New Zealand Law
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It is necessary to trace how the section was bought, whether from his separate funds and if this was ever treated as relationship property or maintained through joint earnings. If it is possible to show this section was always separate property, then the Public Trustee is correct. His widow has 12 months to make a claim, as the notice is really to try to avoid distribution prematurely. So unless this is resolved she can wait until the last period and then file a claim, under either of the acts.
As to resolution, I would always suggest mediation, as being a much easier and cheaper option. Otherwise you will have to wait until either 12 months expires or she files a claim, and then wait for a court hearing
To establish a claim under the Family Protection Act you need to establish a moral duty to provide. This is interpreted fairly widely, but if she is getting a house, then that would seem to be adequate.
That would be a very sensible option. If everybody agrees then you can draw up a document which records the agreements and reserves the disputed property for further argument. The executor would need to be a party, but they would likely agree anything settle some issues