no express intention showing the couple intended the assets to be jointly owned, their instructions to their bank and to their solicitor for their Wills and the inclusion of interest income in the “Owners’ Account” in the financial accounts showed an intention of joint ownership. As a result the judge ordered the accounts to be altered to reflect that intention. The wife was therefore entitled to ownership.

Legal implications not always obvious

How items are treated in financial accounts and how legal arrangements are documented can result in vastly different outcomes which are not always obvious to the layperson – as the wife found in this case. Where there is misunderstanding or dispute over an arrangement which results in Court action and the Court is tasked with the job of determining the parties’ intentions, the success or failure of that action often depends on the documentation available to the Court. There’s a lot to be said for taking professional advice and dotting the “I’s” and crossing the “T’s” and when it comes to financial accounts and legal documentation.

[i] Cochrane v New Zealand Guardian Trust Company Limited [2018] NZHC 2830

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott