13 May 2020 by Corporate & Commercial Alert

Do living annuities fall into a spouse’s estate on divorce or death?

Living annuities are very popular investment products. But how should they be dealt when a marriage ends?

The Supreme Court of Appeal (SCA) was called upon to answer this question in the case of Montanari v Montanari (1086/2018) [2020] ZASCA 48 (5 May 2020). The facts in the case were relatively simple: The parties were married out of community of property with the accrual system. Over a number of years, Mr Montanari had purchased three living annuities from a long-term insurer. Mr Montanari subsequently sued for divorce. In addition to a claim for spousal maintenance, he sought a declaratory order that the living annuities, which provided his monthly source of income, were not assets in his estate and were consequently not subject to Ms Montanari’s accrual claim.

The nub of Mr Montanari’s case was that the ownership of the capital value of the living annuities vested in the insurer, and that he was only entitled to annuity income.

In adjudicating the matter, the SCA started by assessing the precise nature of a living annuity investment in the light of relevant legislation, previous court cases, and the evidence of experts called by the parties during the trial.

The SCA found as follows: The capital under a living annuity belongs to the insurer and is not available to the annuitant. The member can direct in which investments the amount paid to the insurer will be placed. However, the annuitant’s only contractual right is to be paid an annuity in an amount selected by him. There is no obligation on the insurer to repay the capital paid for the annuity; it is merely obliged to pay the agreed annuity. The annuitant can choose the level of income and the income frequency between a pre-defined minimum of 2,5 per cent and a maximum of 17,5 per cent level as prescribed by the Minister of Finance in the Government Gazette under the Income Tax Act 58 of 1962. The annuitant may change the income percentage on the anniversary date.

In summary, the SCA held that the capital of a living annuity did not fall within the annuitant’s estate and, accordingly, found in favour of Mr Montanari on that issue.

Crucially, however, the enquiry did not end there. The SCA asked whether the findings above meant that Ms Montanari had no claim whatsoever in respect of Mr Montanari’s living annuities. The SCA referred to what it considered to be an analogous case, De Kock v Jacobson & another 1999 (4) SA 346 (W). In that case the parties were married in community of property. One spouse had a right against a pension fund which had two components, namely, a right to a cash payment and a right to monthly payments by way of pension. The spouse in that case conceded that the right to a cash payment fell within the joint estate. As to the monthly pension, the court in the De Kock case concluded that there was no logical or legal reason why the cash component should not also form part of the of the community of property existing between the parties prior to the divorce.

In the Montanari case, the SCA aligned itself fully with that reasoning and saw no reason why it could not be extended to the case at hand. Mr Montanari had a clear right to the investment returns yielded by his capital re-investment with the insurer, in the form of future annuity income. The court held that the right was an asset in Mr Montanari’s estate for purposes of determining the accrual, and that the right could be valued.

The SCA accordingly ordered that Mr Montanari’s right to future annuity payments in respect of his three living annuities was an asset in his estate for purposes of calculating the accrual in his estate. The court also ordered that the matter be remitted to the trial court for the admission of evidence on the value the right.

To sum up: If a spouse holds a living annuity at the time of divorce or death, the legal position is that, while the capital of the annuity is not an asset in his or her estate, the future annuity revenue stream is an asset in his or her estate, and should be valued.

As an aside, it would be interesting to know on what basis such a revenue stream would be valued. In the case of an ordinary (life) annuity the annuitant receives a fixed amount annually. However, in the case of a living annuity, the annuitant receives a variable amount annually, depending on the percentage (currently between 2,5 per cent and 17,5 per cent) which the annuitant annually elects to withdraw. A valuer would need to make quite a few assumptions. The actuary who gave evidence for Ms Montanari suggested that regard would be had to variables such as the investment return assumptions, the level of contributions, and the annuitant’s mortality.

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