Arguably one of the most important documents you’ll ever sign, your marriage contract sets out the financial consequences of your relationship and getting it wrong can have dire consequences when your marriage comes to an end. In this article, we take a closer look at 5 key factors in the context of one’s marriage contract and how they can impact your future financial position within the marriage.
Assets
Understanding how your assets are dealt with in the context of your marriage is essential. If you opt for a community of property marriage, all assets owned by you and your spouse will combine into a single joint estate, with each of you holding a 50% share. This includes assets owned before marriage and those acquired during the marriage, with a few exceptions. Conversely, choosing to marry out of community of property means that both you and your spouse will retain and manage your own separate estates, encompassing assets obtained both before and during the marriage. The accrual system, being the default system when entering into an antenuptial contract, comes into effect upon the dissolution of the marriage through either death or divorce where each spouse’s share of the accrual is calculated. Generally speaking, in the absence of the accrual system, each spouse retains their respective estates upon dissolution of the marriage.
Debt
Debt is a significant contributing factor to marital breakdown, so it is important to fully understand the financial implications of debt in the context of your future marriage. While the concept of a community of property marriage may appear equitable on the face of it, this type of marital regime involves the joining of all debt – in other words, all debt that was incurred before the marriage as well as all debt incurred by each spouse during the course of the marriage. This means that, through the act of marriage, you can become jointly and severally liable for the debt of your spouse – even if you entered into the marriage debt-free. What’s more, while you remain married, your spouse can continue incurring debt in the name of the joint estate for which you can be held personally liable. Conversely, parties to an out of community marriage retain separate estates throughout the duration of the marriage without the ability of one spouse to bind the other without their knowledge and consent. Again, it is only when the marriage dissolves through either death or divorce that the accrual calculation comes into effect in which case any debt held in either spouse’s name will be used when calculating the accrual value. Where the accrual system has been excluded, each spouse remains personally liable for their respective debt.
Insolvency
A devastating consequence of an in community of property marriage is that where one spouse is declared insolvent, the other spouse will simultaneously be declared insolvent. This is because there is only one estate which, if found to be insolvent, will affect the joint owners of the estate. As such, a significant advantage of an out of community marriage is that if one spouse becomes indebted or declared insolvent, the other spouse’s estate cannot be attached by creditors. Having said that, keep in the context of a marriage with the accrual system, one spouse’s reckless financial dealings can impact on the other spouse’s share of the accrual. To protect against this, Section 8(1) of the Divorce Act provides that where one spouse’s conduct seriously prejudices the value of the estate and, in doing so, prejudices the other spouse’s share of the accrual, the prejudiced spouse may approach the courts for an immediate division of the accrual – meaning that the prejudiced spouse does not need to institute divorce proceedings in order to protect the accrual of their estate.
Divorce
When it comes to divorce, the process in a community of property marriage is relatively simple as it involves the joint estate being equally divided between the two spouses. The only exception to this is where one spouse brings an application for a forfeiture order on the grounds that the other spouse has unduly benefitted financially from the marriage. So, while the divorce process may appear simple, it is very often inequitable as it can result in one spouse benefiting more than he/she contributed economically to the marriage. Similarly, an out of community marriage that excludes the accrual system can also result in the economically weaker spouse being prejudiced in the event of divorce, especially in the case of a stay-at-home parent who was unable to generate wealth in their own name during the subsistence of the marriage. When it comes to divorce, the accrual system is widely believed to be the most equitable way of sharing assets between divorcing spouses because the system is designed to ensure that both spouses share equally in the assets they’ve accumulated during their marriage – although note that it’s essential that the ante-nuptial contract accurately records the respective commencement values and identifies any assets to be excluded from the accrual.
Death
Where a marriage is dissolved by the death of the first-dying spouse, the nature of the marriage contract will determine how the estate will be administered. Where a spouse to a community of property marriage dies, it’s important to know that the entire estate will be wound up as there cannot be one party to a joint estate. Once all costs and debts have been paid, the surviving spouse will have a claim against the deceased estate for their 50% share, while the remaining 50% of the net estate will be distributed in terms of the deceased spouse’s will. In the absence of a will, the estate will be distributed in terms of the laws of intestate succession. Although the accrual calculation in the event of the first-dying spouse’s death can be complex, it is inherently more equitable in that each spouse shares equally in the assets that accrued during the duration of the marriage. On the death of the first-dying spouse, the executor will take the commencement value of each estate as it appears in the ante-nuptial contract as a first step to determining the accrual, ensuring that the growth is shared equally between the two spouses. To the extent that the deceased’s estate is larger, the surviving spouse has an accrual claim for their share of the accrual. Conversely, in the event that the surviving spouse’s estate is larger, the deceased’s estate has a claim for its share of the accrual.
Understanding these five factors in respect of your marriage contract is essential for your future financial planning. By understanding the division of assets, debt responsibility, insolvency, and what happens on dissolution, you are able to better safeguard your financial future.
Have a super day.
Sue
