Antenuptial Contracts: Insurance for a Happily Ever After
While South African society has become very progressive, our legal system is slow to adapt, as it’s a laborious and time-consuming process to replace legislation. As a result, some relics of a past era remain part of our law. Couples getting hitched should take note of how this can affect their financial security not only at divorce, but also while they’re married.
These days, many soon-to-be-wedded couples know about the legalities surrounding a marriage. They’re aware that under South African law, any couple failing to agree otherwise will automatically be deemed married “in community of property”.
But, most couples only associate marriage agreements with divorce. How does your agreement affect you while you’re married?
Until 1984, our legal system considered a wife to be the subordinate of her husband. The burden of the “marital power” robbed most married woman of the ability to enter into any significant legal transactions without prior approval from their husbands. For all material purposes, wives were treated as children. Although the “marital power” has now been abolished, the marital property regime it was linked to remains intact.
When a couple marries without concluding an antenuptual contract (ANC), also known as prenuptual agreement or ‘prenup’, they indirectly agree to the following:
- All of the assets and debts of both spouses are combined in a communal pot (‘the joint estate’) so that the spouses’ financial affairs become completely intertwined.
- If a husband exerts unequal economic, social or physical power, the wife’s assets and income are exposed to appropriation or abuse by the husband.
- The concept of the ‘communal pot’ is not restricted to assets and income. It also extends to debts and expenses. If one spouse incurs excessive expenses or debts through gambling, extravagance, ignorance or bad business decisions, creditors can reclaim any amounts owing from not only that spouse’s assets and income, but also from the hard-earned assets and income of the other spouse.
- The same principles hold true in the sequestration of one of the spouses. The entire ‘communal pot’ is made available to the sequestrated spouse’s creditors and the estate of the financially responsible spouse is, in effect, seized.
- Community of property becomes particularly unfair in marriages of a short duration. On termination of the marriage, the ‘communal pot’ is split equally between the spouses – irrespective of the value of the assets each spouse contributed at the start of the marriage. In this way, after only a short marriage, one spouse can lose half of the assets they’ve accumulated over many years of hard work. Think about ex-Beatle, Sir Paul McCartney, who had to pay Heather Mills almost 25-million Pounds after being married for just over five years!
- The potential for this scenario is high – a report on marriages and divorces released by Stats SA on 30 May 2018 reveals that four out of ten marriages end in divorce before their 10th anniversary.
The only way to protect both parties is by signing an ANC prior to the wedding ceremony. The basic effect of an ANC is to ensure that the spouses’ assets are kept separate, affording the couple valuable protection against creditors. In addition to this, most married couples choose to include ‘the accrual system’ as part of their ANC. The accrual system ensures a fair distribution of assets when the marriage ends. This is best illustrated by an example:
- Grace and Simon are both well-paid professionals when they marry. Grace has net assets worth R100,000 and Simon’s are worth R300,000.
- A few years later, they have their first child. Grace stops working to care for their growing family. Simon continues to work, amassing more and more income and assets in his estate.
- Fifteen years later they divorce. At this stage, Grace’s assets have grown to only R200,000, but Simon’s assets are now worth R2 million.
- Without the accrual system, Simon and Grace would simply walk away from the marriage with the assets they have – which would be very unfair to Grace.
- With the accrual system, an adjustment takes place to ensure that each spouse shares equally in the assets that have been acquired during the marriage (excluding the assets that each party had before they got married).
- Grace’s assets grew by R100,000. Simon’s grew by R1.7 million. The difference in the growth of their estates is therefore R1.6 million. In terms of the accrual system, Simon will therefore have to pay R800,000 to Grace. They will therefore both walk away from the marriage with the R900,000 (half of the joint growth of their assets), plus the assets they had before the marriage.
Although, the above calculations aren’t always easy to understand, the important thing to remember is that the inclusion of the accrual system leads to the fairest possible result. For this reason, almost all couples choose to be married with an ANC that includes the accrual system.
Whether or not a marriage ends in divorce, an ANC is the only responsible and fair way for a couple to protect their assets against creditors and financial risk during their marriage. While tending to the legalese might not come naturally while you’re getting ready for your romantic wedding day, it’s an essential part of planning the wedded bliss you’ve always dreamt of.
Some other benefits of an ANC are the following:
- The sequestration of one spouse has no impact on the assets and estate of the other spouse
- The creditors of one spouse can’t touch the assets or income of the other spouse. A creditor can only recover amounts owing from the assets or income of the spouse who incurred the debt.
- The fact that each spouse is regarded as having a separate estate allows for effective tax structuring and the ability to limit financial and business risks.