By Linda Greeff, 12th March 2015
The most common question asked at the time of divorce is, how are you married? While most people think of an accrual claim in the context of a divorce, a common way in which a marriage is dissolved is by death of one or both of the spouses. If married out of community of property, with the incorporation of the accrual system, the accrual comes into effect on dissolution of a marriage, whether it is by death or divorce. When we are happily married it is the last thing that we consider – either death or divorce. We have got better at understanding the importance of having an up-to-date Last Will and Testament.
How does the Accrual System work? Each spouse declares a “commencement” value for his or her estate. On dissolution of the marriage each spouse’s estate is valued once more. The spouse whose estate shows the least gain is given a claim against the spouse whose estate shows the greater gain, for an amount equal to one-half of the difference between the two gains or “accruals “called the dissolution value. The “commencement” values are adjusted for inflation and the “dissolution” values exclude certain assets like inheritances. The accrual system effectively ensures that spouses share equally in the wealth they create during the marriage.
Both spouses entered into the marriage without any assets. The deceased accumulated an estate of R40 million, consisting mainly of business interests and fixed property. The surviving spouse accumulated an estate of R6 million. Let us refer to the deceased as the husband. The husband bequeaths his estate to his children of a previous marriage. The accrual calculation will be as follows:
R40 million – R6 million = R34 million
R34 million ÷ 2 = R17 million
The surviving spouse (wife) is now entitled to an accrual claim of R17 million against the estate of her deceased husband. This claim ranks as a liability and must be settled prior to heirs (children) receiving their share. Clearly this poses a serious problem to the liquidity of the estate. Liquidity refers to the cash available to cover all your liabilities in your estate, without compromising the inheritance of your heirs and beneficiaries.
The wife dies, leaving her estate to her children from her previous marriage, knowing her husband has sufficient assets of his own. Her deceased estate now has an accrual claim against her husband’s estate (the surviving spouse) and he would have to pay the amount of the accrual claim into his deceased wife’s estate, to be inherited by his stepchildren.
Should each spouse bequeath the entirety of their estate to the survivor, then the accrual claim will not cause a liquidity shortfall.
As we can see from these examples, the death of a spouse in a marriage with the accrual system can lead to a lot of trauma where the surviving spouse not only has to deal with the loss of a partner but financial distress as well.
By properly planning for one’s death, one can ensure that the effects of an accrual claim are dealt with. Estate planning is an integral part of financial planning and an estate liquidity analysis should always be done. This includes the calculation of the accrual claim at death, where applicable.