The longer-term financial consequences of your marital contract

It’s officially wedding season in South Africa and if you’re in the middle of planning your special day, don’t forget to attend to one of the most important factors: your marriage contract. Many couples, wrapped up in the preparations for their big day, neglect to seek advice regarding one of the most important contracts you’ll ever sign. Remember, all marriages come to an end either through divorce or death – and a well-drafted contract can ensure that your respective financial interests are protected.

If you plan to get legally married in this country, you can essentially choose between getting married (a) in community of property or (b) out of community of property. The former involves no written marriage contract and is the default marital regime in the absence of an ante-nuptial contract, while there are two iterations of the latter, being either with or without accrual. Let’s unpack.

In community of property: The default matrimonial property regime

If you and your partner fail to enter into a written marriage contract before the date of your wedding, your marriage will effectively be in community of property. All your assets and liabilities (excluding any inheritances) will be merged with those of your spouse to form a single joint marital estate to which you are each 50% owners. What is important to note in this regard is that all debt – including that which existed before the date of marriage – forms part of the communal estate, and the parties to the marriage become jointly and severally liable for the debt. Naturally, this can be patently unfair to the spouse who has little or no debt because, as a consequence of the marriage, she effectively assumes responsibility for 50% of all her spouse’s debt even if she was not aware that it existed. Further, the actions of each spouse in a community of property marriage are contractually binding on the other spouse which could lead to devastating financial consequences, particularly where the irresponsible financial behaviour of one spouse causes the insolvency of the joint estate. The nature of the joint estate is that it is owned jointly in indivisible shares which means that if either spouse declares insolvency it automatically affects the other spouse who holds an indivisible share in the communal estate – meaning that both spouses will automatically be sequestrated.

In terms of contractual autonomy, this type of marital regime has limitations in that certain transactions require the written consent of both spouses. For example, the alienation, ceding or burdening of insurance policies, fixed deposits, shares, or any of the spouse’s investments require written consent from both parties, while buying or selling immovable property or entering into a credit agreement in terms of the National Credit Act requires the written consent of both spouses with two witnesses. While these limitations can cause frustration and make the management of the joint estate cumbersome, keep in mind that they are designed to protect against financially reckless behaviour that can bind the joint estate.

Generally speaking, where such a marriage is dissolved through divorce, each spouse is entitled to a 50% share of the joint estate. Once the settlement agreement has been made an order of court, all the assets linked to the joint estate will be separated in terms of the agreement. Where the couple cannot reach agreement on the division of assets, the court can appoint a receiver to provide input on how the assets should be divided. However, where one spouse feels that the other spouse has failed to contribute financially to the joint estate, she can bring an application in terms of the Divorce Act for the forfeiture of assets which basically means that the other spouse would not be entitled, wholly or partially, to his share of the joint estate.

As is evident from the above, community of property is an imperfect system that can leave a spouse financially exposed in respect of debt and insolvency, and our advice is to explore other marital regimes before deciding to opt for a community of property marriage.

Including the accrual system: Achieving a more equitable marital regime

A marriage with the accrual system is widely regarded as the most equitable marital regime for a number of good reasons. Set up in terms of an ante-nuptial contract – which is a contract intended to set out the financial consequences of the marriage – the accrual system involves each spouse maintaining their own separate estate during the subsistence of the marriage. On dissolution of the marriage (through either death or divorce), each spouse shares equally in the value of the two estates to the extent that they grew (or decreased) during the marriage. The couple’s antenuptial contract will include the date of marriage, the commencement value of their respective estates (i.e. the value of each estate on the date of marriage), the accrual mechanism, and the express exclusion of any assets from the accrual calculation depending on the wishes of the couple – keeping in mind that the idea behind an antenuptial contract is to allow couples to customise their marriage contract according to their needs.

Another advantage of this system is that any debt incurred by either spouse prior to the date of marriage is excluded from the accrual. Any debt incurred during the marriage is taken into account when determining the accrual when the marriage is dissolved, although each spouse remains responsible for their own debt. That said, the irresponsible financial behaviour of one spouse can prejudice the other spouse’s share of the accrual and, in such circumstances, a spouse can bring an application in terms of Section 8(1) of the Matrimonial Property Act for the immediate division of the accrual in order to protect his interests.

The estate of each spouse remains completely separate up until the date of divorce or the death of the first-dying spouse, at which point the accrual will come into play. To determine the accrual, the value of each spouse’s liabilities will be deducted from the value of their respective assets, while excluding any inheritances or applicable legacies or donations. After deducting the commencement value of each estate and adjusting for CPI, the accrual value of the estate will be determined, with each spouse having a 50% claim.

Although this system is more equitable it can be somewhat complicated, and our advice is to ensure that your antenuptial contract is drafted by an expert to ensure that both spouse’s financial futures are protected.

Excluding the accrual: A separate estate for each spouse

Completely separate estates, both during and at dissolution of the marriage, is the hallmark of a marriage that excludes the accrual system. If you and your spouse opt for this marital regime, you will need to expressly exclude it from your antenuptial contract to ensure that the accrual system does not apply. This property regime means that each spouse will retain full autonomy and contractual capacity throughout the marriage and at dissolution, and no sharing of assets will take place. Further, any debt incurred before or during the marriage remains the responsibility of the spouse who incurred the debt, and the other spouse cannot be held liable for any such debt. If one spouse is declared insolvent and is sequestrated, the other spouse’s estate cannot be touched by the insolvent spouse’s creditors. This ‘what’s mine is mine, what’s yours is yours’ approach can be patently unfair, particularly in circumstances where one spouse stays at home to raise children while the other pursues his career and amasses personal wealth. Again, every couple’s situation is different, and it is always advisable to consult with experts when formalising your marriage contract to ensure that both parties are adequately protected going forwards.

Have a wonderful day.

Sue