Thursday, August 19, 2010

Financial Planning for the Modern Woman- Part 2

Liberty Legal Focus

There is an increasing worldwide trend for partners in a relationship not to get married, but to simply live together or "co- habit" has its own consequences as far as taxes and financial implications are concerned.

Tax implications of a "common law union"
In South African law there is no such thing as "common law spouses" even though the term is brandished aroud so often that factually it may seem to exist. In terms of our tax legislation, and specifically the Taxation Laws Amendment Act 5 of 2001, the definition of spouse was extended to include , among others, "persons who are in a same- sex or heterosexual union with which the Commissioner is satisfied is intended to be permanent". The impact of this legislation is that people who fall within this definition are for purposes of estate duty, capital gains tax and donations tax treated as spouses- the section 4(q) estate duty deduction, CGT roll over's and tax free donations will be allowed between these parties. This is obviously very useful when it comes to personal financial planning and in particular estate planning. While the legislation does state that this kind of union, unless there is proof to the contrary, will be treated as excluding community of property, it does not go very far in terms of spelling ot the parties' rights and obligations in terms of their proprietary interests.

What risks should parties who co- habit instead of marrying be aware of?

A couple of pertinent questions may answer this:
  • If the relationship should end because the parties fall out, what will happen to the property acquired during the course of the relationship?
  • Does provision for retirement include both partners or will both be reliant on one partners pension/ retirement fund?
  • Will either parties need or be entitled to maintenance should the relationship terminate?
  • What is the intention of the parties if either dies, in terms of the other inheriting?
  • Is there sufficient provision for the surviving partner and dependants?
Intestate Succession Act

What happens to the assets of one of the parties on death in the absence of a valid will bequeathing those assets to the survivor? The Intestate Succession Act 81 of 1987 specifically deals only with parties married in terms of the Matrimonial Property Act 88 of 1984 and as such precludes co- habiting life partners. The constitutional court has recently made several  rulings to the effect that same sex partners and partners married in terms of Muslim or Hindu tenets should also be protected in terms of the Intestate Succession Act, but no rulings has been made regarding heterosexual life partners. Therefore,  the survivor would have no legal claim against the estate of the deceased.
It is thus critical that life partners make certain that they have current and up to date wills in place reflecting their intentions and wishes.

Maintenance of Surviving Spouses Act

Likewise, the Maintenance of Surviving Spouses Act, 27 of 1990 only caters for "spouses" who are married in terms of the Matrimonial Property Act. The life partner who may have been co - habiting with the deceased before his/ her death and been completely dependant on this person for maintenance would have no claim whatsoever against his/ her estate. (Note that, in terms of the Pension Funds Act 24 of 1956, the person would qualify as a factual dependant and would be able to lodge a claim against those benefits, if any).
A financial needs analysis must be conducted in order to ascertain what the financial implications of the death of one of the life partners would be on the survivor and if there is a need, this need must be catered for.

What happens if the life partners decide to go their seperate ways and split up?

In 2008 the Domestic Partnership Bill was published which sought to provide some clarity and direction on these matters. Basically it distinguished between registered domestic partnerships and unregistered domestic partnerships. In terms of the Bill, parties to a registered domestic partnership would automatically be entitled to a claim in terms of both the Intestate Succession Act and the Maintenance of Surviving Spouses Act, while those in an unregistered domestic partnership would need to go to court for the relief sought. This Bill also clearly stipulated that such relationships would operate as if they were out of community of property, and so would automatically include the accrual system. On termination of the relationship for whatever reason, the parties would get to share in the growth of each other's estates from inception of the partnership. This Bill has not been taken any further and as such cannot be relied upon by parties cohabiting to protect their rights or interests.
How then do life partners protect themselves and regulate their affairs, other than by having a valid will? What happens practically when the relationship ends?

Universal partnership

One of the parties could allege that what is called a universal partnership exists between them. Basically, what is being said is that in terms of the law of contract, an agreement has been entered into between the parties in which they are to share their assets equally. All the terms necessary to prove a valid contract of partnership would need to be proved:
  • That the partnership was entered into for the benefit of both parties;
  • That the purpose of the partnership was to generate a profit;
  • That both parties made a contribution to the partnership- financial or otherwise, and
  • That the contract is legitimate.
If successfully proven that all the assets acquired after the partnership was formed will be jointly owned by the parties in undivided shares, and they will be jointly and severally liable for all debts as well as sharing in growth. However, the parties will be prevented from claiming maintenance from each other on dissolution of the relationship.

It is not necessarily easy to prove that a universal partnership exists, for example you will need to show under the "benefit for both parties" that both parties were actually better off together, than they were seperately. Invariably the parties will have to consult attorneys and may even have to go to court. This costs a lot of money, and those people who lack the financial resources to be able to afford legal fees may end up with nothing at all.

The Alternative: A Domestic Partnership Agreement

All parties co- habiting should take the same view as people in a business partnership with each other. They should enter into a legal agreement to regulate their proprietary affairs so that should the partnership terminate, there will be binding guidelines in place to determine how the property will be split up.
The best time to enter into this agreement is when both parties are on good terms with each other and have a long term view on the relationship. It is too late if you wait until one of the parties whishes to go his or her own way. A domestic partnership agreement deals with life partnerships and is similar to entering into an antenuptial contract. It will detail each party's rights and obligations, for example:
  • Their respective financial obligations to the joint home;
  • Their rights and obligations towards each other;
  • Rights and obligations regarding jointly owned property, including the division of jointly owned property.
Generally on dissolution of the partnership, the parties will be entitled to retain the assets they own in their individual capacities and to share in the assets jointly owned or specifically identified in the Domestic Partnership Agreement.

Careful thought and consideration needs to be given when doing financial planning for life partners, especially when it comes to protecting their wealth in the event of death or termination of that partnership.

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