Death and the accrual system: Here’s what to know

Man and woman discussing in front of laptop

Many married couples fail to consider the estate planning implications of the accrual system in the event of death. Where a couple is married with the accrual system, each spouse retains their own separate estate and upon the death of the first-dying spouse, the marriage is dissolved and the accrual calculation arises. Although the accrual system is considered most equitable form of matrimonial property regime, calculating the accrual can be technical and can add a layer of complexity to one’s estate planning. Here’s how it works.

If you’re married out of community of property, your ante-nuptial contract – which would have been signed before your wedding – will set out the financial consequences of your marriage. Ante-nuptial contracts are fully customisable in that they allow couples to incorporate anything into the agreement provided that the terms are not illegal or immoral. For instance, when setting up the agreement, spouses can choose to exclude certain assets from the accrual and, in doing so, must clearly set out the details of the excluded assets. So, if a spouse wishes to exclude a piece of jewellery, she will need to include a valuation certificate and an accurate description of the item. Another example would be when a spouse wants to exclude a specific retirement fund from the accrual, in which case she would need to clearly define the name of the fund together with its policy number. However, the contract must be clear on which assets are excluded and those which make up the general commencement value to avoid double accounting. In terms of general exclusions, the following assets are automatically excluded from the accrual unless otherwise agreed to by the spouses:

  • An inheritance, legacy, or donation which accrues to a spouse during the subsistence of the marriage;
  • Any donation between spouses;
  • Any amount accrued to a spouse by way of legal damages.

Your ante-nuptial contract will include the commencement value of each spouse’s estate which is the value of their respective estates on the date of marriage. If a spouse wants to specifically exclude fixed property from the ante-nuptial contract, it may make sense to rather include the value of the property in the commencement value. This is because the property may be sold down the line and there may be problems tracing the funds when the marriage comes to an end through either death or divorce.

The general principle of the accrual system is that each spouse is entitled to take out the asset value that he/she brought into the marriage, and whatever is built together during the subsistence of the marriage is shared equally. So, at the beginning of the marriage, their respective commencement values will be recorded in the antenuptial contract. If no value is recorded, each spouse will have a presumed commencement value of R0. On the death of the first-dying spouse, the spouse with the smaller accrual will have an accrual claim against the spouse with the larger accrual, with the accrual claim being equal to 50% of the difference.

Practically, this means that where the first-dying spouse has the larger estate, the surviving spouse will have an accrual claim against his/her deceased estate, with this claim being a preferred claim which must be paid before any portion of the deceased estate is distributed. Where the first-dying spouse has the smaller estate, his/her deceased estate will have a claim against that of the surviving spouse. Bear in mind that the accrual claim is only acquired on the dissolution of the marriage and, as such, is a contingent as opposed to a vested right.

Unless both scenarios have been planned and accounted for in the form of a detailed estate plan, complications can arise which can cause heartache, frustration, and financial stress both for the surviving spouse and for the deceased’s heirs and beneficiaries. This is particularly the case where the spouses have children from a previous marriage or where the deceased bequeathed assets to a third party, in other words, someone other than his/her spouse.

Case study: Thabo and Maxine

Let’s consider the estate plan of Thabo and Maxine who are married out of community of property with the accrual. Upon signing their ante-nuptial agreement, they each indicated a commencement value of R0. Thabo and Maxine were both previously married and each had children from their first marriage. Thabo’s estate is currently valued at R20 million which includes:

  • Business interests: R10 million
  • Primary residence: R5 million
  • Retirement annuity: R5 million

Maxine’s estate is valued at R5 million and includes:

  • Jewellery collection: R1 million
  • Unit trust portfolio: R4 million

In terms of Thabo’s Will, he has bequeathed his entire estate to his children from his first marriage and has nominated his children as beneficiaries on his retirement fund as they are both still studying and are financially dependent on him. Maxine has bequeathed her entire estate to her only child from her first marriage.

Scenario 1: Thabo is the first-dying spouse

Thabo passes away tragically in a car accident and his executor calculates the accrual as follows:

The value of Thabo’s estate: R20 000 000

Less: The value of Maxine’s estate: R4 000 000

Total: R16 000 000/2

Accrual: R8 000 000

As can be seen from the above, Maxine now has an accrual claim against Thabo’s deceased estate for R8 million which creates a liquidity problem in the deceased estate. This is because Thabo has bequeathed his primary residence (R5 million) and his business interests (R10 million) to his children, while the remainder of his net asset value is housed in retirement funds. Maxine’s accrual claim of R8 million is a preferent one and must be honoured before any other heirs or beneficiaries receive anything from the estate. To honour the accrual claim, the executor will need to realise some of Thabo’s assets which were actually intended for his children. To complicate matters further, Maxine was financially dependent on Thabo at the time of his death which means that she will likely be entitled to a share of his retirement fund death benefits. So, even though Thabo had expressed his wishes clearly in his Will, Maxine’s right to an equal share of the accrual thwarted Thabo’s estate plan and left his children with a diminished inheritance. If Thabo had had an estate plan prepared for him, this liquidity problem could have been adequately resolved through appropriately structured life cover to the value of the accrual claim on Thabo’s life with his estate as the nominated beneficiary.

Scenario 2: Maxine is the first-dying spouse

In this scenario, we have assumed that Maxine passes away before Thabo. Using the same accrual calculation above, Maxine’s deceased estate would have an accrual claim for R8 million from Thabo, which again causes liquidity problems for Thabo. Thabo’s wealth is tied up in business interests, fixed property, and his retirement fund, and he does not have access to R8 million to honour the claim. Thabo is only 48 years old at the time and, as such, cannot access any capital in his retirement annuity. His only option is to liquidate his property and/or business interests which will severely compromise his financial future. Again, if Maxine had put an estate plan in place, her accrual claim could have been provided for using life cover on Maxine’s life with Thabo as the nominated beneficiary.

As is evident from the above, a couple’s estate plan should always include ‘first-dying’ and ‘second-dying’ spouse scenarios to ensure that there is sufficient liquidity in each estate regardless of which spouse passes first.

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