The lowdown on antenuptial contracts and the accrual system

The lowdown on antenuptial contracts and the accrual system
22 Feb 2021

She said “Yes”!

The ANC will be the most important contract that a married couple will ever sign together. Entered into before marriage (obviously), the purpose of the contract is to change some or all of the automatic financial consequences of marriage – once the couple ties the knot. The ANC allows the couple to tailor-make their own matrimonial property regime. They can include any provisions they like in their ANC, provided the provisions are not against the law, good morals or the nature of marriage.

After the umpteenth “Congratulations” message, you realise (with glee) that you are about to marry the love of your life. Smiles, hugs and well wishes galore, complete with champagne corks popping and families hugging. It is all happiness and bubbles.

But, it dawns on you – there is actually a lot of planning involved. So you get started. You make, what you think, is a thorough list and you go systematically through your “To Do’s”. From choosing a wedding date to choosing your wedding invitation design, on to the flavour of the cake and flower arrangements. And then finally the dress…. Da-da-da. Scenes from “Say yes to the dress” playing in your mind. And once that is all decided (complete with dreaded table seating arrangements) you take a big sigh of relief – All done! Yay!

Think again my friend. Your work has only just begun.

Because amongst the pomp and pageantry that is the planning of a wedding, comes the more serious stuff. A wedding is not all about diamonds and pearls (cue Prince). It is also about the joining of two estates, legally.

So what does this “legal” thing involve?

Deciding how you will be married – and we are not talking about whether it will be in a Church, in a garden or whether you will be married by a shaman – we mean the actual financial and proprietary consequences of your union – is crucial.

Step in the marriage contract.

A marriage contract, a prenuptial contract, an antenuptial contract (ANC) or premarital contract are basically different names for the same type of thing. Most commonly, referred to as a prenup or an ANC (especially in South Africa, where the term “ANC” is more commonly used).

The ANC will be the most important contract that a married couple will ever sign together. Entered into before marriage (obviously), the purpose of the contract is to change some or all of the automatic financial consequences of marriage – once the couple ties the knot. The ANC allows the couple to tailor-make their own matrimonial property regime. They can include any provisions they like in their ANC, provided the provisions are not against the law, good morals or the nature of marriage.

But a couple needs to choose and decide wisely because changing the provisions of an ANC can be problematic a few years down the line – think about it – the ANC dictates the financial and proprietary consequences of the couple’s future and can affect the rights of the couple’s creditors, should something go awry (financially speaking anyway).

But do I have to?

Well, no. Not really. Not if you don’t want to (or if you and your partner decide not to). But considering that an ANC determines whether a marriage will be in or out of community of property with or without the accrual system, it becomes crucial to the financial consequences of your union to at least consider it.

Why do we say this?

Well, if you don’t have an ANC, you are automatically married in community of property. And this means that there will be only one estate between a husband and wife i.e. everything is shared equally between spouses, which also includes all of your (as in joint) debts (“One ring to rule them all” comes to mind). And depending on your individual financial situations and obligations, this may not be ideal. For either of you.

If you do decide to enter into an ANC, the estates of each spouse will remain separate. The ANC will set out the terms of possession of assets, treatment of financial earnings during the marriage, control and ownership of property as well as how things will be split if the marriage comes to an end or when your spouse passes away. In short, it’s all about protecting your rights as an individual and simplifying things in an emotionally taxing split.

But then there is the decision of whether or not to include the accrual system. You see, if you simply enter into an ANC (without proper guidance) your marriage will automatically be subject to the accrual system, unless you specifically exclude this from your contract.

And this sounds rather complicated. We agree. But let’s go through each marital regime one by one and hopefully simplify things….

There are essentially three marital regimes in total and they consist of –

Married in community of property

Covered already briefly above, being married in community of property happens automatically if an ANC is not drawn up. It means that there will be only one estate between a husband and wife throughout the term of their marriage.

A husband and wife will share the risks and the benefits of their joint estate. Everything the couple has ever earned or spent and earns or spends after their marriage will form part of this joint estate. Meaning that no asset can be physically divided and you and your spouse will share equally in the profits and losses regardless of your financial contribution.

When you are married in community of property, certain transactions will require the consent of your spouse, while others will not. For example, starting a company, trading shares, or selling movable assets do not require consent from your spouse. Buying property, applying for a home loan or credit on the other hand, will.

One of the biggest disadvantages to couples who are married in community of property is that you are responsible for all debt incurred by your partner – this includes debt that was incurred before your marriage. All contractual debt, such as personal loans, credit card debt, and even maintenance and child support from a previous marriage. It is all included. The implication for couples married in community of property is that there is no safety net of having separate estates to safeguard the family’s finances.

If one of you is declared insolvent or creditors come knocking on your spouse’s door, you will both be liable for the outstanding debts. Furthermore, if your partner does not have money to pay the debt, you can be held responsible for the full debt.

And this can be a real problem.

Married out of community of property

It’s as simple as saying – “what is mine is mine and what is yours is yours”. It sounds precocious and rather pedestrian. But when it boils down to it, that’s what being married out of community of property means.

To be married out of community of property you need to enter into an ANC which will stipulate the terms and conditions for the exclusion of community of property between spouses. Each spouse usually retains their separate property and will have complete freedom to deal with their property as they deem fit. If one spouse is declared insolvent, the other spouse’s property is protected from the insolvent spouse’s creditors.

But it does get a little more complicated than simply excluding the community of property. The issue of accrual now arises – either getting married out of community of property without accrual or with accrual.

But what is this accrual?

The term ‘accrual’ is used to denote the net increase in value of a spouse’s estate since the date of marriage. In other words, what was yours before the marriage remains yours, and what you have earned during the marriage belongs to both of you. Because the right to share in accrual is exercisable only upon dissolution of the marriage, such a right is not transferable and cannot be attached by creditors during the subsistence of the marriage.

The accrual system is therefore a formula that is used to calculate how much the spouse with the larger estate must pay the smaller estate if the marriage comes to an end through death or divorce. Only property acquired during the marriage can be considered when calculating the accrual.

When the accrual is included, a spouse will be entitled to share in the growth of the two estates at death or divorce.

The underlying philosophy of the accrual system is that each spouse is entitled to take out the asset value that he or she brought into the marriage, and then they share what they have built up during the marriage, together.

And that seems fair.

But, how does the accrual system affect a couple’s financial planning during the subsistence of the marriage?

  1. Fixed property – if a couple is married with the accrual, each spouse is free to purchase fixed property in their own name (with no spousal consents required) or as co-owners. Regardless of whether the property is purchased individually or jointly, the property will form part of the accrual and will be taken into account when the marriage is dissolved. If a person owns fixed property at the time of entering into an antenuptial contract, the value of the property at the time of the marriage should be recorded in the ANC. This is because when the marriage is dissolved the extent to which the property has increased in value from the date of marriage to the date of death or divorce will be included in the accrual calculation – meaning that only the profit is included in the joint estate for accrual purposes. But, if the spouse obtained ownership of the property through inheritance before the marriage, such property can be excluded from the accrual in the ANC;
  2. Debt – a significant advantage of the accrual system is that each spouse remains responsible for his/her own debt. During the subsistence of the marriage, the marriage is effectively out of community of property in that each party’s estate remains separate. This means that if one spouse sets up a business which cannot pay its debts, the estate of the solvent spouse remains protected from creditors. Importantly, where a couple is married with the accrual, only the debt that they incurred from the commencement of their marriage is included in the accrual calculation. Any debt that was incurred prior to their marriage will be excluded from the accrual calculation;
  3. Credit score – when married with the accrual, each spouse enters the marriage with their own credit score. If your spouse had a poor credit rating when entering into the marriage, your score will not be affected in any way and your credit scores will not be merged upon marriage. However, if you and your spouse decide to apply jointly for credit products such as a home loan or joint credit card, bear in mind that financial providers tend to look at your dual income and your respective credit scores;
  4. Estate planning – this is an important exercise for couples married with the accrual system to undertake to ensure that each spouse is adequately provided for in the event of a tragedy. The accrual comes into effect when one spouse passes away which means that it is the executor’s job to calculate the increase in the real value of the respective estates and to calculate the accrual. If the surviving spouse’s share is less than the deceased spouse, they will have a claim against the deceased estate for their share of the accrual which the executor will then be obligated to pay over to them from the estate. Where a spouse bequeaths all their assets to the surviving spouse, no problems should arise from such an accrual claim;
  5. Retirement planning – it makes financial sense for each earning spouse to contribute the maximum tax-deductible amount towards an appropriate retirement fund in their own names (if possible). Where a spouse does not earn an income, there is no tax advantage for investing in a retirement annuity and it may, therefore, make sense for the earning spouse to contribute towards an approved retirement fund. This does not mean that the non-earning spouse will be prejudiced when it comes to retirement funding as the value of the member spouse’s retirement fund will be included in the accrual calculation unless specifically excluded in the ANC. If the marriage dissolves as a result of death or divorce, the non-member spouse will be able to claim a share of the member spouse’s pension fund interest calculated as at the date of death or divorce;
  6. Trusts – where married with the accrual system, each spouse is free to set up trusts, whether inter vivos or testamentary, in accordance with their needs and objectives. This means that a spouse is free to transfer assets they own into a living trust without the permission or knowledge of the other spouse. Sadly, inter vivos trusts are often misused by trust founders as a way of hiding assets from the other spouse when going through a divorce. However, the legislation does make provision for a spouse to bring an application to the high court to have trust assets taken into account when determining the accrual.

Are any assets excluded from the accrual?

In a word – yes.

The following assets are not considered in determining accruals i.e. they are not included in the net value of estate assets –

  1. any asset excluded from the accrual system under the ANC as well as any other asset which the spouse acquired by virtue of his/her possession or former possession of such asset;
  2. an inheritance, legacy or donation which accrues to a spouse during the subsistence of the marriage, except in so far as the spouses may agree otherwise in their ANC or in so far as the testator/trix or donor may stipulate otherwise, as well as any other asset which has been acquired by the spouse by virtue of his/her possession or former possession of the inheritance, legacy or donation;
  3. any donation between the spouses is not considered in either estate, and
  4. any amount which accrued to a spouse by way of damages, other than damages for patrimonial loss.

Ok, but how does one go about determining an accrual?

Easy peasy –

  1. firstly, draft a list of all the assets, such as immovable property, furniture, vehicles, pension interest, annuities, policies, investments, bank accounts and interests such as shares and loan accounts in companies/partnerships/trusts or any other form of business, etc. obtained during the marriage at the present day values;
  2. start by deducting the assets that were excluded in the ANC, as well as any other assets acquired by virtue of the possession, or former possession, of the excluded assets;
  3. then deduct inheritances, legacies or donations, as well as any other asset acquired by virtue of the possession, or former possession, of the inheritances, legacies or donations;
  4. once again deduct any debts and liabilities,
  5. and lastly deduct the commencement value, as stated in the ANC and adjusted by CPI.

The net result will be the accrual in the estate.

The initial value of a spouse’s estate must be declared either in the ANC or a separate statement made not later than six months after the marriage, failing which the initial value will be deemed to be nil.

That’s great, but how does it work? Practically speaking…

As an example – you are married out of community of property but with accrual. And your spouse passes away –

At the commencement of the marriage, Mr. declared R 100,000 and Miss declared nil in their ANC. At the dissolution of the marriage on Mr.’s death the respective net market values of their estates assets are Mr. R 3,000,000 and Miss R 100,000. At the date of the marriage the official CPI was 120 and at Mr.’s death it is 300:

Mr.’s estate:

Net value (assets minus admin costs and liabilities) at death 3,000,000.00

Less: Net value declared at commencement of marriage 100,000.00

Adjusted for Consumer Price Index 300 X 100,000 ÷ 120 250,000.00

Net value of accrual (a) 2,750,000.00

Miss’s estate:

Net value (assets minus liabilities) at death of Mr. 100,000.00

Less: Net value declared at commencement of marriage nil

Net value of accrual (b) 100,000.00

Difference between accruals: (a) 2, 750,000,00 less (b) 100,000,00 2,650,000.00

Miss is entitled to claim one-half thereof from the estate of Mr. 1,325,000.00

But what about marriage out of community of property without accrual?

Ok, so we understand that if you get married out of community of property with accrual, each person keeps their assets and liabilities acquired before they got married as is, but they then share in the profit and/or loss of the estate incurred during the subsistence of the marriage i.e. what’s mine is mine until we get married, then it becomes “ours”.

But without community of property and without accrual – there is a lot of “without’s” – it basically amounts to “what is mine, stays mine”. If there is no accrual (and no assets are excluded in the ANC), then the spouses have their own estates which contain property and debts acquired prior to and during the marriage – nothing is shared. In other words, the value of each party’s estate at the commencement of the marriage is deemed to be nil.

Meaning that each party involved in the marriage will remain individual and their estates separate. Basically – assets and liabilities acquired individually before the marriage form part of their separate estates and assets and liabilities acquired during the course of the marriage will also remain separate.

In this situation, if the parties divorce or when one spouse passes away, each party will attain their own individual assets and liabilities. There can also be no claim for a transfer of assets. Spouses who are married out of community of property have separate estates and are not liable for each other’s debts.

So everyone leaves the marriage clean. And this can be beneficial in a particularly acrimonious divorce.

A happy ending

Whatever regime you choose, marriage certainly is something to be celebrated. Pomp and pageantry, diamonds and pearls. And of course champagne. All of it! It is a time full of love and laughter where magical memories are made.

Your marital regime is only the start of a (hopefully) very long and healthy life as one unit.

Please note that the above article does not amount to legal advice and cannot be relied on as such. Therefore to ensure that you are entering into the appropriate marital regime for you, get in touch with us today to see how we can best advise and assist you in drafting a suitable marital agreement.

In the meantime – we wish you well! Congratulations and Mazeltov!

Article sourced from Benaters.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Shaun Benater
Shaun Benater

Hola, mi nombre es Shaun! Hi, my name is Shaun! I am a Spanish citizen by descent, tracing my heritage all the way back to 1492. I sat for my... Read more about Shaun Benater

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