If you and your spouse are married in community of property, this means that you share a joint, undivided estate that is made up of your respective assets and liabilities, including those that accrued prior to the date of your marriage. As the default marital regime, there is typically no antenuptial contract that supports a community of property marriage and the legal consequences of your marriage are set out in the Matrimonial Property Act of 1984.
The community of property marital regime has many shortcomings, especially when it comes to debt. Both spouses in such a marriage remain jointly liable for each other’s debt, including any debt that either spouse incurred before the marriage. If your spouse dies heavily indebted, even if you had no knowledge of the debt, it could have devastating consequences when it comes to winding up the joint estate. Here’s what happens.
Winding up the joint estate
On the death of the first-dying spouse, the entire joint estate is wound up. This is because there can be no ‘joint estate’ if there is only one owner. The executor of the joint estate will need to first settle all the liabilities that exist in that estate regardless of who incurred the debt or when the debt was incurred. Remember, spouses to a community of property marriage are jointly and severally liable for all the debt regardless of whose name the debt is registered in, including all contractual debt, loans, mortgage bonds, and credit cards.
Once the executor has paid all the estate’s creditors, you will then have a claim for 50% of whatever is left in the deceased estate, while the balance will devolve on your spouse’s nominated beneficiaries in the event of testate succession, or on his heirs in terms of the Intestate Succession Act. Where the first-dying spouse was heavily indebted, the surviving spouse can be left financially vulnerable – possibly even financially devastated – as a result of her partner’s actions while he was alive.
For instance, take a situation where a retired couple married in community own their primary residence which is valued at R2 million. The couple has an investment of R3 million which they draw from to cover their living expenses. Prior to his death, the husband engaged in a failed business venture and owes his creditors R2 million, unbeknown to his wife. In his will, the husband bequeaths his 50% of the home to his adult daughter. In winding up the joint estate, the creditors will first be paid the R2 million owing to them, assuming that the executor will use R2 million from the couple’s investment for these purposes. Please note that for the purposes of this example we have not included tax. The estate now consists of a property valued at R2 million and the remaining invested capital of R1 million. In terms of the deceased’s will, his daughter is entitled to 50% of the home, being R1 million in value. This leaves the surviving spouse with only R1 million capital left to support her financially. She may, therefore, be forced to realise the value of the home to ensure that she has funds available to cover her living expenses, but only owns 50% of the property. As a result of the deceased’s actions, the surviving spouse could be left with insufficient capital to live off, even though she had no part in racking up the debt.
From an estate planning perspective, it is always advisable for couples married in community of property to have sight of each other’s wills and to ensure that there would be sufficient liquidity in the estate should one of them die.
By law, the executor is required to administer the entire estate on the passing of the first-dying spouse and not just one half of the deceased’s share. As such, the executor’s and Master’s fees are calculated on the gross value of the joint estate, with all other standard administration costs being payable from the joint estate, with the exception of funeral costs or administration costs relating to assets excluded from the joint estate (if any) which are paid from the deceased’s 50% share of the estate. Where the first-dying spouse bequeaths his share of the joint estate to the surviving spouse, this could result in executor’s and Master’s fees being paid twice on the same assets. It is, however, possible to negotiate your executor’s fees upfront when drafting your will.
When it comes to estate duty, only the deceased’s half of the net joint estate is taken into account when determining the dutiable estate, keeping in mind the R3 500 000 abatement.
CGT and transfer duty
When it comes to capital gains tax, death is regarded as a disposal for CGT purposes. If the first-dying spouse bequeaths his share of the joint estate to the surviving spouse, the surviving spouse is treated as having obtained the asset at the same time, at the same cost, in the same currency and for the same purpose as the deceased. However, on the death of the second-dying spouse, CGT will need to be paid. Where the first-dying spouse bequeaths immovable property in his will or where an heir inherits immovable property in terms of intestate succession, no transfer duty is payable.
Once the banks receive notification of your spouse’s death, it is possible that his accounts will be frozen. If you and your spouse share a joint bank account, this may leave you in a position where you are unable to draw money from your bank accounts, keeping in mind that no debit orders can run off a frozen bank account. While the executor can apply to the Master to have funds released for the maintenance of the surviving spouse, this process can be time-consuming and can leave the surviving spouse financially cash strapped.
One of the legal consequences of marriage is that it gives rise to a duty of support between spouses.
As such, where the first-dying spouse does not make adequate financial provision for the surviving spouse in terms of his will, the surviving spouse may bring a claim against his estate in terms of the Maintenance of Surviving Spouses Act for the provision of reasonable maintenance needs. Her claim will enjoy the same preference as a maintenance claim from a child dependant.
As mentioned above, community of property is a deeply flawed matrimonial property system that can result in one spouse being financially prejudiced through the actions of the other spouse. That said, it is important for couples married in community of property to remember that only their 50% share of the net joint estate is theirs to bequeath. Further, a spouse cannot use their will to remove assets from the joint estate in the event of his death.
Regardless of one’s matrimonial property regime, all couples should undertake a transparent, comprehensive estate planning exercise to ensure that no difficulties arise on death.