In the build-up to nuptials, many couples make the unfortunate mistake of not drafting an ante-nuptial contract before taking their vows. In the excitement of planning a future together, it is understandable that many couples avoid talking about how their estates would be separated if the marriage were to end. According to a recent Stats SA report, there has been a constant increase in divorces from 2012 to 2017, with 51% of divorces initiated by women. The median age for divorce amongst South African males is 44, and 40 in the case of females. The largest number (27.2%) of divorces were for marriages that lasted between five and nine years. Given these statistics, it makes sense to obtain independent advice prior to selecting your matrimonial property regime. How you are married can have far-reaching financial consequences and it is important to understand the options available to you. In essence, there are two types of marital property regimes in South Africa, which are (1) marriage in community of property and (2) marriage out of community of property. Here’s how they can impact your future.
Marriage in community of property
Marriage in community of property is the cheapest and most popular regime, and is the default option in the absence of an ante-nuptial contract (ANC). Effectively, if no contract is entered into prior to the date of marriage, the marriage is automatically in community of property. In this form of marital property regime, the two estates are joined together into one estate of equal, undivided shares. In other words, the couple owns the joint estate together and it is only divisible upon termination of the marriage. All assets belonging to the spouses before the marriage, as well as all assets accumulated during the marriage, form part of the joint estate (subject to a few exceptions such as an inheritance which is expressly excluded in terms of the testator’s will). Importantly, all liabilities accumulated both before and during the marriage form part of the joint estate. In community of property literally means ‘what’s yours is ours and what’s mine is also ours’.
In this regime, each spouse enjoys equal management over the joint estate. However, the law does require the consent of the other spouse for certain transactions, such as buying or selling immoveable property, or entering into a credit agreement. No spousal consent is required for transactions such as banking, setting up a company, trading shares or selling movable assets.
One advantage of this marital regime is that, in the absence of an ante-nuptial contract, there are no upfront legal costs that need to be incurred by the couple. If you are the economically weaker spouse when entering the marriage, you could gain financially from marrying in community.
A significant disadvantage of being married in community of property is that you are responsible for all debt incurred by your spouse – even debt that was incurred before your marriage. Bear in mind that this applies to all contractual debt, personal loans, credit card debt, and even maintenance that is payable by your spouse to children from a previous marriage. If you are the financially stronger spouse going into such a marriage, your financial position could be significantly weakened by a community of property. Another consideration is that, if your spouse becomes unable to pay his debts, the joint estate can be declared insolvent and you can be held liable for his debt.
In the event of divorce, the assets of the joint estate will be divided equally between the two parties. First prize is for the two spouses to reach an agreement on the division of the joint estate. This is referred to as a settlement agreement which will ultimately be incorporated into a divorce order. If the spouses cannot reach an agreement, the court has authority to appoint a liquidator to divide the assets on behalf of the joint estate. Given that at the time of divorce many couples have experienced a complete breakdown in communication, the chances of them being able to agree on the division of the joint estate are slim, and this remains a distinct disadvantage of community of property. The diagram below shows the mechanics of an in community of property marital regime.
Marriage out of community of property
In order to marry out of community of property, the couple needs to enter into an ante-nuptial contract before getting married which costs around R2 000 in South Africa. In terms of this contract, community of property and profit and loss are excluded. This means that there is no joining of estates and each spouse keeps his/her estate separate. However, the spouses can choose to either include or exclude the accrual system from their ANC. If the accrual system is not expressly excluded from your ANC, you will automatically be married out of community of property with the accrual.
(a) Out of community of property without the accrual
In this system, each spouse keeps a separate estate which in essence means ‘what’s mine is mine and what’s yours is yours’. Whatever assets and liabilities they individually had before the marriage continue to form part of their separate estates. In addition, assets and liabilities acquired by each spouse during the marriage will remain in their separate estates. In other words, each partner retains absolute control and independence over their separate estate.
A distinct advantage of this marital property regime is that each spouse retains complete control over her assets and liabilities. In general, one spouse cannot be held liable for the debts of the other spouse. This means that if a husband is declared insolvent, his creditors will not be able to touch the estate of the solvent wife.
On the other hand, this type of marital property regime can have devastating financial consequences for a stay-at-home-spouse. Should the marriage come to an end, a stay-at-home-mother who was unable to grow her own estate in terms of asset value would have no claim to her husband’s estate. The fact that she would have contributed to the marriage by raising the children, running the home and supporting her husband’s career is not taken into account.
In respect of marriages after 1 November 1984, each spouse retains their separate estate in the event of divorce. This means that each spouse keeps his/her own estate plus all the growth in their separate estate that occurred during the marriage, less any losses. The diagram below shows the mechanisms of this form of marital regime.
(b) Married out of community of property with the accrual
All marriages that are entered into out of community of property are deemed to be with the accrual system. In terms of the accrual system, each spouse retains control over his/her separate estate during the course of the marriage but can share equally in the growth of each other’s estate during the marriage. Simply put, the accrual system aims to ensure that both spouses in a marriage gain a fair share of the estate once the marriage comes to an end. The term ‘accrual’ means the net increase in value of a spouse’s estate since the date of marriage.
In terms of the accrual, the net value of each spouse’s estate is declared at the beginning of the marriage. The commencement value is then recorded in the ante-nuptial contract. Everything that you owned prior to marriage remains yours, but everything that you build together during the subsistence of the marriage should be shared equally. It is important to bear in mind that each spouse retains a separate estate during the course of their marriage, and the right to share in the accrual can only be exercised when the marriage is dissolved.
In terms of the accrual, spouses are generally not liable for each other’s debts. All that they share is their net assets. Thus, if one spouse becomes insolvent, the other spouse is protected against creditors. This form of marital property regime is by far the most equitable, especially where one spouse chooses to stay at home or put their career on hold while raising children or caring for extended family.
Depending on the complexity of the estates, calculating the accrual can be complicated. However, it remains the most equitable method of sharing the assets accumulated during the marriage.
The net value of each spouse’s commencement value at the date of marriage is deducted from the net value of each estate at the end of the marriage. If the husband’s estate has grown more than the wife’s estate, the wife has the right to claim up to 50% of the value by which the husband’s estate exceeds the growth in her estate.
Unsurprisingly, the Holmes & Rahe Stress Scale ranks divorce as the second most stressful life event (after the death of a spouse). Given that the overwhelming majority of divorces end as a result of an irretrievable relationship breakdown, mutual agreement between couples on the separation of assets can hardly be expected at the time of divorce. Although no one wishes to plan for the end of a marriage at the beginning, it is a discussion worth having with your future spouse.
Categories: Financial Planning