The accrual system: What happens when your spouse dies?

All marriages come to an end – either through death or divorce. If you are married out of community of property with the accrual system, you and your spouse most definitely enjoy a more equitable and fair matrimonial property regime. That said, many couples fail to consider how the accrual calculation impacts their estate plan, often with devastating consequences. Having a valid Will in place is insufficient when it comes to estate planning, particularly because the accrual system can add an additional layer of complexity in the event of death. Here’s what your estate plan should take into account. 

The ante-nuptial contract 

When entering into your marriage, your ante-nuptial contract is undoubtedly the most important document that you will sign because it is designed to set out the financial consequences of your marriage. Whereas the financial consequences of an in community of property marriage are determined by law, you and your spouse can use your ante-nuptial contract to tailor-make your own matrimonial property regime. Spouses can decide to incorporate anything they like into their ante-nuptial contract provided the terms are not illegal or immoral. When drafting your ante-nuptial contract, however, bear in mind that it is very difficult to alter the terms of the agreement later in life. Unless expressly excluded, marriages out of community of property will automatically include the accrual system. In terms of this matrimonial property regime, each spouse retains his/her separate estate until the marriage is dissolved through either death or divorce, at which point the accrual system becomes applicable.  

Assets excluded from the accrual calculation 

When drafting their ante-nuptial contract, spouses can choose to exclude any asset from the accrual, although they will need to ensure that specific details are included in the agreement which clearly identify the asset. For example, if a wife wishes to exclude a piece of jewellery, she will need to include a valuation certificate and accurate description of the item. A spouse can also choose to exclude assets that will accrue in the future, such as a retirement fund although, once again, he will need to be specific about identifying the asset he wishes to exclude. When it comes to 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 which accrued to a spouse by way of legal damages. 

Once the spouses have made decisions as to what should be included and/or excluded from the accrual, each spouse must declare a commencement value for their estate from which point the growth in their respective estates will be gauged until such point as the marriage is dissolved.  

The accrual system 

By way of simple explanation, in the event of the first-dying spouse’s death, the accrual is calculated by taking the value of the smaller estate and subtracting it from the value of the larger estate. The difference between the two estates is then split and the estate with the smaller values has an accrual claim against the estate with the larger value. Where the first-dying spouse has the larger estate, the surviving spouse will have an accrual claim against his 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 deceased estate will have a claim against 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 i.e. someone other than his spouse. 

Accrual claim on death 

During the course of the marriage, the marriage is out of community of property and community of profit and loss. This means that each spouse retains control of his or her own estate. Where the marriage is dissolved by death, the accrual system comes into effect whereby the spouses get to share equally in the growth of their estates calculated from the date of marriage.  

By way of example, let’s consider Mike and Mandy who are married out of community of property with the accrual. For the purposes of this exercise, we have assumed that their respective commencement values were zero. Mike and Mandy were both previously married and have children from their first marriages. They do not have any children from their marriage together. Mike’s estate is currently valued at R20 million, including business interests of R10 million, the primary residence which is in his name of R5 million, and a retirement annuity of R5 million. Mandy owns a small art collection valued at R1 million and a unit trust portfolio of R4 million. In terms of Mike’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. Mandy has bequeathed her entire estate to her only child from her first marriage. 

Estate planning scenario 1: If Mike is the first-dying spouse 

If Mike was to pass away, the accrual would be calculated as follows: 

The value of Mike’s estate: R20 000 000 

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

Total: R16 000 000/2 

Accrual: R8 000 000 

Mandy would therefore have an accrual claim against Mike’s deceased estate for an amount of R8 million. This can create complications in Mike’s estate because he has bequeathed the primary residence of R5 million and his business interest of R10 million to his children. As an accrual claim is a preferent claim, the deceased estate is obligated to pay Mandy her share of the accrual before distributing any assets to Mike’s named heirs. This could result in the executor having to sell some of Mike’s business interests which is not what Mike intended in his Will. Further, as Mandy is dependent on Mike’s income to help cover the costs of living, it is likely that the retirement fund trustees will consider her a financial dependant in which case she could be allocated a portion of Mike’s retirement fund interest.  

Estate planning scenario 1: If Mandy is the first-dying spouse 

If Mandy pre-deceases Mike, her deceased estate effectively has a claim against Mike of R8 million. Mike’s wealth is tied up in his business interests, fixed property ,and his retirement fund. In order to discharge the debt owed to Mandy’s estate, Mike may be forced to liquidate some of his assets which is less than ideal and could severely compromise his financial future. Bear in mind that he cannot access the funds in his retirement annuity, which means that he would need to liquidate business and/or fixed property interests in order to meet his obligations. 

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. For effective estate planning to take place, it is always advisable that couples are transparent with each other regarding their Wills so as to avoid unpleasant surprises later on. 

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