Protecting the farm from divorce
Divorce where farms are involved often involve particular complexities which may be far more likely to arise than in non-farming cases.
While the law on divorce applies in exactly the same way to cases with farms as to those without, the source and nature of farming assets, as well as wider family involvement, can present a unique set of difficulties making it more complicated to structure a financial settlement in such a way as to minimise the impact on the farm.
Many farming families are capital rich but income poor with liquidity issues as the farm assets and land are intrinsically linked to the successful running of the farming business. It is often not as simple as obtaining an order that an asset be transferred to the other party or sold without this having a significant knock-on effect, either on the running of the farm or on other family members who may have interests in those assets.
It is often the case that the farm has been passed down through the family over many years with careful estate planning to minimise exposure to tax and to preserve the farm for future generations, which is at risk of being unravelled on a separation. Multiple family members can be involved in the running of the farm, risking them being drawn into the divorce proceedings if there are disputes about beneficial ownership.
Estate planning, including the use of trusts and other ownership structures, is always sensible and taking advice on these wealth planning tools is vital, but it is easy to overlook the importance of relationship planning, to take account of the risk of relationship breakdown and the impact this might have on the farm and the wider family.
While inherited assets are generally treated as “non-matrimonial” property by the Family Court – in contrast to “matrimonial” property which are those assets built up during the marriage – in that non-matrimonial assets are not subject to the “sharing principle” (where the starting point is equality), there are circumstances in which the court can still invade non-matrimonial assets.
For example, the former matrimonial home may form part of the farm. The matrimonial home is usually considered as the most matrimonial of assets in nature regardless of whose name it is in. An inability to raise liquidity to offset the other party’s sharing claim to this property may require creative solutions.
Further, once the court has considered to which assets the sharing principle ought to apply, the exercise does not end there with the court also required to consider the “needs principle”, ie what each party needs to move forward in order to achieve what the court considers fair. One party could seek to argue that their financial needs outweigh the non-matrimonial source of the assets and so these should be invaded by the court so they are not left unable to meet their needs moving forward.
Putting the arguments which may be made by either party in the event of divorce aside, ultimately, the best way to protect farming assets is to consider the use of pre or post nuptial agreements. A nuptial agreement can record what the parties consider to be the matrimonial and non-matrimonial assets and to which assets the sharing principle ought to apply, rather than leaving this to the discretion of a court.
It can also record what the parties consider appropriate to meet their needs in the event of a separation, helping to avoid a situation where one party artificially inflates their needs in order to justify receiving a greater share of the overall pot.
While the Family Court will not be bound by a nuptial agreement simply because one exists (fairness must still be considered, although the existence of such an agreement can alter what the court considers fair), such an agreement, if drafted properly and with both parties receiving legal advice, can be highly persuasive and the parties ought to expect to be held to the terms even if they differ significantly from what a court might order absent such an agreement.
For more information on this topic, please get in touch with Adam Maguire, partner in our Family team.