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How financial security can be managed in divorce

19 May 2023 Citadel
Kirsten Smit, Advisory Partner at Citadel

Kirsten Smit, Advisory Partner at Citadel

Divorce is on the rise in South Africa – up by 13.1% since 2020 according to StatsSA – and may carry significant financial implications for families. As such, Citadel Advisory Partner, Kirsten Smit shares six key financial considerations in the event of a divorce.

1. DEFINE EACH PARTY’S FINANCIAL OBLIGATIONS UPFRONT

“Both spouses need to be fully aware of all the assets in the marriage, including trusts, property, share portfolios and inheritances. Full disclosure and honesty extend to everything in a marriage,” says Smit.

Secondly, it is important when getting married to choose the antenuptial contract wisely – one can be married either in community or out of community of property. “You need to understand the implications of this, and if and how it affects you from a tax, divorce and death perspective.”

Thirdly, a divorce settlement needs to outline each party’s financial obligations towards each other as well as towards their dependents. Smit advises that it is wise to work out in detail how the dual household expenses will be covered and by whom, and if disputes arise, to get in the help of a professional mediator. “Just as important as working out the details of how much time each parent will get with their children, it is equally if not more crucial to work out upfront how best to handle payments of all expenses, including food, education, medical care, extra-murals, clothing and so forth. If the parties struggle to come to an agreement, it is usually best decided upon with the help of a professional mediator who is well-versed in how best to create an optimal, well-functioning environment for all parties and dependents following a divorce.”

2. REMEMBER THAT CHILD MAINTENANCE ENDS AT 18 YEARS

Parents owe it to their children to agree on a maintenance plan, however, this agreement is only legally valid until each child reaches maturity. In terms of the Children's Act, maintenance is payable until the child reaches the age of 18 years, but it can be extended to the age of 21 if the child has not yet entered the job market and is still in need of support.

3. MODEL THE MONEY VALUES YOU WANT YOUR CHILDREN TO LIVE BY

“Divorce can be extremely stressful and in times of stress, people are prone to make emotional decisions about money. Just remember, though, that divorced parents can still find ways to align on the values they want to continue to impart to their children when it comes to money,” says Smit. “It will benefit your child and his or her own future value systems around money if they can see that their divorcing parents are spending time discussing and agreeing upon common principles that they would like the children to learn and live by when it comes to managing money. Healthy financial behaviour needs to be modelled and reinforced by both parents, whether they are married or divorced.”

4. THINK ABOUT THE DISSIPATION OF ECONOMIES OF SCALE

“Many costs double up as you are essentially now dealing with two homes rather than one – not just physically but also in terms of other investments, expenses and liabilities,” says Smit. Economies of scale across investments and purchases dissipate and this dissipation can lead to one or both parties becoming over-indebted if their finances are not managed carefully.

“It’s important to factor in that both partners need to have independent credit records and can’t rely on one partner to obtain or secure leverage and debt for both parties. In cases where a couple was previously married within community of property, the debt incurred by the one partner may have an impact on the other partner. These issues need to be managed and disentangled carefully with the help of a financial advisor, legal advisor or mediator.”

5. GET ADVICE ON THE MANAGEMENT OF SHARED INVESTMENTS

In cases where one partner made all the financial investments on behalf of the family prior to the divorce, the other partner could require professional assistance on the future of those investments when a divorce happens. “In many marriages, you have one partner who handles the finances and other whose role is different. In such a case, when a divorce happens, it’s usually best to seek professional advice. Especially in the case of, for instance, a homemaker who needs to find their feet financially after a divorce, it's very helpful to talk to a trusted advisor.”

Smit explains that both parties need to spend time strategising how to structure their existing investments, how to best manage debt and cashflow, ensure that sufficient risk cover is in place if required, and plan for the future. “Divorce is the ideal opportunity to reassess how best to build wealth going forward to ensure your own financial independence down the line.”

6. BECOME FINANCIALLY SAVVY AS SOON AS POSSIBLE

“In the case where one is not used to managing the finances, I would recommend that the person spends time growing their knowledge, expertise and experience in this area. It can be as simple as regularly reading a personal finance column in the finance section of a media publication or doing an online course that covers the basics of investing and money management. It’s also vital to ask questions. I find that the more my clients learn along the way with me, the more empowered they feel – and that’s incredibly gratifying,” advises Smit.

SUMMARY

“The crux of financial management is that money is a finite resource and needs to be protected, invested appropriately, and spent wisely. This reality can come into very clear focus during a divorce and can provide an opportunity for both parties to get clarity on the financial future they want to create for themselves and for their children,” says Smit.

“The fair and successful financial management of divorce is highly subjective and largely dependent on the circumstances at hand. Money is always emotive, and it is always in everyone’s best interests to treat it with respect and teach their children to do the same. Healthy financial behaviour in divorce – just as in single life and marriage – needs to be modelled. If the parties don’t know how to do this, they can turn to trusted advisors to help them find the best way forward.”

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