People have the habit of falling in love and then sometimes this leads to marriage. The legal framework in which people get married will impact on their financial planning going forward. If you're an individual who gets married without entering into a contract then the marriage will be in community of property (COP).
So, what does this mean? All your assets and liabilities pre- and post-marriage fall into a single joint estate, in which you have an equal share. So, if either of the spouses wish to enter into a legal contract or deal with any of the property in any way, both spouses must consent to this. This extends to life insurance as well, which means financial planning is required for both spouses.
COP immediately results in financial planning needs when it comes to estate planning. The most obvious of these are:
- On the death of the first dying spouse, the executor deals with the entire estate - all the assets regardless of whether they are registered in the deceased spouse's name or the surviving spouse's name. The executor therefore will charge his fee on the value of the total estate, not just the deceased's share of the estate. Therefore there needs to be cash to pay the executor's fee of 3.5% (plus VAT) of the entire gross estate, not just the 50% that is allocated to the deceased spouse.
- The entire estate is frozen - because it is one joint estate the executor has to divide it and allocate the surviving spouse her 50%. Until the executor has done this, she may not deal with any of the assets in the estate. Therefore, no matter how wealthy the couple may be, even if he bequeaths the entire estate to her, she will have a need for immediate liquidity - and only life insurance, payable to her as the beneficiary, in a new bank account opened after the death of the deceased spouse, will provide for this. Both spouses have this need, as there is no certainty as to who will die first.
- When it comes to drafting a will - the parties are only able to freely dispose of half of the entire estate - what happens when the estate is illiquid and the spouse drawing up the will wants to leave an asset to someone other than the surviving spouse? For example, she has built up a business and she wants to leave it to her daughter, but it forms more than 50% of the value of the joint estate? How is this achieved?
There are also income tax considerations which come into play, which may influence, for example, taxable non-retirement funding income for each party (and which is still relevant for the 2013/14 tax year):
- All rental income must be split between the parties as well as any expenses claimed against that rental income.
- All interest earned must on any interest/bank account be split between the parties - but they both enjoy the full interest exemption.
- Income earned from trade (including annuity income) will be taxed in the recipient's hands alone and not split between the spouses.
- Any capital gains will also be split between the spouses. Currently, each tax payer qualifies for a R30,000 capital gains tax exemption per year. However, if the asset disposed of qualifies for an additional capital gains tax exclusion -for example, a primary residence, then because the CGT exclusion on the sale of a primary residence attaches to the residence and not the person, the spouses together would qualify for the R2-million, proportionately.
It's good to know that a couple may change their marital regime from COP to out of COP by approaching the high court and getting a post nuptial agreement registered.
So, COP is a marital regime that requires much financial planning and it is wise to approach a financial advisor to support you in identifying appropriate solutions for your needs.
