When a relationship sours, it’s inevitably painful for those involved. They are left feeling hurt, angry, shocked and, at times, betrayed. If the relationship was formalised by marriage and ends in divorce, as more than one in three marriages in South Africa do, the emotional mix may become even more complicated, because, besides the relationship ending, the joint finances must be broken up, too.
Thinking with their hearts rather than their heads, many couples seek out a sharp divorce attorney and prepare to do battle in court, instead of negotiating with the focus on preventing a potentially devastating financial outcome. Often, a home must be sold and the proceeds split, savings must be halved, child support must be paid and a spouse who either does not work or works part-time must find full-time employment, which has implications for child care. Frequently, one spouse, typically the woman, is at an economic disadvantage and stands to lose a large portion of the wealth in which she shared.
In the United States and Australia, divorcing couples are advised to consult a financial planner who specialises in divorce planning, as well as an attorney. This special breed of financial planner complements a lawyer’s expertise with insight into the short- and long-term implications of any settlement the couple might reach.
In South Africa, financial planners are aware that they should be part of the process of a couple’s divorce settlement, but, all too often, they are
consulted only after the legal process has been concluded. In fact, the sense of financial stability that comes from having a financial expert on your side can be an anchor at an otherwise difficult time, Nicky Gous, a former financial planner at Citadel Wealth Management, wrote in a recent article.
Although divorce is likely to alter your financial status radically and negatively affect your emotional state, proper planning and a coherent strategy can provide you with an immediate sense of accomplishment that will have a positive impact on everything else, Gous says. Clive Hill, a legal adviser at Sanlam Trust, agrees that both parties should have their own financial advisers and attorneys. Having two specialists who can together devise solutions for the best possible divorce settlement is invaluable.
Gous says a financial planner can help you to determine your post-divorce costs before you start to negotiate the divorce settlement. He or she can take you through a variety of scenarios to provide you with an insight into what different settlement terms will mean in the long term.
Wouter Fourie, the 2015 Financial Planner of the Year and an independent financial planner with Ascor Independent Wealth Managers, says spouses often do not fully realise the financial implications of divorce, and a financial planner can help you to work out a cash flow and a budget.
To plan properly, you need to know what assets you will receive or have to give up in terms of the divorce order and/or your marriage contract, as well as your maintenance obligations. Once you have all that information, you will have to rework your budget and start to re-organise your finances.
Here are some of the financial issues you need to get to grips with as you confront divorce.
BEFORE THE DIVORCE ORDER
Establish the assets and liabilities
Before you and your spouse reach a settle-ment and draw up a divorce order, you need to establish which assets belong to you and which belong to your spouse. Bertus Preller, a specialist in family and divorce law at Abrahams & Gross in Cape Town and author of the book Everyone’s guide to divorce and separation, recommends that you put together the following documents:
All the documents listed above will be easier to come by if you and your spouse are working amicably towards a divorce settlement with the help of your financial planners.
Planners disagree over whether they should continue to advise client couples after their divorce. Kirsten Smit, a financial planner at Citadel, says she declines to advise both parties after a split unless the divorce is genuinely amicable; otherwise, she refers one of them to one of her partners.
On the other hand, Fourie says he would continue advising the couple unless conflict caused one spouse to walk away. With continuity of financial advice, the other spouse’s financial information is more easily accessible, he says.
When it comes to the division of assets, beware of settling for an asset that could be encumbered with a loan – for example, if your spouse borrowed against your home to start a business. A good financial adviser can help you to understand the relative value of assets – for example, whether you are better off with a house that needs to be maintained and insured or a share portfolio that will pay dividends.
In hostile divorces, Preller says it is not uncommon for the parties to try to hide assets or plead poverty. He says they may fail to disclose bank accounts, claim an asset is less valuable than it really is or make payments to another person in order to hide money. An unco-operative spouse may also fudge business accounts, transfer assets to a family trust, under-report income on tax returns and financial statements, make secret arrangements with employers to defer bonuses until after the divorce is finalised, “repay” fake loans to friends or relatives, delay profitable business deals or contracts, or even transfer shares at no value to someone else.
If you suspect your spouse is doing any of these things, Preller suggests you appoint a forensic accountant. You can also include in your divorce agreement a clause stating that each party warrants that they have made full disclosure of all the assets in their possession, registered in their name, or held by a nominee. The clause should also state that if any asset is later found not to have been disclosed, the guilty party will pay the other 50 percent of the value of that asset and 50 percent of the costs of ascertaining the nature and value of the asset and enforcing his or her rights to it.
Wealthy spouses may transfer assets to a trust and then claim that the assets are no longer under their control, but controlled by the trustees. Preller says if assets are transferred to a trust for the purpose of hiding them, a court will not hesitate to deal with the assets as if they are owned by the spouse personally. Also, trust assets that are effectively controlled by one spouse can be deemed to be part of his or her estate. If the trust assets are controlled by the trustees, the rights of the partners in the marriage to benefit from the assets as beneficiaries should be included in the assessment of their estates. In addition, if the assets in the trust were transferred to it by way of a loan, the loan account may be an asset in the estate of the spouse who placed the assets in the trust.
Hill says that valuing assets thoroughly is becoming a specialist area, and if you and your spouse are wealthy, it may be advisable to appoint a professional appraiser.
He says it is not necessarily a good idea to convert all assets to cash, because it may not be an opportune time to sell; it may be better to transfer assets from one spouse to another.
It is often a challenge to liquidate business assets, because the business owner may not be able to dispose of the assets without the consent of the other shareholders and without affecting his or her income-earning capacity. Also, the business owner may seem wealthy, but the venture may have huge debts of which the other spouse is unaware.
Hill says if it takes time to transfer assets, and the spouse who is transferring the assets dies before the transfer has taken place, the former spouse will join a long list of claimants to the deceased estate. No matter what the divorce order states, creditors are entitled to their share. This is also the case if the ex-spouse gets into financial trouble while he or she is still alive: creditors can attach assets that were supposed to have been transferred to the former spouse, he says.
Marital regime obligations
The marital regime – in other words, the form of marriage you chose – may create a financial obligation that you need to meet, or are entitled to receive from your spouse, upon divorce. Establishing if there is any such obligation, and making sure your rights are enforced in the divorce order, are important. The Matrimonial Property Act and the Civil Union Act create three different potential scenarios on divorce.
Customary and Muslim marriages
Since the Recognition of Customary Marriages Act became effective in 2000, customary marriages can be registered in law, in which case, in terms of the Act, they are entered into “in community of property”, unless the parties have an ante-nuptial contract.
Muslim marriages are not recognised by South African law, unless they have been formalised by a marriage officer recognised by the Marriage Act. Attempts to have Muslim marriages recognised via the Muslim Marriages Bill have stalled because of objections that the proposed law interferes with Sharia law. In the meantime, since 2014, a number of Muslim clerics have been registered as marriage officers and are formalising Muslim marriages.
Without formalisation, the rights of divorcing Muslim spouses are unprotected. Sharia law provides for reasonable maintenance for a divorced spouse, but, in practice, spouses can be left vulnerable.
Married in community of property
If you are married in community of property, you and your spouse share the assets and liabilities you had before and during the marriage. On the date of divorce, these are split 50/50.
Preller says the exception is if you obtain what is known as “forfeiture order” in terms of which one spouse forfeits his or her right to half the estate. He says a court will take three things into account when granting a forfeiture order:
He says examples are where the economically stronger spouse proves that the weaker spouse wrecked the marriage through infidelity, or a young person marries an older, wealthy person simply to get at his or her assets.
The spouses can reach an agreement as to how the assets will be split – for example, one spouse will keep the house and the other will take other assets in lieu of his or her half-share. This agreement needs to be included in the divorce settlement, and a financial planner can help you to understand the financial implications of the agreement.
Preller says if you cannot agree how to split the assets, the court may appoint a liquidator to receive and divide the assets.
Married out of community of property
If you are married out of community of property, you agree that your estates, with all their assets and liabilities, will remain separate both before the marriage and during the marriage. This is achieved by signing an ante-nuptial agreement.
You can be married out of community of property but agree that, in the event of divorce, the assets acquired during the marriage will be split by way of an ante-nuptial agreement with accrual. In this case, an attorney who is a notary public and who executes the ante-nuptial agreement records each spouse’s assets and liabilities at the start of the marriage. If the marriage dissolves, each spouse’s assets and liabilities are re-assessed. The difference between the value of the spouses’ estates at the start of the marriage and their value on dissolution of the marriage provides the accrual value. The amount accrued by the spouse with the smallest gain is deducted from the amount that accrued to the wealthier spouse, and the difference is split, with the wealthier spouse transferring half of that value to the less wealthy spouse.
Marriages out of community of property entered into after November 1, 1984 are assumed to be with accrual, unless the agreement specifically states that the marriage is without accrual, whereas earlier marriages are typically assumed to be without accrual. In the case of post-November 1984 marriages out of community of property without accrual, there can be no claim for a transfer of assets, Preller says.
An accrual claim can make a significant difference to your post-divorce financial situation. If you are the spouse who has to pay the claim, the means of payment, in the form of assets to be liquidated or transferred, have to be identified. Again, this is where a financial planner can help you to understand the implications of an accrual claim.
In respect of marriages before November 1984, a “redistribution of assets” clause was introduced into the Divorce Act with the intention of assisting mainly vulnerable older women who are less likely to find employment upon divorce.
The redistribution clause can also be used by people married out of community of property in terms of the Black Administration Act before the Matrimonial Property Act was amended in 1988, putting black civil marriages on the same footing as those of the rest of the population.
Preller says the spouse seeking the redistribution order must have contributed directly or indirectly to the maintenance of, or the increase in, the estate of the other, and a court will grant a redistribution order only if it thinks it equitable and just to do so.
In a 2014 article on redistribution orders, Lize de la Harpe, a legal adviser at Glacier by Sanlam, wrote that trust assets may also be taken into account for the purposes of a redistribution order, if it is just and equitable to do so, provided there is evidence that one of the spouses controlled the trust and that, but for the trust, he or she would have acquired or controlled the assets in his or her own name.
She cited as an example the 2006 Supreme Court of Appeal case, Badenhorst v Badenhorst, in which the former wife sought half of the husband’s estate and asked the court to include in his estate the assets in a discretionary trust. The court found that the husband did indeed have full control of the assets in the trust and used the trust as a vehicle for his business activities. The court therefore ordered that the value of the trust assets had to be added to the value of the husband’s estate in order to determine what a just and equitable redistribution would be.
Both parents are obliged to maintain their children, and their obligations are determined in relation to their financial means, Preller says.
If a parent’s circumstances change after the divorce order has been granted, an application can be made to increase or reduce the amount of maintenance set in the original order, he says. You should not, however, expect that, if your former spouse remarries, his or her maintenance obligations to your children will change. Step-parents are not obliged to maintain step-children. Once your child reaches the age of 18, he or she will have to make his or her own application for maintenance, if it is still required.
Hill says it is important to ensure that maintenance takes inflation into account. Bear in mind that medical scheme contributions and school fees usually increase at a rate much higher than the consumer price index (CPI), therefore the maintenance calculation will require a more sophisticated escalation rate than CPI. Once again, the input of a suitably qualified financial adviser could prove invaluable, because he or she would know how to calculate the expenses you face in the years ahead.
For a spouse
Neither spouse is automatically entitled to spousal maintenance, Preller says. The reciprocal duty of support that exists while you are married ends when you divorce, he says. The law favours a clean break, with both former spouses becoming economically independent, but the Divorce Act does provide for spousal maintenance in some cases:
Maintenance payments can be unreliable
Many divorcees who are awarded custody of the children struggle to get their former spouses to pay maintenance and face repeated visits to the maintenance court to have orders enforced. You can obtain an emoluments attachment order (often referred to as a garnishee order) on a former spouse’s income, but bitter former spouses can go to extreme lengths – even resigning from their jobs – to avoid their obligations in terms of those orders. When a parent with a maintenance order moves overseas, enforcement can be even more of a problem and a great deal more expensive, because of the legal costs involved.
If you are the custodial parent, non-payment of maintenance can wreak havoc with your monthly budget and your financial plans.
Parents who diligently pay maintenance are also vulnerable: you might be contributing generously, yet be subject to unexpected demands on your finances from your former spouse on behalf of your child. Although unexpected expenses are a reality for everyone, for a divorced parent they may be more of a surprise, more difficult to justify, or a source of conflict.
If you do need to approach the maintenance court for help in getting a disgruntled former spouse to pay his or her due, you need to be financially prepared, because the battle may be lengthy.
Be aware, too, that there could be repercussions for you if your former spouse has a responsibility to pay school fees and fails to do so. Schools hold the parent who enrolled the child liable for the fees and may be unsympathetic to cases in which a former spouse has failed to pay his or her share of the fees.
At the time of writing, in June, the Western Cape High Court was hearing a case involving a divorced mother who was denied a school-fee exemption because she and her divorced husband were regarded as a “family unit”. The mother was unable to provide proof of her husband’s income, because of their difficult relationship, and the school and the Western Cape Department of Education decided not to grant her a partial school-fee exemption for her daughter.
Another important issue that a divorcee receiving maintenance needs to consider is what would happen if the former spouse died or was disabled.
Hill says Sanlam Trust had a case in which a divorced mother of four who had been a stay-at-home mom during a 20-year marriage was receiving monthly spousal maintenance payments after her divorce. When her former husband died unexpectedly, the minor children could claim maintenance from his estate, but she had no claim on her ex-husband’s estate. This situation could have been avoided if the woman and her former husband had included in their divorce settlement that spousal maintenance obligations were binding on the deceased estate, Hill says. This would have ensured that a lump sum based on the woman’s life expectancy was paid from the estate.
Splitting retirement fund savings
If the divorce order will split one of the spouse’s retirement fund savings between both spouses, it is essential that the divorce order words the instruction to the fund correctly. According to Sanlam Employee Benefits, up to 60 percent of the divorce orders received by retirement funds cannot be enforced, because they do not comply with the requirements of the Divorce Act and the Pension Funds Act. The Act introduced the principle of the “clean break” in 2007, but your former spouse’s fund can’t apply this principle if your divorce order is badly worded.
In 2014, the Association for Savings & Investment SA (Asisa) prepared some guidelines for divorce lawyers and its member financial services companies on how a divorce order should deal with retirement fund benefits. At the time, De la Harpe and Asisa’s senior policy adviser, Russell Anderson, summarised the conditions that must be fulfilled as follows:
Hanekom says divorcing couples often agree to award the non-member spouse a portion of the member’s pension interest calculated from the date of marriage to the date of divorce – in effect, excluding any value built up in the fund before the marriage. In fact, this is in conflict with the definition of a pension interest in the Divorce Act and such a divorce order is not enforceable against a fund, he says. This has been confirmed in determinations by the PFA.
Instead, spouses should base the divorce order on the pension interest and then, when agreeing on the percentage or rand value, take into account that they are splitting only what was built up during the marriage. In other words, they can’t change what is awarded, only how much of what is awarded.
Hanekom says former spouses of retirement fund members whose divorce orders are unenforceable are being referred to the Law Society, which is directing attorneys to apply for variations of their divorce orders, free of charge.
If your divorce order is found to be unenforceable against your former spouse’s fund, you have not lost your claim to the pension interest. You still have a claim, but you will have to claim against your ex-spouse. In this case, your options are to:
Both options involve further legal costs.
Remember that, although it has been possible since September 13, 2007 to split a pension interest on divorce and make immediate payment to the non-member spouse, only since the law was amended on March 1, 2009 has the tax on such an amount been the responsibility of the non-member spouse.
In cases of unpaid maintenance, there is a provision in the Pension Funds Act that allows a divorced person to approach the Maintenance Court for an order requesting a former spouse’s retirement fund to deduct arrear maintenance owed by the member spouse. According to Hettie Joubert, the head of retirement fund governance at MMI Investments and Savings Retirement Solutions, in these circumstances the member spouse is liable for the tax on the withdrawal every time the fund makes such a deduction. This compounds the member’s loss, because the retirement benefit is reduced by the maintenance amount, as well as by the amount of tax paid on each withdrawal. Clearly, it is better to find other funds from which to pay maintenance than to risk your former spouse going after your retirement savings.
Retirement fund proceeds
If your former spouse has already left his or her pension fund or retirement annuity fund and is receiving an income from the fund, or has bought an annuity with the proceeds of the fund, this is income and no longer a pension interest that can be split.
According to an article posted on the Financial Planning Institute’s website by Momentum legal adviser Annemie Nieman, you may be awarded a share of the income after it is paid to your former spouse if you obtain a maintenance order, but you cannot be awarded a lump sum from a living annuity. In practice, however, she says life assurance com-panies don’t allow the annuity to be split between the member spouse and non-member spouse. They pay the annuity to the member spouse, who is taxed on
it at his or her marginal rate. It is then the responsibility of the member spouse to pay maintenance to the non-member spouse in accordance with the provisions of the divorce order, Nieman says.
Life policy benefits
If the divorce settlement includes awarding a life or endowment policy taken out in one spouse’s name to the other spouse, ensure that the names on the policy are changed. It is not enough to include details of a change of beneficiary in the divorce order. If a former spouse is to be the new beneficiary, this change must be lodged with the life company in question if it is to be valid.
AFTER THE DIVORCE ORDER
Rework your budget
A divorce is typically a massive financial blow, often for both spouses. The fact that you have to keep two homes, both of which need to be maintained and insured and, perhaps, large enough to accommodate children, usually results in higher expenses. It is not a given that the former spouse who earns the lower income will receive maintenance (see above). Often, a non-working stay-at-home mother may have to find a job, which will have associated expenses, such as transport and child care.
If you have split your retirement savings, you may need to budget for increased contributions to a retirement fund, or funds, to get your retirement plan back on track.
Fourie says you must draw up a budget and adjust your lifestyle in accordance with your new circumstances. Accept that you will probably have to live on less. The sooner you make a plan and adjust, the sooner you will get your financial life on track.
Recovery is much easier when both spouses are working, he says. When one spouse stayed at home to look after children, the additional expenses that come with providing maintenance and a second home makes the divorce more financially difficult.
Fourie says you should not underestimate how complicated financial planning around divorce can be; he says a couple he is advising are already on their fifth meeting ahead of the divorce.
But planning before a divorce means you will know what the road ahead will look like after the divorce and you will be prepared for it.
The people who recover most quickly from divorce are those who make a budget and stick to it, he says. One couple Fourie advised got their finances back on track within five years by sticking to a budget and making some tough decisions, such as taking the risk of reducing their life and disability cover.
Fourie says issues often arise when the breadwinner remarries and the new spouse questions the amount of money that is being allocated to a former spouse and children.
Rework your retirement plan
If you and your spouse had a joint retirement plan, you will have to draw up your own plan and open your own retirement fund.
If you receive a share of your former spouse’s retirement fund, use it to kick-start your savings by transferring your share to your fund. This will prevent you from having to pay tax on the amount as a retirement fund withdrawal. A financial adviser can help you to determine what income the amount will provide in retirement, what income you will eventually need, and how you can save and invest to receive it.
Joubert says if you are the spouse giving away a portion of your retirement benefit when you get divorced, you must appreciate the potential impact on your ability to retire comfortably. The portion you give away to your former spouse is not the only cost; you also lose the growth you would have earned on the money if it had remained within the fund. Rather than take the easy way out and give away some of your retirement savings, you should, if possible, give an asset in lieu of your savings that will not have such a disastrous effect on your ability to retire financially secure, she says.
Whatever you do, you will have to rework your retirement plan and, probably, save more to ensure you reach your income goal in retirement.
Update your will and estate plan
Don’t forget to update your will once you’re divorced. The Wills Act provides that if you die within three months of your divorce without having changed your will to disinherit your former spouse, the will will be implemented as if your former spouse had also died. The exception to this is if your will makes it clear that it was your intention to have your former spouse inherit despite your divorce.
The reason for the three-month provision is to acknowledge that it often takes time for divorcees to get their affairs in order. So if your intention is to leave assets to your former spouse, you need to make your intention clear, and if your intention is to disinherit your former spouse, make sure you do so within three months of your divorce. If you have not amended your will three months after your divorce and your former spouse stands to inherit, it is assumed that this was your intention.
Gous says another will-related issue that you and your former spouse need to agree on is who should be the guardians of your children if both of you pass away while they are still minors. If your former spouse will look after your minor children in the event of your death, but you want to leave your assets to your children, you need to set up a testamentary trust for them.
David Knott of Private Client Trust, the fiduciary services division of Private Client Holdings, says that divorce will have a major impact on your estate, and you need to review exactly what will happen when you die. For this, you need a financial planner, not a divorce lawyer. A planner can determine whether your estate has enough money to pay your debts without selling assets that you may want to leave to your children.
Death and disability needs
Gous says you need to re-visit your death and disability cover, because your needs and requirements will have changed. A non-working former spouse who goes back to work needs disability cover, while the breadwinner former spouse may be able to downscale his or her death and disability cover to provide only for the children, unless he or she has a spousal maintenance obligation.
Don’t forget to change the beneficiaries on your group life assurance cover, Fourie says.
As mentioned above, if you have minor children, it is particularly important for the surviving spouse to be sure that the maintenance obligation will be fulfilled regardless of whether the former spouse dies or is disabled.
Your short-term insurance
Christelle Fourie, the managing director of MUA Insurance Acceptances, says short-term insurance claims received soon after a divorce are often complicated, because a separated couple has not confronted issues such as the ownership of assets, or has failed to inform an insurer that one person has a new residential address. To avoid claims being rejected, or the separate partners being underinsured, she urges divorcees to take out their own insurance policies as quickly as possible.
Even if one of the former spouses is still responsible for paying for short-term insurance, there should be separate policies and, ideally, separate brokers, because emotions can get in the way and result in the conditions of the policy not being adhered to.
“In fact, it is better if the policyholder takes full responsibility for the payment, even if they are reimbursed through alimony, because an unpaid policy can result in major problems when the time comes to claim,” Fourie says.
Your home loan
If a home is part of the divorce settlement and the recipient is not the owner, or is the part-owner, the property will have to be registered in the name of the person who will keep the house or flat. There may be other issues to consider if you have a joint mortgage bond.
In a recent article, Steven Barker, the head of home loans at Standard Bank, says that, from a bank’s point of view, a joint bond means that all parties to the agreement are liable for the full debt jointly and severally. “This is regardless of who actually pays the loan or what portion of the monthly instalment each person is paying or not paying,” he says.
If the relationship that brought about the joint bond ends, or if only one person is responsible for the bond, the person who pays can apply to the bank for a substitution on the bond. This means that the person paying has to enter into a new agreement with the bank and accept sole responsibility for the outstanding balance of the bond, while the person whose name is being removed from the bond has to consent to this, he says.
Problems can arise if one person is not willing to consent to their name being removed from the bond documents, but is not willing to continue paying the bond, Barker says. “In this situation, there is no alternative but to seek the assistance of an attorney, who can represent you in court to get an order to remove the other party from the bond.”
Even if a court has ruled through a divorce order that the property will be held by one spouse, that person still has to prove to the bank that he or is she is able to afford the bond repayments. If the payments cannot be met, the bank will not allow a substitution to take place and the property will have to be sold, or another person will have to sign surety or become a joint bondholder, Barker says.
“All substitutions, regardless of their cause, will involve the payment of attorney’s fees, deeds office fees and some form of duty,” Barker says. “It is advisable to ask an attorney for an estimate of the fees and costs, and once the bank appoints an attorney, to negotiate the fees with the appointed attorney.”
Your medical scheme membership
If your divorce order instructs your spouse to pay for healthcare cover for you, you can remain on your former spouse’s medical scheme as an adult dependant, even if he or she remarries. If there is no such order, you can remain on your spouse’s medical scheme if the scheme is an open one (it admits anyone) and you register as a member in your own name. If your former spouse is not responsible for your medical scheme membership and is a member of a restricted scheme, you will have to find your own medical scheme. It is important, then, not to allow a gap of more than three months to open up between memberships, or you will be liable for harsh waiting periods and late-joiner penalties.
Daunting, but potentially liberating
The list of things to consider and deal with during and after a divorce, on top of the emotional turmoil, may seem daunting. As Smit says, it is crucial to keep a positive mindset; as devastating as divorce can be, it can also prove to be immensely empowering, particularly for women.
By taking control of your finances, you might be putting yourself in the best possible position to achieve your goals in future – all the more so if financial management (or lack thereof ) was a contributing factor in the divorce. A clean break might be a financial setback initially, but with good advice and planning, it might eventually be financially liberating.