Investment division in divorce

Another consideration for high-net-worth and later-life divorce

Divorce is inevitably emotional, messy, and complicated. It can even be traumatic. And the more complex and valuable the joint estate, the more sensitive and difficult the division of assets. We’ve written about the treatment of a second property in divorce and the perils of hiding assets (don’t do it!). In this article we examine an asset class that, on the face of it, seems more straightforward – investments. However, the reality of investment division may not be as simple as it appears. 

As always, the starting point is the matrimonial regime. If the marriage is out of community of property without accrual, each party retains their own investments. If the marriage is out of community of property with accrual, any gains made since the date of the marriage, even if investments are separately held, are subject to an accrual calculation. As the majority of marriages in South Africa are in community of property, we will focus on asset distribution in this matrimonial regime, where the joint marital estate is theoretically equally divided. Of course, negotiations in the divorce proceedings may result in a different outcome, as trade-offs are often made.

Types of investments

As with all assets in a divorce case, the first step is obtaining an accurate valuation. This is not as easy as it sounds. Investments fluctuate in value with more frequency than immoveable property or tangible assets such as artworks. While a capital-guaranteed investment, such as a bank savings account, can only go up in value, its value may change on a monthly basis if interest is paid monthly and added to capital. An equity investment, such as stocks and shares or a unit trust, can go up or down. The degree of variance will depend on the volatility of the investment, which is linked to its risk profile. 

Valuation

Therefore, to avoid adding additional potential for dispute, it may help to agree a valuation date for all investments and use that value in discussions. This could be the date the plaintiff files for divorce or a date both parties agree on. Investments should be included in the details of bank accounts, credit cards, and other financial products, with assets and liabilities clearly delineated (a credit card with a balance owing is a liability, not an asset, and forms part of the joint estate). A valuation for a savings account or a unit trust is easy to access. The financial institution normally provides investors with monthly or quarterly statements. If you are in any doubt, contact your provider for an up-to-date valuation.

You can find the daily share prices of any directly held stocks and shares online. Multiply the share price by the number of shares held. Or contact your broker, if you have one, who can supply a valuation for your portfolio. You should be aware that the actual value could vary from the perceived value because there may be specific taxes and fees that are only applied annually or on the sale of the shares. Furthermore, for certain types of investment, there can be a difference between transfer value and surrender value.

Risk

Investments carry varying risk profiles, and a couple may have very different levels of tolerance for risk. A more conservative party may prefer to let their spouse keep the riskier investments, even if these have more potential for growth.

Options and tax implications of investment division

The options available for investment division and their tax implications will depend on the type of investment held.

Capital-guaranteed savings accounts are relatively simple. Income tax is payable on interest earned from savings, but interest earnings are exempt from tax if the amount per annum is R23,800 or less, or R34,500 or less for those 65 years and older. If the account is held in joint names it will need to be either liquidated (cashed in) and divided or transferred to one spouse, depending on the divorce agreement. A savings vehicle may have a notice period or only permit one withdrawal a year, which may have already been taken. It may be possible to make a withdrawal without notice in exchange for forfeiture of a certain amount of interest. The couple – or their lawyers – will decide whether to wait until the end of the notice period to liquidate the account or forego the interest in order to settle promptly.

Tax-free savings accounts are not subject to any taxation but can only be held by individuals. If both spouses have tax-free savings accounts the separate valuations must be included in the total asset calculation and adjustments may need to be made. Transfers cannot be made between tax-free savings accounts so cash would have to be withdrawn and paid to the other party.

Shares or equity investments like unit trusts can be transferred to another beneficial owner or sold. Under South African law, a transfer of property, including shares, between spouses in a divorce settlement is generally exempt from capital gains tax (CGT). However, CGT may apply on sale of the shares. 

Couples with substantial investment assets are strongly advised to consult a tax specialist as part of the divorce proceedings.

Consult with a family attorney

This article provides an overview of the division of investments in divorce but does not constitute legal advice. Each situation is unique and requires careful financial, legal and tax planning. Consulting with a family lawyer such as SD Law and a tax adviser can help ensure a fair and tax-efficient outcome.

SD Law is a firm of divorce attorneys based in Cape Town, with offices in Johannesburg and Durban, who are experienced in high-net-worth divorce and asset division in divorce. If you are considering divorce and want to discuss your options, call family lawyer Simon Dippenaar on 086 099 5146 or email sdippenaar@sdlaw.co.za for a confidential discussion. 

Further reading:

• Protecting high-value assets during divorce
• Dealing with hidden assets in divorce
• Property division in divorce
• Divorce and the two-pot pension system

Divorce Attorney Cape Town

http://divorceattorneycapetown.co.za/

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