Couples married in community of property share a common estate which should seemingly simplify the financial planning process. However, the community of property system is an imperfect one, and recognising its shortcomings is essential for those married under this regime. Effective financial management within this framework requires a thorough understanding of its complexities and risks.
At the outset, it is essential to understand the nature of an in community of property marriage, being the default marital regime in this country. In the absence of an antenuptial contract, a couple will be deemed to be married in community of property and will share a joint estate in equal, undivided shares. Under this matrimonial property regime, all assets and liabilities belonging to each spouse are merged together to form the communal estate, subject to a few exceptions. For example, if a will stipulates that an inheritance should not form part of the joint estate, then that inheritance will be excluded from community. While having a singular, holistic view of the joint estate may appear advantageous from a planning perspective, there are fundamental flaws in this system particularly when it comes to debt.
Being jointly and severally liable for each other’s debts, including debt that was incurred prior to the date of marriage and maintenance obligations to children from a previous relationship, is a significant drawback of this marital regime. As the community of property estate is viewed as a single estate, each spouse has the capacity to bind the joint estate through their actions which practically means that the debt incurred by one spouse can result in both spouses being responsible for the repayment of the debt. To the extent that the joint estate is incapable of repaying its debt, the creditors have a claim against the joint estate which, if found to be insolvent, can place both spouses at risk.
Thankfully, the law provides some protection for spouses in a community of property marriage by requiring spousal consent for certain transactions. For instance, spousal consent will be required where a spouse wishes to realise an asset in the joint estate, cash in an investment, or withdraw money from a joint bank account. Written spousal consent is required for transactions such as the sale of fixed property or when entering into a credit agreement, while no spousal consent is required when conducting day-to-day transactions such as withdrawing or depositing money or making everyday purchases.
Over and above the practical day-to-day management of a joint estate, there are also estate planning factors that should be taken into account. Most importantly, on the death of the first-dying spouse, the entire joint estate will be wound up as there can be no joint estate where there is only one owner. Once all estate costs and debts have been paid, the surviving spouse will have a claim for 50% of the net estate, while the remaining 50% will be distributed to the nominated heirs of the first-dying spouse. In settling the deceased estate’s debt, the executor will be required to settle all the debt in the estate regardless of which spouse incurred the debt or whether the debt was incurred prior to the date of marriage. However, problems can arise in circumstances where the first-dying spouse bequeaths their share of fixed property to a third party. Ideally, spouses to a community of property marriage should have estate planning calculations prepared to ensure that there is sufficient liquidity in the estate to cover all costs and to ensure that the surviving spouse is adequately provided for.
All assets owned by you and your spouse, along with those acquired during your marriage, constitute the joint estate to be divided upon divorce. During the divorce process, remember that both you and your spouse retain full contractual freedom when determining a settlement. You can choose to strictly adhere to your matrimonial property regime for asset division or opt for a negotiated settlement tailored to your specific needs. Negotiated settlements often benefit from the expertise of a skilled divorce mediator. If you and your spouse are unable to reach an agreement, the court may appoint a liquidator to divide the assets on behalf of the joint estate, which is less than ideal. One exception to the division of assets in a joint estate during divorce arises when one spouse claims forfeiture of patrimonial benefits, arguing that the other spouse has unfairly benefited from the community of property. Such a claim can be made under Section 9(1) of the Divorce Act. This provision allows the court to order that one party forfeits their patrimonial benefits to the other if it finds that the party has been unduly enriched in relation to the other due to the marriage.
Your matrimonial property regime also affects your retirement fund benefits. If you are married in community of property, the pension interests of both you and your spouse become part of the joint estate. Consequently, each spouse is entitled to claim 50% of the other’s pension interest as of the divorce date. For pension, provident, and preservation funds, the pension interest is the total benefit the member spouse would have received had their membership ended due to resignation on the divorce date. In the case of a retirement annuity, the pension interest is the sum of the member’s contributions to the fund up to the divorce date, plus simple interest at the prescribed rate.
As is evident from the above, financial planning for a joint estate requires careful consideration and a clear understanding of both parties’ rights and obligations. It is often a source of surprise to us that so many married couples have such limited insight into their marriage contracts and their respective rights. Every married person’s marriage will come to an end either through death or divorce, and a primary aim of financial planning is to plan adequately for either eventuality and to mitigate the financial risks faced by both spouses.
Have a fantastic day.
Sue
