Divorce and the Farm
22nd September 2020
"This is a farming case; and….farming cases are notoriously difficult to resolve….it is a case where it is far easier to criticise a suggested solution than to devise one.”
So wrote the Judge in a farming divorce case in 2004 and this holds true today. Farming divorces are so “notoriously difficult to resolve” because they usually involve very family specific complexities which make it extremely difficult to balance the objectives of creating a practical and fair division of the couple’s finances, whilst protecting and preserving the farm structure and wealth for future generations.
Difficulties usually include:
- Farms are often inherited, raising arguments they are non-matrimonial assets which should not be divided equally;
- Wider family members are often involved, both in ownership and doing the day to day work, meaning more people have an interest in the final outcome;
- How to recognise the parties’ respective contributions to the farming business during the marriage;
- Working out the true value of the farming structure – there are often issues of illiquidity in raising and extracting a lump sum while preserving the farm as an income generating source;
- Complexity around family trust settlements or will trusts;
- Tax issues;
- The day to day commercial and personal pressures of running a farm which is susceptible to outside factors such as weather, oil prices etc.;
- The emotional attachment of both parties, but especially the landowning spouse, to the farm.
The court recognises the difficulty in reaching financial settlement in farming divorces, but as with any divorce involving a business, it is often better to use the court as a last resort and to try and use alternative dispute resolution options.
- Take advice – farms are usually structured involving partnerships, limited companies and trusts. Even when a marriage is not in difficulty, or before the marriage, appropriate legal, accountancy and commercial advice will help prevent later problems. It is also advisable to consider a pre or post marital agreement.
- Provide disclosure – in all divorces, both spouses must give full financial disclosure to the other. With a farming business, this will include presentation of the assets and ownership, but importantly, consideration of wider family involvement and the history of how the land and assets were accumulated. Make sure your adviser is given the ‘full’ story!
- Get valuations – once the assets and ownership structures have been identified, it may be necessary to update e.g. historic land values in the accounts, or the value of plant and machinery, or stock. The cost of this obviously needs to be proportionate.
- Manage costs – if you take advice from appropriate professionals such as accountants, land agents, land valuers and solicitors who specialise in farming divorce, you can identify what needs to be done and obtain the necessary information cost effectively. Another benefit of non-court dispute resolution is the avoidance of a long winded and expensive court process.
- Be creative – by working together constructively with appropriate professional input, it is usually possible to achieve a creative and fair solution together, that would in all likelihood not be the more blunt approach a court might take. For example, taking the opportunity to consider how to pass wealth down to the next generation tax efficiently when balancing the departing spouse’s needs against the farming spouse’s ability to continue farming.
- Remember that fairness does not always mean equality – since the case of White in 2000, the law makes no distinction between the contributions of the ‘money-maker’ against the ‘home-maker’. However, the landowning spouse is unlikely to be made to pay such an amount that would require the break-up of the farming business, which would deprive them of their earning capacity. The focus will be what is available and what is practical.
This guest article was written by George Sprague, Mills & Reeve LLP. Find more of their advice at www.mills-reeve.com/sectors/private-wealth/business-owners