The financial consequences of divorce should never be under-estimated. In the build up to a divorce, it is always advisable to seek independent financial counsel to ensure that you fully understand the implications that a proposed divorce settlement will have on your financial future. In doing so, consider the following:
Emotions cost money
Divorce is one of life’s most stressful events and, regardless of how seemingly amicable a divorce may appear to be, emotions are bound to run high and there are financial risks to making emotional decisions. Whether or not there is fault on one or both sides, it’s hard to keep one’s emotions in check when navigating a divorce. Standing your ground on the basis of a principle you hold dear or trying to exact revenge on your spouse through litigation costs money and ultimately impacts your future financial security. Emotional attachments to physical objects or immoveable property, while understandable, can cost you dearly. While you may be intent on retaining the family home at all costs because of the sentimental value it holds for you, this may not be the best decision from a financial perspective. Be intentional about managing your emotions when making financial decisions, and be sure to bounce all decisions off someone who is independent, impartial and financially savvy.
Ignorance also costs money
While you may not have been actively involved in the joint finances, do not use this as an excuse to remain ignorant in this regard. While you may want to believe that your spouse will act in your best interests, the reality is that he is likely to put his own financial interests first when negotiating a divorce settlement. Trying to negotiate a divorce settlement with insufficient or partial information on hand is impossible, so make it a priority to learn as much as possible about your joint finances, assets, liabilities, trusts, offshore investments and business interests.
Get financial advice before your divorce
While many people seek legal advice before filing for a divorce, very few take steps to obtain independent financial advice before doing so. Agreeing to a divorce settlement without understanding how it will impact on your financial future and your retirement plan is never advisable. While the proposed divorce settlement may appear attractive on paper, how does it practically translate for you financially? What rent will you be able to afford? What retirement funding shortfall will you be left with? To what extent will you need to cut back on your living expenses? What are the tax implications? Before signing a divorce settlement, be sure to get an independent advisor to prepare a comprehensive financial plan based on the terms of the settlement so that you have a clear picture of what your financial future will be like.
Secure your pension fund interests
If you are awarded a portion of your spouse’s pension fund interest in terms of the divorce settlement, it is of the utmost important that the wording of the divorce order is correct. Incorrect or incomplete wording can result in the retirement fund refusing to pay out the pension interest. Bear in mind that if you are married in community of property, the non-member spouse will be entitled to claim 50% of the member’s pension interest as at the date of divorce. On the other hand, if you are married with the accrual system, your spouse’s pension fund value will be taken into account to determine the value of his estate as part of the accrual calculation. In order to ensure that you have a valid claim for your share of the pension fund interest, your divorce order must specifically name the retirement fund (or funds) in the divorce order, and not just the name of the fund administrator. The order should also specify the amount that must be paid to you, and the instruction must be for the fund (and not the member) to pay over the interest.
Preserve your capital
If you have been awarded capital as part of your divorce settlement, be sure to protect your financial future by reinvesting as much capital as possible. If you are awarded a portion of your spouse’s pension fund interest, you can choose to either withdraw the funds or transfer them to a fund in your own name. Bear in mind, however, that there are tax implications for the withdrawal of retirement fund money, so be sure to seek financial advice. Similarly, if you have been awarded discretionary investments as part of the settlement, bear in mind that there may be tax and CGT implications of withdrawing this capital. While you might be keen to invest in a new home, take an overseas holiday or just spoil yourself a little, rather keep your money invested until emotions have settled down and you have a clearer picture of how you want to move forward.
Updating your Will
Not updating your Will after your divorce can have disastrous consequences and may result your spouse unintentionally inheriting from you. As such, Section 2B of the Wills Act specifically deals with circumstances where a person dies after having been divorced. In essence, the Act provides a three-month leeway for divorcing spouses to amend their Wills in line with their new circumstances. This means that if a person dies within three months of her divorce, her estate will be distributed as if her ex-spouse had died before her. In other words, her ex-spouse will not stand to benefit from her estate. However, after the expiration of three months and in the absence of an amended Will, it will be assumed that the testatrix intended for her ex-spouse to inherit in terms of her Will. Importantly, when you do amend your Will following a divorce, be sure to include a clause which specifically revokes all previous Wills and make sure your new Will is clearly dated so there is no confusion as to latest Will. If you have a separate Will for your foreign assets, be sure to update this as well. Further, if you have appointed your ex-spouse as the executor in your Will or as a trustee to a testamentary trust, be sure to make changes where necessary.
Amending your beneficiary nomination
To ensure the correct distribution of your assets in the event of your death it is not enough to simply update your Will. If you have life insurance policies and living annuities in place with beneficiaries nominated, remember that these policies will pay out directly to those beneficiaries in the event of your death. Be sure, therefore, to make any beneficiary nomination changes directly with the insurer or investment house.
Securing your maintenance
If your ex-spouse has a maintenance obligation in terms of the divorce order, you may want to consider putting life cover in place to protect this obligation, bearing in mind that a maintenance order in favour of minor children can form a claim against your ex-spouse’s estate should he die. A correctly structured life policy on the life of your ex-spouse can ensure that there is sufficient liquidity in his estate to meet his obligations should he pass away.
Recalibrating your retirement plan
For most of your married life, you and your spouse would have been saving towards your joint retirement; and the structure and nature of your retirement funding would have been built on your common vision for your retirement years. Your divorce will likely up-end your retirement plans forcing you to completely review and recalibrate. Being solely responsible for your future financial security can be overwhelming and will no doubt take discipline and careful planning. Keep in mind that any pension fund interest that has been awarded to you as part of your divorce order was earmarked for your retirement so, if possible, preserve this money for its original purpose.
Unfortunately, budgeting for one person as opposed to two does not mean that your budget is halved. Certain costs are fixed regardless of how many people benefit from them, such as rental, certain utilities, subscriptions, garden and domestic services, and the costs of caring for pets. At the same time, you will need to factor in how much you need to contribute towards your retirement funding and to make any shortfalls. As a single parent without the help of another set of hands, you may also need to account for the costs of au pairs, child minders and baby-sitters especially if you work full-time.
While emergency funding is important for everyone, as a newly single parent you may want to further fortify your emergency money, especially if your ex-spouse has a maintenance obligation to you. Over and above your normal emergency money, keep at least one month’s worth of maintenance in a separate account just in case your ex-spouse defaults on payment.
If you need to move off your spouse’s medical aid and onto your own one, be sure to make a seamless transition with no interruption in membership as this could leave you unnecessarily exposed. Remember, any break in membership of 90 days or more can result in you having waiting periods and late joiner penalties imposed, so be thorough in your dealings with your medical aid scheme.
Change your marital status
Failure to change your marital status at home affairs can cause future difficulties should you wish to re-marry at some stage in the future. Home affairs will not be able to register another married if their records show that you are still ‘married’ on the system. To change your marital status, you will need to provide them with your divorce certificate – a process which should take around three months to complete.
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