The things to do to protect your wealth in partnerships
We all know the stats on divorce, and how they have exploded over the last 40 years. Today, 50% of all marriages will end in divorce, but perhaps one of the unlikely consequences is the severe impact of this act on the wealth of the individuals.
So let’s look at this in a bit more detail:
Marital regime: Whether you marry in Community of Property or Ante Nuptial Contract ANC (with or without accrual) will impact on your final divorce settlement. Community of Property (COP) is a dated and dangerous concept for your wealth so please take off the rose coloured glasses, don’t be a cheapskate and get some sort of contract in place. If you’ve left it to late to change, you may need to consider a Trust (most importantly if one of the partners has their own business). Remember it isn’t just community of property, but also of loss – in other words, the bankruptcy of one spouse will destroy the assets of both spouses. If you cohabit and live as man and wife but are not ‘married’ in the formal sense then you are barely protected by any law. At the very least, all major assets must be co-owned (at deed level), consumption (true consumption, not savings or investment contributions) be split 50-50.
Abdication: More often than not, one of the partners in a relationship will defer to the other when it comes to finances and let them do what they think is best. This is not delegation, it is abdication and it is not smart. You should be involved in the annual meeting with your financial advisor, and have an understanding of all your entire wealth portfolio. There is no way around it, if it is all Greek to you then upskill by asking questions and doing your own research. It is not cool to be clueless, your wealth is at stake.
Increased consumption costs: When you divorce, the cost of running two households is not halved, in fact the savings you can make is only around 20-25% at most. Because of this, both parties have no option but to make dramatic changes to their consumption patterns. Think twice before taking on shared debt (like a mortgage) that ‘challenge’ you as a couple (in other words the maximum you can squeeze out of the bank). If something happens you will have to sell that asset and that can be painful, costly and disruptive. Not only that but a steep rise in interest rates (that have happened in the past) is also going to cause severe problems.
ANC with or without Accrual? While it might be true that the person who gets the most in a divorce is the one with the better lawyer, the ‘marital regime’ is still important. If you’ve bothered to get married (and let’s face it, more and more people just aren’t) then it is because you are wanting to take on the world as a team, so ANC with accrual makes the most sense. While I might be generalising (and make myself unpopular), marriages that have ANC without Accrual (i.e. what is mine is mine and yours is yours, forever) have a higher probability of failing because of the inherent narcissism in the decision. If you do decide in ANC without accrual then you have to constantly look after number one and I recommend you have your own financial advisor (not one shared with your spouse). Either way, all major assets should be in the name of both partners – houses, investments, stock portfolios. Please don’t make the mistake of one spouse paying for all the household expenses while the other pays for the ‘bond’ for the house which is in their name. Not all consumption items are equal.
Life policies: I am not a fan of ‘joint’ life policies, especially if it is a ‘last survivor’ or ‘first survivor’ policy – rather own your own policy in your own name (who pays for it is irrelevant). On divorce, if the other spouse has significant outstanding obligations (child-care etc) then it is possible to request a change of ownership of his/her policy (so that no changes to beneficiaries can be made without your permission) and you can compel the other partner to continue to fund the policy in his/her divorce decree. At the end of the obligation period you have two choices: you can give him/her back the ownership or keep it, and take over the payments of it so that your children will get the proceeds (not new half or step children/ or second/third/fourth wives). Speak to your financial advisor about the best way to do this.
Retirement funds: In terms of the law, a divorced partner is entitled to half of your accumulated retirement fund. Unfortunately, this is often a large lump sum and much too compelling to be ignored, it will also have a devastating effect on the spouse that has been building up that fund over many years. This is especially devastating if one of the spouses, for whatever reason, has not accumulated any retirement funds. This is often the case where one of the spouses is a ‘stay at home’ spouse or owns their own business. Small Business owners usually plough all their funds into the business and see that as their ‘pension’ (with mixed success!) As soon as you start mucking around with pensions, the tax man usually rubs his hands in glee. My recommendation? Your retirement funds should be equal, irrespective of what you are earning. Sure, it might mean that one of you makes contributions that have to keep rolling over because it maxes out the annual premium deductions from tax (15% of income), but it still gets all the other tax breaks and more importantly can’t be cashed in. The best vehicle for this retirement funding is a RA because they cannot be touched before age 55.
Gaps in the career: If one of the partners chooses to take a break from their career to help raise a family or improve their qualifications this can impact on their future earning ability. If this is a joint decision (stay at home parent for example) then the future impact must be considered. Again, look after number one. This ‘career sacrifice’ should be jointly borne. Far too often one spouse will sacrifice their career because the other spouse has far higher long-term earning potential for the ‘family’, only for the marriage to collapse, pushing the stay at home spouse out into the market, back at where he or she left off years before. Judges are disinclined to award alimony beyond a year or two. You can try and mitigate this in a number of ways: A Post nuptial contract so that the career spouse tops up the stay at home spouse’s salary on divorce until they reach the level they would have been had they not taken the break (with or without promotions). Secondly, the stay at home spouse continues to upskill and get some work during the period so he or she doesn’t get left behind.
Action: Before you get married, investigate and discuss your long-term plans and the ANC that will suit you best. If you’re married in COP a Trust may be the solution (if you can’t change it). There is an old saying that is just as relevant today – the only person who benefits from a divorce is the lawyer. If it ever comes to divorce, and you want to save yourself tens or hundreds of thousands of Rand, check your anger and revenge at the door (perhaps with the help of a therapist), be grownups and come to a settlement between yourselves before calling in the lawyers.
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Author Dawn Ridler ©