Divorce statistics are rising, so most financial planners will find themselves with a divorcing client at some stage. While the divorce process is regarded as the domain of lawyers, in practice it’s often the financial aspects of divorce that create the complications.
Financial planners who familiarise themselves with some of the financial complexities that inevitably arise from divorce can add immeasurable value to their client’s lives at a difficult time.
In any divorce, three money issues have to be addressed and resolved: the proprietary settlement; maintenance for the children and possible spousal maintenance.
In this article, I intend only to deal with Money Issue 1: the proprietary settlement. I will deal with the Money Issues 2 and 3 (child and spousal maintenance) in future articles.
MONEY ISSUE 1: the proprietary settlement (who gets what out of the marriage)
In simple terms, this issue turns on understanding:
- What’s in the pot (that must be shared)?
- What’s not in the pot for sharing?
- What’s the pot for sharing worth?
- How many other pots are there?
- Who ultimately gets what out of which pot?
What’s in the pot, what’s not in the pot and how many pots are there?
The starting point here is the couple’s marital regime. Are they married in community of property (the default regime under South African law) or did they sign an antenuptial contract (also known as an “ANC” or “pre-nup”) excluding community of property? If they have an ANC, does the accrual system apply?
In community of property.
If the couple is married in community of property, then the marriage creates one big common pot (or “joint estate”) and everything owned or owed by the parties falls into it, irrespective of the date or manner the assets were acquired (so assets and liabilities arising before the marriage come into the pot too, as do inherited assets). Each party owns a 50% undivided share of everything in the common pot and this pot has to be divided equally upon divorce.
Out of community of property without accrual.
If the couple is married out of community of property without the accrual system, then the parties have specifically agreed to opt out of any kind of financial partnership in their marriage. They each have their own “pots” of assets and liabilities in their own names and neither gets to claim anything from the other’s pot at the end of the marriage. (It’s not quite as simple as this any more, because if this gives rise to a manifestly unfair result on divorce, a court can now order the spouse with the bigger pot to share some assets – see my article in Blue Chip Issue 90, titled “Some important changes in the world of divorce law”.
Out of community of property with accrual.
The accrual system creates a financial partnership between spouses, where they agree that whatever wealth is created during the marriage will be shared between them at the end. Within the marriage, each party has their own pot of assets and liabilities (which they don’t have to share) but when the marriage ends, a notional third pot is created (let’s call it the “accrual pot”) representing the wealth created during the marriage. The value in the accrual pot is what must be shared between the spouses on divorce, according to the accrual calculation. This usually means that there has to be some transfer of assets between the spouses’ pots on divorce, to give effect to their agreement that wealth created in the marriage is to be shared.
Financial Planners who are prepared to engage with their clients on these kinds of issues can add enormous value
In theory, the accrual calculation is quite straightforward. In practice, it can get tricky. Two respects in which it can get tricky are listed below:
Trickiness #1 – dealing with excluded assets
The Matrimonial Property Act 88 of 1984 (“the MPA”) sets out a couple of things that it stipulates should not fall into the accrual pot. Inheritances and gifts exchanged between the parties are two examples referred to in the MPA. In addition to these standard exclusions, the parties’ ANC may stipulate other things the parties agreed would be excluded from the accrual pot.
Problems arise in divorce when one spouse wants to argue for the exclusion of a particular asset from the accrual pot (based either on the provisions of the MPA or the terms of the ANC) but does not have the proper records to prove the basis for the exclusion of that asset or the value of the exclusion. Many an acrimonious battle has been fought (and lost) by spouses unable to provide a satisfactory paper trail with assets they were hoping to exclude from the accrual calculation.
Financial planners who are alive to the various categories of possible exclusions from the accrual pot can help their clients enormously:
- By making sure they are familiar with the provisions of the client’s ANC as well as the relevant provisions of the MPA (specifically with assets to be excluded from the accrual)
- By reminding clients of the relevance of those exclusions when it comes to dealing with excluded assets in their personal financial plans, as well as investment decisions relating to those excluded assets
- By helping and reminding clients to keep detailed records of any and all transactions relating to excluded assets
- Where possible help clients avoid unnecessary co-mingling of excluded assets with assets falling into the accrual pot
- If co-mingling of excluded assets with other assets is unavoidable, by advising and helping clients to keep a proper, detailed paper trail of the extent and terms of any co-mingling.
Trickiness #2 – compiling a comprehensive schedule of all the assets and liabilities
Spouses are obliged by law to disclose all their assets and liabilities in divorce proceedings (including those they claim should be excluded from the accrual pot). Financial planners can play an important role by helping their clients to compile comprehensive, up-to-date schedules of their assets and liabilities. Our courts take a dim view of divorcing parties who fail to make full disclosure of all their assets, so you definitely don’t want to find yourself in a situation where you are aiding and abetting a client’s non-disclosure.
What’s the stuff in the pot worth?
Irrespective of whether a divorcing couple is married in community of property or out of community of property, current values must be attributed to all assets and liabilities. This can be another cause of conflict in divorce proceedings. The following sorts of issues often arise:
- Deciding on a fair basis for valuing immovable property (and then whether that value should be adjusted for, among other things, unrealised Capital Gains Tax)
- Deciding on what exchange rate to apply to offshore investments and obligations
- Identifying an appropriate basis for valuing business interests and/or shareholdings in private companies
- Deciding how to treat and value share options of various kinds
- Valuations of loan claims
- The adjustment of valuations of pension interests and retirement annuities to make provision for tax
- Deciding how to deal with and value investments in cryptocurrencies, non-fungible tokens and other poorly understood asset classes
Financial planners who are prepared to engage with their clients on these kinds of issues can add enormous value to their divorcing clients by offering sensible, reasonable and practical financial advice, insight and information on these topics, helping the client make informed, measured decisions about their position and conduct in divorce proceedings.
Who gets what?
Once a divorcing couple has identified all the assets and liabilities in the various pots and settled upon appropriate valuations, the actual calculation of what they should each be entitled to take away from the marriage shouldn’t be too difficult to calculate. If they are married in community of property, they are each entitled to walk away with 50% of the joint estate; if they are married with the accrual system, the actual accrual calculation is pretty straightforward (once you have all the figures). The challenge usually is that the calculation only spits out a number: it’s how that number practically gets settled between the parties that is often the trickiest financial step of all in a divorce.
An astute financial planner can add immeasurable value to their divorcing clients by helping clients devise financially sound, practical mechanisms for dividing up their assets equitably and effectively upon divorce, in line with the financial calculations prescribed by their marital regime.
