Financial planning for couples entering their first marriage and who have no children from any previous relationship is relatively easy to navigate. However, the traditional ‘nuclear’ family is no longer the norm and financial planning has had to evolve to cater to more diverse, and often complex, family structures.
According to the 2018 Children, Families and the State report by the Children’s Institute at UCT, 62% of children in South Africa live in an extended family situation and only 25% form part of a traditional nuclear family structure, thereby redefining a ‘household’ as being an ‘arrangement of co-residence with shared consumption and production.’ The majority of families in South Africa now include a blend of people related by blood, through adoption, bound by marriage – same-sex or heterosexual – or part of a non-marital union, and planning for the financial needs of such families generally requires expert advice.
Here are some factors to consider when financial planning for blended families.
If you enter into a new relationship, but have an ex-spouse and/or children from a previous relationship, it is possible that you have maintenance obligations to them. An ongoing financial commitment to a previous spouse or children can be a source of contention in a new relationship, particularly if you are planning to have children together. You may find yourself with competing financial priorities – honouring your financial commitments to a past relationship while trying to create a future with your new partner. This tension can be exacerbated where your previous marriage ended acrimoniously, where your ex-spouse or children make unreasonable financial demands on you, or where your new partner is less than understanding of your financial obligations.
Many divorced women with ex-husbands who regularly renege on their maintenance obligations are placed in similarly uncomfortable positions when entering new relationships. If your ex-husband regularly fails to pay maintenance, your new partner or spouse may become resentful of having to help out financially for children that he is not legally bound to support. Once again, added tensions arise where an ex-husband continues to lead a lavish lifestyle while at the same time avoiding maintenance, or where you face ongoing struggles at maintenance court which, in turn, can affect your employment and/or income. The dynamics of divorce, stepfamilies and blended families are generally intricate and emotive, and very often the guidance of an experienced financial advisor can help navigate the complexities of blended finances.
A young couple entering into an antenuptial contract generally has very little net worth and, as such, often record their respective commencement values for accrual purposes as zero. However, for couples marrying later in life, their antenuptial agreements may be more complex as a result of the wealth that each of them has accumulated prior to the date of the marriage. It is always advisable to seek guidance from an experienced attorney when structuring your ANC, bearing in mind that certain assets are excluded when calculating the accrual. These include any assets that accrue to a person before the marriage, any inheritance, legacy, trust, or any donation received by a spouse during a previous marriage.
Couples can expressly include or exclude certain assets in the ante-nuptial contract depending on their circumstances. For instance, a couple can expressly exclude their retirement fund benefits from the accrual providing that the ANC is worded accordingly. Where you enter into a new relationship but choose not to get married, bear in mind that you may be exposing yourself to significant financial risks.
Contrary to popular opinion, our law does not recognise what is often referred to as ‘common law marriage’ and confers no legal status on couples who live together rather than get married. In the absence of a valid will, the laws of intestate succession will apply which means you will not stand to inherit from your partner. Further, in the absence of a marriage contract, you will have no claim to your partner’s pension interest if the relationship comes to an end. Ideally, couples living together should sign a cohabitation agreement and ensure that they make adequate provision for each other in terms of a valid will.
Another important factor when it comes to planning for complex family structures is the issue of retirement fund beneficiary nomination. In the case of retirement funds, bear in mind that your beneficiary nomination is merely a guide to the fund trustees as to how you would like your benefits distributed in the event of death. However, the trustees are obliged to consider the circumstances of all your potential financial dependants – a process which could take up to a year to complete – before deciding how your death benefits will be distributed. This means that, even though you have nominated your current spouse and your mutual children as beneficiaries to your retirement fund, the trustees could find that your ex-spouse, children from a previous relationship or an illegitimate child meet the criteria of financial dependency and are eligible for a share of the death benefit.
This law is applicable to pension funds, provident funds, preservation funds and retirement annuities, and is designed to ensure that all financial dependants are considered in the process. When making the award, the fund trustees will also take into account elderly parents, adult children that were relying on your financially, and anyone else that you were providing financial assistance to before your death.
Providing for loved ones in a blended family can be further complicated if you nominate minor children on a life insurance policy. In terms of our law, children under the age of 18 lack contractual capacity and are therefore unable to inherit. This means that the proceeds of any policy where a minor is the nominated beneficiary will be paid to the minor’s legal guardian which could, for instance, be your ex-spouse. As a result, your ex-spouse could end up administering the proceeds of your life policy, which is exactly the opposite of what you intended by nominating your minor child in the first instance. This situation can be further exacerbated where the minor child has more than one legal guardian.
Generally, when it comes to life policies intended to provide for the needs of minor children, the best solution is to set up a testamentary trust in terms of your will and to nominate the trust as the beneficiary to the policy. This means that, upon your death, the proceeds will be paid to your trust and will be managed by trustees appointed by yourself.
It is never advisable to draft a DIY will, more so in the case of a blended family where estate planning can be somewhat more complex. As mentioned above, if you die without a valid will, your closest relatives will inherit from you in accordance with a strict, predetermined order of inheritance as set out by the Intestate Succession Act of 1987, with your spouse and children (including adopted children and children from a previous relationship/marriage) benefiting first. This means that, unless you have formally adopted your stepchildren, they will not stand to inherit from your estate should you die without a will.
Further, if you and your partner are living together but unmarried, she will not inherit from you according to the laws of intestate succession. As such, your will is a powerful tool to make adequate provision for you loved ones, including natural, adopted or stepchildren, a life partner, aged parents who rely on you for financial support, or even a former spouse that you want to make provision for in your will.
In terms of the Medical Schemes Act, any person who is financially dependent on you can be registered as a dependant. This includes your spouse or partner, children under the age of 21, children older than 21 who have mental or physical disabilities, aged parents, immediate family in respect of whom you are legally liable for family care and support, although the scheme may require that you provide proof of such dependency. This means that you could have your minor children from a previous relationship registered on your medical aid, together with your current spouse and children, as well as your aged parents. The same applies to your gap cover benefit, although there may be restrictions in terms of the number of dependants you can include on a family gap cover policy or in respect of the age of a dependant in the case of a registering an elderly parent.