At face value, a farm is a property asset which can form part of a separating couple’s matrimonial asset pool like any other asset. But the truth is, farms are usually much more than just a piece of real estate, often representing the couple’s home, livelihood and heritage and typically being an intergenerational business established over many years. As such, farms have certain special characteristics which set them apart from other property assets. If you are a farmer and experiencing a marital breakdown, here are some of the pertinent issues you’ll be needing to consider.
Farmers whose livelihoods rely on shared assets like the family farm can find that going through divorce will involve more than the usual heartbreak and emotional turmoil over a relationship ending. They may also find their business threatened if divorce settlement negotiations mean the farm must be sold to divide matrimonial assets fairly. A farmer trying to retain control of their farm during divorce might despair over the potential extinguishing of their legacy, as the family farm is carved up when a marriage breaks down.
The property may be owned and operated by the couple in a partnership, sometimes with other family members, and complicating matters is that agreements are sometimes informal and unspoken, meaning the couple are often unclear about ownership rights. Further, assets could have been intermingled with family finances, such as if the farm formed the family home rather than existing separately. In other cases, the marital breakdown might result in the need to disentangle complex corporate structures created over many years, and in many cases, the sale of the farm can significantly reduce the viability of the farm operation itself.
The courts try to find the fairest solution and will try to keep a farm intact where possible but only where this will be just and equitable to the departing spouse. The court will usually not force a sale of a farm unless it is necessary to do so to ensure justice to both parties, based on the contributions and future needs of each party and any prejudice to the parties. Family members may have put in years of work without formal pay, believing one day they will inherit the farm, and courts will take such non-financial contributions into account when determining each spouse’s entitlements. Where possible, other assets are often considered to be substituted in order to enable a farming business to continue, or alternatively, a partial sale of land might be considered an option so that the farm operation can continue.
If a farming couple cannot agree on property settlement terms by themselves and decide on litigation, in working out entitlements, the courts must often balance the interests of several families whose attachment to the farm often goes back many generations. These interests can be couched in complex business relationships involving numerous family members beyond the divorcing couple who wish to protect their own interests as well. If the farm is sold to realise the interests of the departing spouse, this can have repercussions for other family members too.
Often a working farm is owned by a company/trust arrangement, which was formed as part of previous succession planning. But the family courts can still order the transfer of a company asset to one of the spouses if the farmer is shown to have an “entitlement” to it making it possible to view it as a matrimonial asset. If a farm is held by a company or trust, where one party has a controlling position in that entity, the farm will probably form part of the asset pool. Certain trust structures do prohibit trust assets forming part of a matrimonial asset pool, but if one party is found to have control of the trust (whether actual or de facto), it will likely be considered part of the matrimonial asset pool. Note that courts are alert to situations where a trust has been designed specifically to stymie Family Court orders and can then deem a trust a sham. In that case, the assets of the trust will be brought into the matrimonial pool.
Court will also consider the effect of the property division on a party’s earning capacity. If the farm is sold, it’s likely one or both spouses will lose their earning capacity. If the party keeping the farm needs to borrow funds to pay out the other spouse, this increases the paying party’s debt, but doesn’t necessarily affect their earning capacity.
Farmers can take protective steps before a marriage fails by entering into Binding Financial Agreements which set out how assets should be divided if a couple splits. But BFAs can still be challenged and courts can set them aside, even if they are drafted as a watertight legal document. This is because in certain circumstances, such as if children are born after a BFA is entered into and that will cause hardship to one of the parties, one party may challenge the BFA and the Court may decide to set it aside. It’s crucial to obtain advice from an accountant or financial advisor due to the complexity of tax issues (such as Capital Gains Tax which can have a significant impact on assets available to share).
But if there was no BFA in place, and settlement negotiations now include the farm, if the parties can’t agree on the division and proceed to litigation, the courts will decide for them what is fair and reasonable division of assets.
When parties can’t agree, rather than proceed to litigation, it’s recommended they explore alternative dispute resolution processes which can be a much better solution for working out the resolution to the marriage and if possible, to protect the farm.
If you are a farmer and facing property settlement negotiations during divorce, it’s important to get early legal advice. Here are just some of the things your lawyer will likely need to know:
- Who or what entity legally owns the farm? What is its set up (partnership, company, trust, or combination?)
- How was the farm acquired (eg. gift, inheritance) and when
- Figure out third party interests (actual or potential)(maybe adult children, siblings, parents)
- Provide title searches, historical searches, mortgage searches
- Ownership of the stock, plant and machinery
- The value of the farm – this will require access to the farm’s accountants. The valuation must be undertaken by an expert valuer (eg. a fully qualified local stock agent who is familiar with the region, and a single expert to value machinery, stock and plant, crops)
- Has the farm been a viable operation? Provide tax returns.
- Is a crop “property” or “income”?
- Water rights – who holds or owns them?
- Are there any zoning issues (such as if the land is set to form part of a subdivision)
- Are there any insurance policies (eg crop insurance)
- Share farming – are there any written agreements?
- What are the parties’ expectations for the future of the farm and ownership
- Real income (what the farm pays for)
- Any contributions from the spouse to the farming operation
- Any superannuation issues to take into account
If you need assistance with a property settlement or other family law matter, or would like more information on the alternative dispute resolution processes available to you, please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Legal Services on (02) 6223 2400.
Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Legal Services.
