Estate planning is an important exercise for couples married with the accrual system to undertake as failing to deal adequately with the impact of the accrual system where the marriage is dissolved by death can lead to serious financial complications and heartache. In this article, we explore why estate planning is fundamental in accrual system marriages and the mechanisms that can be used to ensure that no unforeseen consequences arise in the event of death.
While both spouses to accrual system marriage are alive, their estates are effectively out of community of property, and each spouse has full contractual freedom. It is only in the event of the first-dying spouse that the accrual system comes into effect. The accrual system was introduced in South Africa in 1984 in an attempt to provide marrying couples with a matrimonial property regime to share in the growth of their estates during the marriage, and to a large extent, this has been achieved. However, there remain a number of scenarios where, on the death of the first-dying spouse and in the absence of proper estate planning, the estate of the deceased or that of the surviving spouse can be unnecessarily financially compromised.
Upon the death of the first-dying spouse, the increase in the real value of the respective estates must be determined and accordingly the accrual claim. In its most simplistic form, if the surviving spouse’s share is less than that of the deceased spouse, they will have a claim against the deceased estate for their share of the accrual. In terms of ranking, all debts and liabilities must first be paid from the deceased estate before the surviving spouse can claim their share, but their claim ranks before any bequests or inheritances can be distributed from the estate.
On the other hand, where the deceased spouse’s estate is less than that of the surviving spouse, the deceased estate has an accrual claim against the estate of the surviving spouse, and this claim is deemed property in the estate of the deceased. 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. Further, where a spouse dies intestate this can have devastating consequences for the surviving spouse, especially in the case of a second marriage where the spouses have children from a previous marriage or relationship.
Scenario 1: Where the deceased spouse’s estate is larger
Let’s take the situation where the deceased spouse’s accrual is larger than that of the surviving spouse, in which case the surviving spouse would have an accrual claim against the deceased’s estate. Where the deceased has bequeathed everything to his spouse in his will, no complications should arise. However, let’s assume that the deceased made a bequest of R1 million to his daughter from a previous marriage. The surviving spouse’s accrual claim will take precedent over any bequests made in the deceased’s will which means that the executor will need to ensure that the surviving spouse gets her fair share of the accrual before any distributions are made. This is because the surviving spouse has a preferred claim which is determined before effect is given to any testamentary disposition or any inheritance that flows in terms of the laws of intestate succession. The result could be that there is insufficient liquidity in the deceased’s estate to honour the bequest that he made to his daughter, thus nullifying the intentions laid out in his will. If the deceased did not undertake a careful estate planning exercise, he may have also not accounted for the surviving spouse’s accrual claim which may, in turn, leaves the surviving spouse financially compromised.
Scenario 2: Where the surviving spouse’s estate is larger
In this scenario, we have assumed that the wife, being the first-dying spouse, has a smaller accrual than that of her husband (the surviving spouse). The couple jointly owns their primary residence. In her will, the wife leaves her full estate to her son from a previous marriage. As her estate is smaller, in the event of her death her deceased estate will have an accrual claim against that of her husband, and this claim is deemed property in her deceased estate. In winding up the estate, the executor will need to lodge an accrual claim against the husband’s estate on behalf of the deceased. Depending on the liquidity in the husband’s estate, especially in circumstances where the bulk of the husband’s wealth is held in retirement funds and/or business interests, the husband may be forced to realise the primary residence to pay what is owing to the deceased estate in terms of the accrual claim.
Scenario 3: Where the first-dying spouse dies intestate
In this scenario, we have assumed that neither spouse has a will in place. Both spouses have been married before and have children from their previous marriages. The wife is the first-dying spouse and has the smaller estate. Her husband, whose assets are made up of business interests, retirement funds and a primary residence, has the larger estate. In terms of the laws of intestate succession, the husband and the children of the wife will be entitled to an equal share of the deceased’s estate. If not adequately planned, the surviving spouse may be forced to realise assets to pay his wife’s heirs their share of the accrual, and this could severely prejudice his financial future. These consequences could have been pre-empted and guarded against by an effective estate plan.
A lack of basic estate planning can lead to a number of far-reaching, unintended consequences which financially devastate those left behind. Our law provides a number of very effective estate planning mechanisms that can easily be employed to avoid scenarios such as those highlighted above from occurring. Death is traumatic enough, and a lack of estate planning can serve to compound the tragedy and leave those left behind in a financially vulnerable position.