When one parent becomes a full-time caregiver, the shift from two incomes to one places strain on the family budget while costs of raising children increase.
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Couples married in community of property share a single, undivided estate. At first glance, this may appear to simplify the financial planning process, after all, everything is merged into one common pool. Yet, as many couples come to realise, the community of property system is far from perfect. Its shortcomings, particularly when it comes to debt and estate planning, highlight the importance of understanding the regime in detail.
Understanding the nature of community of property: By default, South Africans who marry without an antenuptial contract are deemed to be married in community of property. This means that all assets and liabilities belonging to each spouse are combined into one joint estate, shared equally. There are limited exceptions: for instance, if an inheritance is specifically excluded by a Will, it will not fall into the communal pot. While on paper, this system may offer transparency and simplicity, in practice, it can create serious complications, especially where one spouse brings debt or financial obligations into the marriage.
Joint liability for debt: Perhaps the most significant flaw of this system lies in debt exposure. Both spouses are jointly and severally liable for all debts, including those incurred before the marriage, and obligations such as maintenance payments to children from previous relationships. Remember, creditors view the joint estate as a single entity, which means that reckless financial decisions by one spouse can bind both. As such, if the estate is unable to meet its obligations, creditors have full recourse against the estate, and insolvency can affect both partners.
Safeguards through spousal consent: The law attempts to protect spouses by requiring consent for certain transactions. While day-to-day activities, such as making household purchases, withdrawing cash, or depositing money, can be carried out independently, larger or more significant transactions require spousal consent. For instance, written spousal consent is necessary for the sale of fixed property or for entering into credit agreements, while verbal consent suffices for certain other financial dealings. Although these safeguards are important, they do not completely shield couples from the inherent risks of a shared estate.
Estate planning considerations: The consequences of a community-of-property marriage extend beyond day-to-day financial management. On the death of the first-dying spouse, it’s important to know that the joint estate ceases to exist because there can be no ‘joint’ estate with only one owner. The executor is therefore required to wind up the entire estate, settle all debts and costs, and then allocate the remainder.
The surviving spouse has a claim to 50% of the net joint estate, with the other half distributed to the heirs of the deceased spouse. This can create liquidity problems, particularly where illiquid assets such as property are involved. For instance, if the deceased spouse bequeaths their 50% share of the family home to a child or third party, the executor may need to sell the property to satisfy the heirs’ claims. To avoid such unintended consequences, couples should prepare detailed estate planning calculations to test liquidity and ensure that the surviving spouse will be adequately provided for.
Divorce and the division of the joint estate: In the event of divorce, all assets and liabilities acquired during the marriage form part of the joint estate and must be divided equally. While couples retain contractual freedom to negotiate a settlement that suits their circumstances, disputes can escalate – especially in acrimonious divorces. Where couples fail to reach an agreement, note that a court may appoint a liquidator to divide the estate, an outcome that is rarely satisfactory.
Retirement funds and pension interests: At divorce, the pension interests of both spouses are considered part of the joint estate, and each spouse is entitled to claim 50% of the other’s pension interest as at the date of divorce. For pension, provident, and preservation funds, the pension interest is defined as the benefit the member would have received had they resigned on the divorce date. In the case of a retirement annuity, it equates to the contributions paid in plus simple interest at the prescribed rate. It’s important to note that these rules can significantly impact divorce settlement negotiations, and advice should always be sought from an experienced advisor.
From a financial planner’s perspective, it is often surprising how few married couples understand the implications of their marriage contract. Every marriage will end, either through death or divorce, and careful planning for both eventualities is essential. By understanding the rights and obligations imposed by a community of property marriage, couples can make informed decisions, mitigate risks, and ensure that both parties are adequately protected.
* Odendaal is a certified financial planner at Crue Invest.
PERSONAL FINANCE