Issues with the accrual of an estate make it essential to involve an expert.
When a couple divorces or one spouse dies, challenges may arise with the “accrual system”—a concept often included in a prenuptial agreement unless specifically excluded.
Each spouse’s estate value is determined on their date of marriage as an “initial value.” At divorce, the spouse with the greater growth in their estate is required by law to pay a portion of this growth to the other spouse. The same arrangement applies upon death.
In divorce, this accrual claim must be considered when drawing up a settlement agreement.
Accrual has the greatest impact when one of the spouses dies: an accrual claim in favor of the surviving spouse is made against the deceased’s estate. This is seen as a liability that must be settled before any assets can be transferred to heirs as per the will.
Estate planners must account for this claim in liquidity calculations. If they fail to do so, it can result in the liquidation of estate assets, harming heirs and beneficiaries.
If each spouse leaves their estate to the surviving spouse, the accrual claim can be settled without liquidity problems. Issues arise when the deceased leaves part of the estate to a third party.
For example, if a couple marries without assets that can be seen as part of a “starting balance” and the wife acquires no assets during the marriage, while the husband builds significant business interests, let us assume he leaves an estate worth R50 million upon his death.
If he leaves his estate to his children from a previous marriage, the widow still has a right to 50 percent of the accrual, resulting in a claim of R25 million.
This claim must be settled before any assets are transferred to heirs, potentially causing a liquidity shortage. Alternatively, he could stipulate that the children pay an amount equal to the accrual claim to receive their inheritance. If they are unable to do so, the estate would pass to the widow.
Life insurance could also be used to provide the necessary funds. If a claim is made against the surviving spouse, it can be treated as an asset in the estate and used to settle liabilities.
Any remaining amount can be divided among heirs according to the will.
The widow may also be asked to transfer an accrual claim to the estate, for which provision should be made.
This issue is even more complicated if the deceased leaves assets to minors in a trust, as the Master of the High Court requires that all claims in favour of the estate be paid, meaning that a cash payment to the trust is required.
Life insurance can enable the deceased to settle the accrual claim. The policy proceeds is a deemed asset in the estate and no executor fees will be payable on it.