Divorce and the Family Farm: Assisting Your Farming Clients Prepare for Divorce

As accountants, you assist with structuring to minimise risk in relation to exposure to creditors and tax, however there are other considerations to keep in mind in the event of family members going through separation.

Back in the seventies and eighties, when people had farms, they were typically held in their own names with a trading partnership that owned, for example, all the cattle or grain that operated a business on the property.

Then, for example, if a son was brought into the business, they joined into the partnership often with a promise to receive the farm when their parents retired or on a gifting transfer prior their death.

The Court, to an extent, treated farming cases as a special sort of case. They would take into consideration the family history of the farm and give significant recognition to the person who contributed the family farm. In those days they would try to structure the final orders in a way that the property didn’t have to be sold.

However, those days are over. The Court now does not see rural cases differently from how any other business would be treated. So there is a much tougher approach to the sale of rural properties and it is important for your clients who may be potentially impacted, to have an understanding of this change of view that has occurred.

The intergenerational transfer of wealth is a consideration in which you as a farmer’s accountant are now much more involved. The typical problem now in dealing with rural cases is that no matter how sophisticated the structures are, rural cases are often asset rich and income poor, which can make it difficult for farmers to borrow money to pay out a separating partner.

We don’t often take these cases to trial because what typically happens is the party that is leaving gets paid out in installments so the farm does not need to be sold to meet the property settlement.

Divorce settlements and farmers – Bill and Mary’s story 

Tom and Jane are the parents of Bill. Bill tells his parents that he wants to get married to Mary. Tom and Jane are concerned as Bill is already part of the trading partnership and when they retire or die Bill will receive ownership of their farming property. In the event that Bill and Mary separate they don’t want to have a situation where the farm has to be sold. Tom and Jane see their commercial lawyer and that lawyer suggests they see me to do a binding financial agreement.

We do a lot of financial agreements for rural families in conjunction with their commercial lawyers. These are typically not agreements where Mary is left with nothing, but what they do often say is that we agree that in the event of a divorce, there is a formula on how Mary’s entitlement is calculated and then there is an acceptance that it will be paid out, for example, over a number of years.

The agreement might provide for an initial payment to purchase a house for Mary for an agreed amount, and whilst that house is in Mary’s name it is mortgaged which is being funded by the family farm. That then allows Mary and any children they might have set up properly and then there will be instalments paid annually so that it doesn’t ‘break’ the farm. It is, of course, still going to be a strain, but it is achievable.

Best case scenario and how Accountants can assist

Binding financial agreements should be considered very early in any relationship, when people are looking at bringing children into their business or when generational transfers are being contemplated.

Even so, I have also assisted in doing binding financial agreements later in relationships. For example, I have drawn up financial agreements where the farming family’s son has been married for 25 years and his parents are now looking at transferring the property to him. They are living out of town but are looking to move to a retirement village. They want to pass the farm down to their son but want their daughter-in-law to sign a financial agreement that specifies if some time down the track their son and daughter in law split up, there is going to be a structured way to pay out the daughter in-law’s entitlement.

That sort of generational wealth transfer often comes up when people are getting into their 60’s and the next generation is pressing to get ownership. The parents are wanting to structure it so in case of separation they do not lose the family farm.

The key take away as an accountant, to a farming family is that you would be better off doing structuring before your clients separate. If you cannot do that and you have a couple who are separating, then it is a matter of getting people to sit down and look at it as a commercial venture, and do your best to keep their personal emotions out of it.

In terms of structuring, as an accountant you can assist getting the company and trust ownership sorted. But then the addition of binding financial agreements are an additional piece on top of these designed to limit the damage. It is important to accept that if there is a separation, the party who is leaving will have an entitlement. But how that is to be paid should be structured in a fashion that is not going to cripple the business and farm and lead to liquidation.

Overall, the best-case scenario is always a negotiated settlement with the solid foundations put in place first for the right business structures and agreements.