Financial considerations on divorce

While the number of marriages in South Africa drops each, year, the rate of divorce is sadly on the rise. In general, the financial implications of a divorce are devastating and often result in both partners having to significantly lower their standards of living post-divorce. With so many emotional, financial and logistical implications, the decision to divorce is seldom taken lightly. From a financial planning perspective, there is much to consider when planning a divorce.

1. Understand your marital property regime

The starting point of any divorce negotiation is to understand the marital property regime that you are married under. How you are married will determine the guidelines for financially exiting the marriage. In terms of South African law, there are essentially two marital property regimes, being (i) in community of property and (ii) out of community of property. In the absence of an ante-nuptial contract, a marriage will automatically be in community of property and the two estates will be combined to form a joint estate. If you have signed an ante-nuptial contract, your marriage is out of community of property. Unless you have specifically excluded the accrual, your marriage will be subject to the accrual system.

In the case of a marriage in community of property, the assets of the joint estate will be divided equally between the parties. Where a couple is married out of community without the accrual, each spouse keeps a separate estate, and whatever assets and liabilities they have – whether accumulated before or during the marriage – fall within their separate estates. Where a couple is married with the accrual system, a more complicated accrual calculation will be used to separate the assets. In terms of the accrual, the net value of each spouse’s estate is declared at the beginning of the marriage. The commencement value is then recorded in the ante-nuptial contract. Everything that is owned prior to marriage is owned separately, but everything that is built together during the subsistence of the marriage is shared equally.

2. Cut back expenses

Over and above the legal costs of a divorce, the costs of physically separating your lives into two separate homes can be enormous. Expenses can include moving costs, rental deposits, new furniture and appliances, domestic worker hire, short-term insurance cover, soft furnishings and subscriptions such as fibre and streaming services. While you might be comfortably making ends meet prior to your divorce, it is advisable to make a concerted effort to cut back your expenditure in anticipation of the additional (and often unseen) costs that lie ahead.

3. Secure your medical aid coverage

Depending on the terms of the divorce order, one spouse may be liable for paying the membership premiums of the other spouse either indefinitely or for a pre-determined period of time, for instance for twelve months following the date of divorce. During the uncertainty of divorce negotiations and proceedings, which in the case of a contested divorce can sometimes take years, it is important not to let your medical aid membership lapse. If your medical aid membership lapses, you will need to re-apply for membership of the scheme and may be subject to underwriting – something which could result in waiting periods and exclusions.

4. Understand your retirement funds

In terms of the Divorce Act, retirement funds form part of a member’s assets and must be considered when dividing the marital assets. In terms of the ‘clean break principle’, retirement fund benefits accrue to a member at the date of divorce. If you are married in community of property, you are can immediately claim your share of your ex-spouse’s retirement fund benefits. You can elect to withdraw your share in cash, although you would be liable to pay tax on this withdrawal. Alternatively, you can choose to transfer your share of the benefits to another retirement fund, in which case there will be no tax consequences. In order to claim your share of your ex-spouse’s pension interest, the divorce order must be crystal clear. For the order to be binding on the retirement fund, it must be precisely worded to ensure that it can be enforced. Many poorly worded divorce orders have resulted in the order being rejected by the retirement fund. To ensure that the order is accepted by the retirement fund, it must specifically name the retirement fund, set out the exact amount or percentage assigned to the non-member spouse and include a specific instruction to pay the benefits to that spouse.

5. Reinvest capital

If you are entitled to a share of your spouse’s pension fund interest, you have the option of taking it as a cash withdrawal or transferring it to a retirement fund of your own. Legal bills and the costs of setting up two separate households may tempt you to cash out your pension interest rather than reinvest the capital. Bearing in mind that, going forward, you will be single-handedly responsible for funding for your retirement, it goes without saying that preserving your capital is the most logical thing to do.

6. Amend your life policies

It is likely that you and your spouse had life policies that made provision for each other in the event of death. Following your divorce, it will be necessary to revisit the quantum of life cover as well as the nominated beneficiaries to your policies. If your ex-spouse is responsible for maintenance in terms of the divorce order, it is wise to ensure that he has a life policy in place to protect his maintenance obligations in the event of his death. If your spouse was the nominated beneficiary on your life policy, you may wish to amend this to avoid her inheriting unintentionally.

7. Communicate your new marital status

Once you are divorced, you will need to provide home affairs with a copy of your divorce decree in order for them to change your marital status on the central database. If you are a woman, you may apply to home affairs to revert to your maiden surname, a prior surname or a double-barrelled surname with that of your ex-husband’s. This process should take about three months to process. If you have children, it is helpful to communicate with your children’s school so that the educators and coaches are aware of the divorce. If you have group life cover, it is wise to let your employer’s HR representatives know of your divorced status.

8. Update your will

Something that many newly divorced people neglect to do is to update their Last Will & Testament, which could have disastrous and unintended consequences. The Wills Act essentially makes an allowance for divorcees to amend their Wills in the three months following the divorce. In terms of Section 2B of the act, if a testator dies within three months of the date of divorce, then his Will that was drawn up before the divorce will be executed as if his spouse had pre-deceased him. In other words, his former spouse will not inherit if the testator dies within three months of the divorce. If he dies after the three-month period, the law assumes that even though the testator had the chance to amend his will, he chose not to – and his former spouse will therefore be eligible to inherit.

9. Re-assess your income needs

If you were a stay-at-home spouse prior to your divorce, it may be necessary to go back to work in order to make ends meet. Depending on the maintenance order you may find that, together with your income, you still cannot cover the costs of living. This could result in you looking for a higher-paid job or finding an alternative source of income. The fact is that a divorce generally results in both spouses having to significantly reduce their standard of living. Your financial planner will help you to re-work your budget, put a debt reduction plan in place and provide advice on cutting back expenditure.

10. Open your own bank account

If you operated a joint bank account with your spouse, it is advisable to open a bank account in your own name to ensure that you can transact independently and confidentially. This can be quite a laborious process as you will need to set up new debit orders and reconfigure your online banking. Approached wisely, however, this could be used as an opportunity to shop around for more cost-effective banking options, re-assess your expenditure and re-organise your banking.

11. Put accounts in your name

In many households, the cell phone contracts of each partner and their children are often held in one spouse’s name for ease of management and payment. If this is the case, be sure to move the cell phone contract into your name. If your cell phone contract is not in your name, it may be difficult to upgrade or change contracts without your ex-spouse being present. Similarly, there may be other accounts that you will need to change from being joint accounts to an account in your name only so as to make transacting and payment easier going forward.

12. Separate your short-term insurance

Once your new living arrangements have been finalised, you will need to separate your short-term insurance. The spouse who retains the house will need to adjust the insured value of the household contents and remove any assets from the policy that belong to the other spouse. Similarly, where a spouse moves out and finds alternative accommodation, he will need to put appropriate short-term cover in place.

13. Don’t spoil the children materially to appease your guilt

Most parents going through a divorce attest to experiencing unbearable feelings of guilt. Unfortunately, in many divorce situations, parents make the classic mistake of overspending on their children as a way of assuaging guilt or making up for lack of time with the kids. While spoiling children in the wake of a divorce is common, it is definitely not wise. Besides for sabotaging your own financial goals and possibly causing tension with your ex-spouse, it can also damage your children’s relationship with money. Given that children learn most of their financial values from their parents, our advice is for both partners to remain positive role models when it comes to money.

14. Consider the costs of running two separate households

The costs of uncoupling and running two separate households cannot be under-estimated. Given that a divorce generally involves doubling up on one of the family’s largest monthly expenses (being the rent or bond payments), it goes without saying that a family will feel the effects financially. Over and above the costs of paying for a second home, other expenses are driven by the need to duplicate expenses such as furnishings, childcare, domestic help, electricity and water, subscriptions and insurances.

15. Opt for an uncontested divorce if possible

An uncontested is by far the quickest and least expensive type of divorce, and generally results in less emotional stress. By working together with the same attorney, spouses in an uncontested divorce agree to the divorce terms, maintenance, division of assets and childcare plan. The attorney will then draft the settlement agreement, and have it made an order of court. An uncontested divorce can cost anywhere from R2 000 to R20 000 and can be finalised in a matter of weeks. Emotionally and financially, an uncontested divorce is undoubtedly first prize and can be achieved if both partners are committed to an amicable and fair resolution. On the other hand, a contested divorce can drag on for years as spouses dispute over maintenance, division of assets and childcare. The emotional costs of a contested divorce are high, and the legal bills can run into hundreds of thousands of Rands.

16. Find a mediator

Another way of avoiding the high costs of a contested divorce is to appoint a mediator to help you reach common ground. Being impartially trained professionals, mediators are skilled at helping couples focus on resolving disputes and moving forward. Once the mediator has helped the couple reach agreement, their lawyers will draft the divorce settlement agreement, and have it made an order of court. Mediated divorces can be finalised within three months if both parties are committed to the process.

17. Keep your emotions in check

Divorce ranks as the second most stressful life event after the death of a spouse, making it incredibly difficult not to make emotional decisions during this time. However, fighting a battle ‘on principle’ or being more focused on retribution than on resolution are not effective strategies to bring to the negotiation table. In fact, it is likely that these strategies will result in increased animosity, a protracted divorce and escalating lawyer’s fees. Employing tactics based on your emotions are likely to lead to irrational decision-making at a time when you are likely to be at your most fragile. Faced with a protracted divorce and mounting legal costs, you may well be tempted to cut your financial losses and walk away from assets that you may have a rightful claim to – something which you are likely to regret once the dust has settled. The role of a neutral mediator in keeping emotions in check and allowing both spouses to be heard cannot be overestimated.

18. Avoid sentimental attachments

Closing a major chapter of your life may lead you to develop sentimental attachments to material things such as the family home, a holiday house or pieces of furniture that you believe hold significance for you. These emotional attachments may become stumbling blocks in the negotiation process and create unnecessary delays. Keep a firm check on any emotional attachments you may have to material belongings and commit to making rational decisions that are in your best interests.

19. Look out for your own best interests

Unfortunately, many divorces end up being acrimonious, especially if they involve protracted negotiations, stalling tactics, or attempts by one party to hide assets. While your decision to separate and ultimately divorce may start out amicably, avoid entering into negotiations too naively. Be sure to look out for your own best interests and ensure that you have a team behind you that will do the same. Itemise your assets and those of your spouse. In acrimonious divorces, some spouses can try and hide their assets in places such as cryptocurrencies or offshore. Be realistic about the fact that your spouse is likely being advised to look out for his own best interests, too.

20. Seek guidance from an independent advisor

Having an independent financial planner on your team during the process of your divorce is essential. Your financial planner can help you assess any offer of settlement before you accept it to ensure that it is your best financial interests. He will also help you to understand the tax and CGT implications of any disinvestments or sale of assets that need to take place as a result of the divorce. Before accepting a settlement offer, it makes sense for you and your planner to revise your financial plan using the settlement figures so that you fully understand the financial consequences of accepting the offer.