The A-Z of divorce financial planning

With high rates of divorce, it’s no surprise that divorce financial planning as a specialised field is on the rise. Besides for getting expert legal advice, many divorcing couples are now, wisely, seeking financial advice on how best to separate the marital assets before finalising their divorce settlement. The conclusiveness of a divorce order means that the financial consequences of your divorce cannot be undone and, if faulty or inequitable, you can be left in a financially unstable position which can take decades to overcome.

Accrual system: The accrual system was introduced in South Africa in 1984 in an attempt to provide marrying couples with a matrimonial property regime to share in the growth of their estates during the marriage. Parties to a marriage with the accrual system are married out of community of property where each spouse is responsible for their own estate during the subsistence of the marriage. If the marriage comes to an end through death or divorce, the extent to which each estate has grown during the marriage will be shared equally between the two parties.

Ante-nuptial contract: An ante-nuptial contract is an agreement entered into before a couple gets married. Its purpose is to set out the financial consequences of the marriage and, as such, can be customised by a couple according to their needs. The ante-nuptial contract can set out the terms of possession of assets, control and ownership of property, and how assets will be split on dissolution. Unless expressly excluded, an ante-nuptial contract will include the accrual system.

Beneficiaries: Revising your estate plan following a divorce is an imperative, and this would include checking and updating the beneficiary nominations on your various policies. If you and your spouse have life cover in place on each other’s lives, be sure to amend your beneficiary nominations to ensure that the intended people receive the proceeds of the policy in the event of your death. If you and your ex-spouse have minor children at the time of divorce, seek expert advice before naming your minor children as beneficiary to your life policy. Remember, minor children lack legal capacity and are therefore unable to inherit directly. This means that, in the event of your passing, the proceeds of your life policy which you intended for your minor children may end up being administered by your ex-spouse, being the surviving legal guardian of your children.

Clean-break principle: In 2007, the Pension Funds Amendment Act introduced the clean-break principle upon the granting of a divorce order. In terms of this Act, the spouse who is not a member of a retirement fund at the date of divorce can have immediate access to her pension interest benefit which was awarded in terms of the divorce order. Previously, the non-member spouse would have had to wait until the member spouse formally retired from the fund before accessing her capital.

Commencement value: When structuring your ante-nuptial contract, you and your spouse will declare the commencement value of your respective estates which will be used as the starting point for the accrual calculation when the marriage dissolves. On divorce, the assets and liabilities of each estate will be calculated in order to arrive at a net value, after which the commencement value will be deducted from each estate to arrive at the accrual, which is then shared equally between the divorcing spouses.

Divorce attorney: Divorce is traumatic for everyone involved and trying to navigate it alone can be overwhelming. Our advice is to secure the services of an attorney who specialises in divorce to ensure that your interests are protected and that an equitable settlement is reached.

Divorce order: Otherwise known as a Decree of Divorce, this document is a summary of your divorce settlement and proves that your divorce was legally finalised in a South African court. Be sure to keep copies of your divorce order as there are many instances when you will need to provide proof of your divorce.

Family home: Who gets the family home is one of the most emotive, divisive decisions made during a divorce – and understandably so. A family home generally holds memories of happier times and is a place where your children may feel most comfortable. Not wanting to disrupt the children is often provided as a reason for holding onto the family home, although this is often not the best course of action. The value of the primary residence generally forms a proportionately large part of a couple’s asset base. As such, the spouse who receives the family home as part of the divorce settlement may be left in a position where a significant part of their divorce settlement is illiquid. Think carefully before making emotional decisions regarding your primary residence. Instead, seek financial advice on your post-divorce budgeting and cashflow, and then cut your cloth accordingly.

Forfeiture order: A forfeiture order may be granted by a court where a divorcing couple are married in community of property and the ground for divorce is the irretrievable breakdown of the marriage. In granting such an order, the court may order that the patrimonial benefits of one party be forfeited to the other on the basis that, failing to do so, will result in one party benefiting unduly.

Guardianship: If your spouse is the parent of your children, the two of you will remain the legal guardians to your minor children, unless otherwise ruled by the Court. Remember, the High Court is the upper guardian of all South African children and, as such, the court has the authority to grant sole guardianship to one parent, although this is very rare.

Healthcare: The additional costs of running two separate households following a divorce can be burdensome and you may be tempted to cut back expenses such as medical aid and gap cover premiums – which is never advisable. Be sure that your medical aid and gap cover membership is not interrupted during divorce. If costs are an issue, seek professional advice on potentially downgrading your medical aid plan option.

Interim maintenance order: This type of court order is particularly useful where divorce proceedings are protracted and where one spouse requires interim maintenance from the other in order to cover his/her living costs. An application for interim maintenance can be brought quickly and cost-effectively so as to provide a spouse with financial relief pending the finalisation of the divorce. The spouse bringing the application must provide proof that she does not have sufficient financial means and that her spouse can realistically afford the maintenance being sought.

Joint estate: If you are married in community of property, you and your spouse share a single, joint estate. Upon divorce, the value of the joint estate will be divided in two and each spouse will be entitled to an equal share of the estate. The only exception is where the courts grant a forfeiture order (see above).

Kids: Calculating the costs of caring for your minor children is an important part of the divorce negotiation process, and it’s important to get the budgeting right so that the maintenance order is fully aligned with your childcare costs. Remember, when assessing the maintenance requirements of your children, give careful thought to the additional costs that you may be faced with as a result of the divorce such as transport costs, aftercare fees, babysitting and/or divorce counselling or therapy.

Life cover: As a life event, divorce should trigger you to undertake a review of your life cover. Besides for updating your beneficiary nominations (as mentioned above), now is the time to review the role that life cover serves in your portfolio and the amount of cover you need, keeping in mind you will likely no longer need to make financial provision for your ex-spouse in the event of your death.

Mediation: If you and your spouse are contemplating a divorce, it is always advisable to consider the option of mediation. The process involves commissioning a qualified, neutral third part to help negotiate an equitable divorce settlement for both parties thereby reducing legal costs and avoiding a long, drawn-out divorce.

No-fault divorce: In South Africa, we have what is referred to as a ‘no-fault’ divorce system meaning that the spouse filing for divorce is not required to prove that the other spouse is ‘at fault’ in order for a decree of divorce to be granted. The spouse who issues summons against the other spouse for divorce, merely needs to allege that the marriage has irretrievably broken down and that there is no reasonable prospect of the marriage working out.

Opposed divorce: Also known as a contested divorce, this type of divorce is where the divorcing couple cannot reach agreement on some or all of the aspects pertaining to the divorce. Contested divorces are generally protracted and expensive as the parties will need to follow the legal procedures pertaining to such divorces which can take years to finalise.

Pension interest: The term ‘pension interest’ is used in the context of divorce and is a notional amount based on the benefit that the member spouse would have received from her retirement fund at the date of divorce. The purpose of the pension interest calculation is to allow divorcing spouses to share in each other’s retirement benefits at the date of divorce without having to wait for formal retirement to receive their share of the asset. Pension interest is calculated at the date of divorce, keeping in mind that the member spouse must be a registered member of the retirement fund on the date of divorce. In the case of pension and provident funds, if a member spouse resigns from her employment or retires from the fund before the date of divorce, there is effectively no pension interest, and the benefit accrues to her – whereafter it will be dealt with as any other asset in the estate.

Redistribution of assets: Section 7(3) of the Divorce Act makes provision for the court to order a redistribution of assets on divorce where it feels that it is equitable and justifiable to do so, although this type of order relates only to those couples married out of community of property before 1 November 1984. A spouse seeking a redistribution order must demonstrate that they contributed directly or indirectly to the maintenance or increase in their spouse’s estate during the marriage, although it is not necessary for them to show exactly which assets they contributed to. In contemplating such an order, the court will also take into account the existing financial means and obligations of each spouse and use its discretion when contemplating a fair redistribution of assets. A spouse’s pension interest may form part of the redistribution order.

Settlement agreement: Parties to a divorce have full contractual freedom to negotiate their own settlement agreement and are not bound to adhere to the tenets of their marital regime when negotiating a settlement. This generally happens in the case of an uncontested divorce where a couple manages to agree amicably to a settlement that works for their specific circumstances.

Trusts: In particularly nasty or acrimonious divorces, one spouse may use an inter vivos trust to hide assets from the other spouse, thereby reducing the amount that she may be awarded as part of the divorce settlement. An experienced divorce attorney will be aware of such tactics and have the wherewithal to dig deeper if necessary.

Unopposed divorce: In an uncontested divorce, both parties agree to the terms of the divorces and all issues pertaining to the division of assets, child custody, maintenance and debt.

Will: One of the most important things to do following your divorce is to update your Will to ensure that your ex-spouse does not inadvertently inherit from your estate. In terms of Section 2B of the Wills Act, you effectively have a three-month grace period to amend your Will. Simply put, should you die within three months of your divorce without having changed your Will, the courts will administer your estate as if your ex-spouse had died before the date of divorce. But, if you still have not updated your Will three months post-divorce, in the event of your death the courts will assume that you intended for your ex-spouse to inherit from your estate in accordance with the terms of your Will.

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