By: Nicole van den Munckhof
Globally, approximately two-thirds of all women were married or cohabitated. As marriage rates are slowly declining to 64% projected for 2020, down from 69% in 1970, according to Our World In Data, more and more couples are opting to live together, and in South Africa, it is no different, but there may be unintended financial consequences.
In South Africa, numerous laws determine the rights and obligations of spouses in a marriage. Among them are the Marriage Act 25 of 1961, The Recognition of Customary Marriages Act 120 of 1998, and the Civil Union Act 17 of 2006. Some acts determine what happens if the marriage is dissolved, like the Divorce Act 70 of 1979, The Matrimonial Property Act 88 of 1984, and the Maintenance Act 99 of 1990.
As the law is currently written, co-habitation is not covered by any of the abovementioned acts.
Given the legal vacuum around cohabitation, it's crucial to consider how to structure your joint finances to ensure both parties are protected if a relationship ends. There are several options available, each with its implications and considerations. Here are a few to get you started:
Option 1: The Chinese Wall
What’s mine is mine, and what’s yours is yours. In this instance, each party is responsible for their expenses and shares equally in the joint household and lifestyle expenses. This seems like a clean and easy solution. However, it can pose significant challenges if there is an income disparity. Frankly, the person earning less may find it challenging to keep up with the person earning more. Or it could lead to the one partner living pay cheque to pay cheque and the other partner saving significantly.
Option 2: Shares expenses based on earnings
Partners share the joint household and lifestyle expenses in the same ratio as their respective earnings. This means the partner who earns more pays more. This grants both partners an equal opportunity to save or have some funds left to spend on themselves.
Option 3: The Sugar Daddy / Momma (aka The Blesser)
One partner fully funds the joint lifestyle.
Each option mentioned above has challenges, and partners face risks if the relationship ends. Therefore, it is essential to ensure that you and your partner are open and honest about how you intend to manage your finances and come to an agreement where you both feel comfortable that your interests are protected. This awareness will help you navigate the potential pitfalls of cohabitation.
Whatever you agree on, it is crucial to solidify that agreement formally. The most reliable way to do this is with a Co-Habitation Agreement. It is highly recommended that formal legal advice be sought and a legally binding agreement entered. This will give you the reassurance and confidence that your interests are fully protected.
Remember, the agreement you make is not set in stone. Regular updates are essential to reflect changes in your relationship or personal circumstances. This will ensure that your financial arrangements remain fair and equitable, no matter what life throws at you.
Ensuring that your partner inherits in the event of your death is a critical issue. The best way to guarantee this is by having a valid will.
How do we structure our assets and investments?
Again, it is essential to ensure your interests are covered. When buying a property together, ensure that a co-ownership contract clearly shows the split in ownership.
Discuss and agree on your legal position, approach to purchase and exit strategy before buying a property together. This can again be captured and formalised in the Co-Habitation Agreement.
Other assets and investments should also be dealt with in the terms of the Co-Habitation Agreement.
What about using a trust or company to structure our joint assets?
Setting up a trust or corporate structure to house your joint assets is another option that can protect both parties of the relationship. These options come with additional administrative obligations from a financial reporting and tax perspective. It is essential to consult with a professional to determine the best solution based on your circumstances.
What about tax?
From a tax perspective, cohabitating couples enjoy the same status as legally married couples. What this means:
Donations to your partner would not be subject to donations tax.
If you inherit immovable property from your long-term partner – you will not need to pay transfer duty.
Section 4(q) of the Estate Duty Act allows the deduction of any asset left to the surviving spouse.
Family structures can become complex. Honesty and transparency are pivotal when making decisions that affect your micro and macro family, dependents & children.
Finally, staying up to date with any legislative changes that may affect your relationship and how you have agreed to navigate life together is crucial. This proactive approach will ensure that you are always well-informed and prepared for any changes that may impact your cohabitation.
Managing a joint relationship can be intricate, and we often avoid discussing what would happen if the relationship ended. The law is ever-changing and evolving, and like we saw the change and progression of the law in the New Divorce Amendment Act 1 of 2024, it is imperative to stay abreast of changes that may affect you.
It's vital to seek unbiased professional advice that guarantees the protection of both your interests. This is a topic to navigate with others.
*Nicole is a certified financial planner at Independent Securities.
PERSONAL FINANCE