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Financial planning for couples married with the accrual system

What couples need to be aware of when making financial decisions.

If you’re married out of community of property with the accrual system, you will have an ante-nuptial contract in place which sets out the financial consequences of your union. Including the accrual system is a way to ensure that each spouse gains a fair share of whatever the couple has built together when the marriage comes to an end either through divorce or death. Where a couple is married with the accrual system there is no joining of estates, and each spouse has full and exclusive control over their own property while the marriage subsists. But, how does the accrual system affect a couple’s financial planning during the subsistence of the marriage, and what should the couple be aware of when making financial decisions?

Fixed property

If a couple is married with the accrual, each spouse is free to purchase fixed property in their own name (with no spousal consents required) or as co-owners. Regardless of whether the property is purchased individually or jointly, the property will form part of the accrual and will be taken into account when the marriage is dissolved. If a person owns fixed property at the time of entering into an ante-nuptial contract, the value of the property at the time of the marriage should be recorded in the ANC. This is because when the marriage is dissolved the extent to which the property has increased in value from the date of marriage to the date of death/divorce will be included in the accrual calculation – meaning that only the profit is included in the joint estate for accrual purposes. Remember, if the spouse obtained ownership of the property through inheritance before the marriage, such property can be excluded from the accrual in the ante-nuptial contract. Property obtained through inheritance during the marriage is automatically excluded from the accrual. Having said that, a couple is free to tailor-make their antenuptial contract according to their unique needs and, in doing so, can choose to exclude other assets from the accrual including retirement funds or fixed property.

Debt

A significant advantage of the accrual system is that each spouse remains responsible for his/her own debt. During the subsistence of the marriage, the marriage is effectively out of community of property in that each party’s estate remains separate. This means that if one spouse sets up a business which cannot pay its debts, the estate of the solvent spouse remains protected from creditors. Importantly, where a couple is married with the accrual, only the debt that they incurred from the commencement of their marriage is included in the accrual calculation. Any debt that was incurred prior to their marriage will be excluded from the accrual calculation. The right to share in the accrual can only be exercised when the marriage is dissolved which means that the accrual cannot be attached by creditors while the marriage is in existence. It is important to bear in mind that the reckless or negligent financial conduct of one spouse can serve to prejudice the other spouse’s share of the accrual, and our law provides recourse for this in section 8(1) of the Matrimonial Property Act. In terms of this legislation, a spouse does not need to bring divorce proceedings to protect their share of the accrual but rather can bring an application for the immediate division of the accrual in order to protect their interests. If successful, the court may in terms of Section 8(2) order that the marriage is no longer subject to the accrual system but will be subject to complete separation of property. 

Credit score

When married with the accrual, each spouse enters the marriage with their own credit score. If your spouse had a poor credit rating when entering into the marriage, your score will not be affected in any way and your credit scores will not be merged upon marriage. However, if you and your spouse decide to apply jointly for credit products such as a home loan or joint credit card, bear in mind that financial providers tend to look at your dual income and your respective credit scores. If one spouse has a bad credit history the application may be rejected or subject to a higher interest rate. If you and your spouse operate a joint account and default on a payment, the payment default will be recorded on each of your credit records. When it comes to financial planning, therefore, bear in mind that while your estates may be separate, each of you has an obligation to maintain a good credit score for the sake of your joint future.

Estate planning

Estate planning is an important exercise for couples married with the accrual system to undertake to ensure that each spouse is adequately provided for in the event of a tragedy. The accrual comes into effect when one spouse passes away which means that it is the executor’s job to calculate the increase in the real value of the respective estates and to calculate the accrual. If the surviving spouse’s share is less than the deceased spouse, they will have a claim against the deceased estate for their share of the accrual which the executor will then be obligated to pay over to them from the estate. Where a spouse bequeaths all their assets to the surviving spouse, no problems should arise from such an accrual claim. However, if one spouse bequeaths some or all of their assets to a third party, this could give rise to liquidity problems in the estate where the surviving spouse lodges an accrual claim against the deceased estate. Couples married with the accrual should, therefore, have an estate plan prepared for them to ensure that there is sufficient liquidity in each of their estates in the event of death.

Retirement planning

From a retirement planning perspective, it makes financial sense for each earning spouse to contribute the maximum tax-deductible amount towards an appropriate retirement fund in their own names. Where a spouse does not earn an income, there is no tax advantage for investing in a retirement annuity and it may, therefore, make sense for the earning spouse to contribute towards an approved retirement fund. This does not mean that the non-earning spouse will be prejudiced when it comes to retirement funding as the value of the member spouse’s retirement fund will be included in the accrual calculation unless specifically excluded in the antenuptial contract. If the marriage dissolves as a result of divorce, the non-member spouse will be able to claim a share of the member spouse’s pension fund interest calculated as at the date of divorce. One particular risk worth noting in this regard is that the non-member spouse can only claim a share of the member spouse’s pension interests if they are a member of the fund at the time of the divorce. It is not unheard of in particularly acrimonious divorces for the member spouse to resign from the retirement fund prior to the date of divorce in order to avoid a claim against their retirement fund.

Trusts

Where married with the accrual system, each spouse is free to set up trusts, whether inter vivos or testamentary, in accordance with their needs and objectives. This means that a spouse is free to transfer assets they own into a living trust without the permission or knowledge of the other spouse. Sadly, inter vivos trusts are often misused by trust founders as a way of hiding assets from the other spouse when going through a divorce. However, the legislation does make provision for a spouse to bring an application to the high court to have trust assets taken into account when determining the accrual. Having said that, the prejudiced spouse will need to prove that the trust founder retained control of the trust assets and that, barring the trust, they would have acquired and owned the assets in their name. In other words, the onus is on the applicant to prove that the trust is effectively a ‘sham’ trust designed to hide assets from their spouse.

Moveable property

Throughout the course of the marriage, it is only natural for a couple to acquire moveable property such as sports equipment, furniture, clothing, household appliances, jewellery, vehicles and so on. Sadly, when it comes to divorce, many proceedings become unstuck because couples cannot see eye-to-eye on the ownership of the so-called ‘small stuff’. Incurring legal fees to win an argument over who owns the microwave is counterintuitive and only serves to diminish the value of the joint accrual. To avoid arguments and costly delays in the event of a divorce, make filing and record-keeping a habit in your relationship.

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Eric Jordaan

Crue Invest (Pty) Ltd

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