The goal of any divorcing couple should be to protect their assets and ensure the most equitable division of those assets on divorce. Protracted divorce negotiations can be emotionally taxing and counterproductive as they only serve to diminish the value of the estate the couple is fighting over. With 56.6% of South African divorces involving children under the age of 18, many divorce negotiations are more complex than simply dividing the assets in half. From our experience, couples can benefit enormously from engaging their financial planner before and during the divorce negotiations. In this article, we explore what pre-divorce financial planning entails and how it can benefit divorcing couples financially.
Understanding your rights in terms of your marriage contract
Your financial planner will help you understand your rights in terms of your marriage contract and what you can reasonably expect to include in your divorce settlement. Many divorcing spouses have completely unrealistic expectations in terms of what they are entitled to claim for and, as such, begin negotiations with improbable settlement offers. This approach only serves to create false expectations, prolong negotiations and lead to disappointment. What many couples fail to realise is that South Africa has a ‘no fault’ divorce system which means that if one spouse believes that the marriage has permanently broken down, the other spouse’s consent is not required for a final divorce order to be granted. The common narrative that one spouse can sue the other spouse ‘for everything’ is simply not how it works in practice. This is because your marriage contract lays out the financial consequences of your union and sets out the framework for how assets should be divided in the event of divorce.
Information gathering and financial needs analysis
Before drafting a divorce settlement offer, ask your financial advisor to undertake a financial needs analysis so that you fully understand your financial needs post-divorce. In our experience, there is very seldom a balance of power between married couples when it comes to finances – with one spouse generally taking the financial lead while the other takes a back seat. This can create problems in the negotiation process especially when it comes to the disclosure of assets. In order for your financial advisor to assist you, the following information and documentation will be of benefit to him/her:
- Payslips, tax returns and IRP5s of both spouses
- Copies of any finance or lease applications as these will include disclosures of earnings, as well as assets and liabilities
- Bank and credit card statements of both spouses
- Financial statements in respect of any companies in which either spouse has shareholding
- The details of any long-term insurance policies
- The details of any retirement funds to which either spouse belongs
- Breakdown of your respective assets and liabilities as well as the household’s income and expenditure
- A copy of your ante-nuptial contract
- The details of any trusts owned by either spouse
Scenario planning your settle offer
Based on the above information, your financial advisor will be able to prepare a number of scenarios designed to demonstrate what a settlement agreement would mean practically your financial future. When viewed as a capital amount, the proposed settlement may appear attractive to the untrained eye. Your advisor will be able to help you develop a post-divorce budget, cashflow analysis and draw down strategy to determine how long the capital will last. He/she will also be able to provide expert advice on the division of retirement funds, the tax implications of realising assets, and the appropriate structuring of life cover aimed at securing maintenance obligations of the maintenance payer. Special scenario planning considerations could include:
- Retaining or realising the primary residence: While you may be tempted to keep the family home, this is not always the best option financially. Besides for the costs of upkeeping and maintaining the property, there may be CGT implications for your later on if you need to liquidate the asset which, in turn, can diminish the value of your settlement.
- Living annuities as an asset in the estate: Living annuities in the context of divorce planning can be complex for a number of reasons. A recent court ruling has found that capital held in a living annuity does not form part of the estate for the purposes of dividing assets on divorce. However, the future annuity stream can be used in determining the maintenance obligations of the other spouse, if any – keeping in mind that a spouse does not have an automatic right to receive maintenance.
- Divorce settlement housed in a living annuity: There are distinct disadvantages of receiving one’s divorce settlement in the form of a living annuity from which one can draw down between 2.5% and 17.5% of the residual capital annually. While the offer may sound attractive in that it will provide a regular income, keep in mind that no lump sum withdrawals can be made from a living annuity which may create cashflow problems if you are faced with large expenses such as overseas travel, home renovations, or transfer duty, by way of example.
- Updating long-term insurance: Your advisor will be able to recalibrate your long-term insurance needs, restructure your benefits and amend your beneficiary nominations, where appropriate. He/she will also be able to structure appropriate cover on your ex-spouse’s life to protect his/her maintenance obligations towards you and/or your children, keeping in mind that such a policy must be structured so that your ex-spouse cannot unilaterally change the beneficiary nominations.
Determining the division of retirement fund assets
A divorcing spouse may have a claim to a share of the member spouse’s retirement fund benefits, also known as the ‘pension interest’ calculation, although this can be a particularly complicated field to navigate. The share to which a non-member spouse is entitled will depend largely on their matrimonial property regime, their ante-nuptial contract and the type of retirement fund towards which the member spouse contributes. Most importantly, the wording of the pension interest order in the divorce settlement agreement has to be meticulously drafted and meet a set of strict criteria failing which the pension fund can refuse to action the instruction. Your financial advisor will be able to accurately calculate your pension interest claim and assist your divorce attorney with the wording in the settlement agreement to ensure that the instruction is actionable.
Decisions relating to your pension interest
If you are awarded a share of your ex-spouse’s pension interest, you will need to make strategic decisions relating to the pension fund capital – something which an experienced advisor will be able to assist with. Specifically, your financial advisor will be able to demonstrate the financial implications of withdrawing the capital, keeping in mind that a withdrawal may be subject to tax which in turn will reduce the benefit that you ultimately receive. You also have the option of taking a portion of your pension interest in cash and making use of the once-off R500 000 tax-free withdrawal benefit (assuming that you haven’t made any previous withdrawals), with the balance being transferred to an approved retirement fund without incurring tax. Alternatively, you may elect to transfer the full amount into a retirement fund of your choice without incurring tax. When making a decision in this regard, keep in mind that the decision to terminate an insurance-based retirement annuity may result in cancellation fees and/or penalties which can affect the net value of your pension interest, although your advisor should be able to guide you through this process.
Updating your estate plan
In updating the beneficiary nominations on your various policies and investments, your financial planner will be able to advise you on the options available. When it comes to your life insurance cover, bear in mind that minor children under the age of 18 are not able to inherit funds directly, so you may want to reconsider nominating them as beneficiaries on your policy. Your financial planner may advise you on the benefits of setting up a testamentary trust in terms of your will to ensure that assets intended for your minor children are protected until they are old enough to manage their own affairs. It is also important to note that removing your ex-spouse as a beneficiary on your retirement fund does not preclude him/her from benefiting in the event of your death. This is because the distribution of retirement fund death benefits is governed by Section 37C of the Pension Funds Act which places a duty on the fund trustees to allocate the benefits amongst your financial dependants. This means that if you are responsible for paying maintenance to your former spouse in terms of your divorce order, he/she may qualify as a financial dependant in terms of the Pension Funds Act and the trustees may apportion a share of your retirement benefit to him/her.
The above article serves to highlight the financial intricacies and complexities involved in structuring an equitable divorce settlement where asset preservation is paramount. Obtaining a divorce order is an expensive process and you only get one opportunity to get it right. Our advice is to find an experience financial planner who can work alongside your divorce attorney to negotiate a fair settlement designed to protect your financial future.
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