Antenuptial Contracts
In South Africa, as in many other countries, you can choose between getting married in or out of community of property. Before explaining the difference between these options, or marital regimes as they are also known, we have to first explain the legal concept referred to as your “ESTATE”.
IT IS ALL ABOUT YOUR ESTATE
Every single person has an estate. Your estate can be equated to a basket containing all the assets and liabilities that you may acquire during your life. Before getting married you and your future spouse will each have your own separate estates. Having your own estate means that all the assets in your estate belongs to you and that you may freely deal with those assets. You are also entitled to encumber your estate with obligations by for instance taking out loans.
MARRIAGE IN COMMUNITY OF PROPERTY
Should you get married, without first signing an Antenuptial Contract “ANC”, your marriage shall by default be one in community of property. This will mean that you and your future spouse will combine the assets and liabilities of your respective estates as at date of marriage. It can be equated to you and your future spouse emptying the contents of your separate “baskets” into a new single communal basket in which both of you will have an equal but undividable share of all the assets as well as a joint liability in respect of all obligations.
PROS
- Both spouses are entitled to half of all assets in the joint estate. It is important to point out that this particular advantage can also be obtained by getting married out of community of property with the accrual (to be discussed later)
CONS
- Both spouses are liable for all debts incurred before and during their marriage.
- You put all your eggs in one basket. Should you run into financial trouble you may very well lose everything.
- Upon the death of the first spouse the whole estate will be locked down until the estate is finalized. This in many instances causes hardship for the surviving spouse as he/she will not have access to money and funds jointly held and owned by them.
- The executor’s fees payable upon the death of the first spouse are calculated on the value of the total estate and not only on the 50% share of the deceased spouse. This in most instances makes this a much more expensive marital regime upon death.
- Many legal actions, for example taking out loans or buying and selling assets will require both spouses’ consent and signature. Some people may see this as beneficial. This however may become cumbersome in old age when one spouse for instance develop Alzheimer’s disease and become unable to partake in important decisions.
- Passive income will be divided equally between spouses, limiting their ability to efficiently structure their tax affairs between two separate estates as are possible if married out of community of property.
MARRIAGE OUT OF COMMUNITY OF PROPERTY
If any two people wish to get married out of community of property, they will need to draw up an Antenuptial Contract and conclude and execute this contract before a Notary Public before they get married.
It is important to note that the Marriage Officer who officiates the marriage does not in any way determine whether you are married out of community of property or not. All the Marriage Officer does is to marry you. Getting married and executing an Antenuptial Contract are two distinct and separate acts.
There are two variations of getting married out of community of property, namely :-
OUT OF COMMUNITY OF PROPERTY – WITHOUT ACCRUAL
The Matrimonial Property Act (No. 88 of 1984) provides for a System of Accrual sharing between spouse married out of community of property. This accrual sharing automatically finds application on all marriages out of community of property, unless it is expressly excluded in the Antenuptial Contract.
If you choose to exclude the application of the accrual sharing system in your Antenuptial Contract, then it will mean that :-
- Both you and your future spouse will retain your separate estates after marriage and be able to deal with the assets and liabilities in your respective estates without needing any permission or assistance from the other.
- Neither of you would have any claim for sharing of assets against the estate of the other upon death or divorce.
OUT OF COMMUNITY OF PROPERTY – WITH ACCRUAL
If your Antenuptial Contract does not expressly exclude the Accrual System, then this system will by default apply to your marriage. Unlike a marriage out of community of property with the exclusion of the accrual, in this case an accrual claim will vest upon death or divorce in favour of the spouse whose estate shows no accrual or a smaller accrual than the estate of the other spouse. This is best explained by using a few practical examples
EXAMPLE 1
John and Sue gets married out of community of property with the Accrual. On the date of their marriage both John and Sue has absolutely nothing. Should they divorce 10 years later when the nett value of John’s estate amounts to R 5 million and the nett value of Sue’s estate amounts to R 1 million, the accrual will be calculated as follows:-
Accrual in John’s Estate R 5 million
Accrual in Sue’s Estate R 1 million
Difference in accrual R 4 million
As the accrual in Sue’s estate was smaller she will have a claim against John’s estate for half of the difference in the accruals in their respective estates.
Sue will therefore have an accrual claim against the estate of John for
an amount of R 2 million being 50% of the difference in accrual between
their respective estates.
Interestingly enough this will mean that they will both end up with R 3 million upon divorce which for all intents and purposes simulates the equal sharing of assets one gets with a marriage in community of property.
Section 6(3) of the Matrimonial Property Act provides that the value of ones estate shall be deemed to be nil as at the commencement of the marriage if this value was not declared in the Antenuptial Agreement. If you have any assets which you want to exclude from the application of the accrual system it is important to specifically exclude these assets in your antenuptial agreement. The effect of such an exclusion is illustrated in the following example.
EXAMPLE 2
John and Sue gets married out of community of property with the Accrual. On the date of their marriage John is the owner of a house with a market value of R 1 million and has no debt whatsoever, whilst Sue has savings in her bank account in the amount of R50’000,00. Should they divorce 10 years later when the nett value of John’s estate amounts to R 5 million and the nett value of Sue’s estate amounts to R 1 million, the accrual will be calculated as follows:-
John’s Estate on marriage R1’000’000,00
John’s Estate on divorce R5’000’000,00
Accrual in John’s estate R4’000’000,00
Sue’s Estate on marriage R50’000,00
Sue’s Estate on divorce R1’000’000,00
Accrual in Sue’s estate R950’000,00
Difference in accrual R3’050’000,00
50 % of difference R1’525’000,00
In this example Sue will have an accrual claim in the amount of R1’525’000,00 against John’s estate.
From the aforesaid it follows that serious consideration should be given to whether starting values should be declared.
DECLARATION OF NETT VALUE AT DATE OF MARRIAGE
A few things to consider when declaring the nett value of your estate at the commencement of your marriage:-
- Take note that an asset which has been excluded from the accrual system in terms of the antenuptial contract, as well as any other asset which may be acquired by virtue of your possession or former possession of this asset, is not taken into account as part of your estate at the commencement or the dissolution of your marriage. In other words if you name it you claim it.
- The nett value of your estate at the commencement of your marriage is calculated with due allowance for any difference which may exist in the time value of money at the commencement and dissolution of your marriage. If you for instance don’t refer to any specific asset but merely give a value, this value shall be adjusted to take into account inflation. This is done by adjusting your commencement value upwards by using the Consumer Price Index as published in the Government Gazette.
Taking this into account it does not make sense to include assets that will loose value over time. If you have a motor vehicle worth R100’000,00 when you get married it is unlikely that this vehicle will still be worth that amount five years later. If you however don’t specify how you derive at the starting amount of
R100’000,00 the problem will be that this R100’000,00 will be adjusted upwards for inflation whilst the true value of the actual but unnamed asset will be going down. The nett result will be to wrongly reduce the accrual claim of the other spouse.
A common mistake or oversight when defining the nett values at the commencement of the marriage is to not take pension interests into account. Although your pension interests does not form part of your estate, such pension interest are deemed to form part of your estate in the event of a divorce. The effect of this is that the value of your pension interest will be included as part of the calculation of the accrual in your estate should you get divorced.