Family farm divorce: What farming families & farm shareholders should know
Whether you own a farm, your parents own a farm or you have married into a family with a farm, here we will explain the complexities and nuances where, if a couple that has a connection to a farm/farm properties, divorce or separate, how any future family farm divorce settlement will likely unfold.
For farming families, it is not only the separation or divorce of the current owners of the farm that can have a catastrophic impact, other relationship breakdowns can too. For example, adult children of the owners or other business partners outside of the family.
Common concerns we hear within farming families when a relationship ends, are often like these:
- What will they be entitled to in the divorce?
- What does that look like?
- Will the farm be impacted by the break up?
The questions are the same for parents who want to protect the farm into the future, aware that relationship breakdowns have real potential to jeopardise their farming legacy. They also want to know what they can do proactively to minimise the risk if other family members or business partners were to split from their partner or spouse.
To answer these queries in the context of family farm divorce or de facto relationship breakdown, we must first help you become familiar with the process, from the family law perspective.
Farming families and relationship endings
When a married or de facto couple separate, there is a requirement to undergo a financial separation process called a financial settlement (often called a property settlement). As part of that process, business interests need to be assessed and valued and this can create uncertainty for anyone with interests in the family farm.
What happens to the family farm, and how the lives of those connected to the farm are affected by a separation, is dependent on what type of entity the farm operates under.
To understand the complexities and issues that can arise from separation and divorce where there is a family farm, we’ll cover the following:
- The types of ownership structures farms are operated under & where risks may more present;
- How entitlements are determined upon a relationship breakdown; &
- Challenges that often present in the context of the family farm.
Let’s start with farm entity structures…
Farm ownership structures
As you may well know, farms can operate under any of the following business structures in Australia:
- Sole trader
- Partnership
- A private Company where the husband and wife own shares and are Directors of that company
- A private Company where the parents and other family members are shareholders of that company
- A company under a family (discretionary) trust structure; or
- A company under a unit trust structure.
Having the farm owned by a company under a family or unit trust is to keep the farm at “arms length” and minimise the financial risk to the shareholders. However, the most common structure we see for many of the baby boomer generation particularly, is that the farm is operated under a Partnership Agreement. Typically these are spouses however there may also be more than 2 people in partnership under a partnership structure.
In the partnership structure, there is no security in terms of the personal liability in terms of the operations of the farm. It is a more risky structure in a family law sense as well because the farm (or part thereof) is more likely to be considered part of the property pool.
From working with many farming families for many years, where a farm is operated as a partnership entity, it is often the case that money is coming in and going out at different times, often treated (in some ways) like a personal bank account.
This is due to cyclical and seasonal fluctuations, market prices and weather events including natural disasters that create an inconsistency in revenue, while expenses still need to be paid to keep the farm operational. A lot of farm owners operate the business on a ‘debt model’ which also creates difficulty in isolating the flow of income and how profits (or losses) are shared amongst the owners.
Does this mean that family farms with a company or trust structure are free of being involved in a family law matter? The answer is no. Read on to learn why that is the case.
Will the farm be impacted by the break up?
To answer this question, first we need to provide context as to how a farm could be considered as part of the property settlement process.
The property settlement process
The core steps in any marriage or de facto financial separation are as follows:
- Financial disclosure This is where both parties list all of the assets and liabilities owned together and individually, including any assets held in companies or trusts. Adjustments to the way the property pool will be ultimately split is made in consideration of whether the farm is considered an asset owned wholly or partially by one party to the marriage (or de facto relationship) or if it is a financial resource (see step 3 below).
- Assessment of financial and non-financial contributions of both parties over the course of the relationship, including gifts and inheritances received to date or imminent. Non-financial contributions take into account unpaid work on the farm, caring for children, maintaining a home on the farm and other unpaid non-paid contributions over the course of the relationship. Adjustments to the way the property pool is to be split is in consideration of both financial and non-financial contributions of both parties to the relationship. We also consider parent and homemaker contributions which concern a party’s contribution to the welfare and development of children of the relationship or marriage.
- Assessment of each person’s current and future needs (now called ‘current and future circumstances’). This includes earning capacity and financial resources that both people have currently, and will have going forward. Considerations here also take into account history of family violence in marriage/relationship, employment and income opportunities as well as the future needs of any children they have.
How the property pool is split takes these factors into account, and adjustments to the division are made accordingly. This step is where income from the family farm by shareholder dividends is considered. If the farm isn’t considered an asset, then it is to be considered a financial resource because it will provide an income for one party into the future. Following the Full Court’s recent decision in Shinohara, add backs or ‘notional property’ are also considered at this stage of the process too.
- If the parties can reach an agreement, they detail the property division, which is then to be submitted to the Court to review to ensure it is a “just and equitable” division. If they cannot reach an agreement, Court proceedings are required to have the Court make a decision for the parties.
- If the Court approves the Agreement, then it will become a legally binding document known as Property Consent Orders. Or, if the Court makes the decision about the financial settlement on their behalf, Court Orders will be issued (both legalling binding documents that must be complied with).
So, if the family farm is not an asset but legally considered a financial resource, the income to be realised by one party is taken into account.
If the family farm is legally considered an asset, then its market value needs to be determined. This includes both the land and its assets.
Farm valuation challenges in separation and divorce
The valuation of any farm, just by the very nature of farming in Australia, is that it is very hard to accurately value at any moment in time. What must be valued before the farm property itself are any water rights, livestock and farm assets such as machinery, grains and stocks; which will all feed into the global value of the farm.
Access to water for irrigation or otherwise is a vital asset of any farm. The valuation of water rights can be very complicated. Considerations include water volume and type of water and whether the water rights are permanent or annually allocated. It also takes into account water market activity at a point in time and the security and reliability of supply. The timing of a valuation is crucial, given the significant fluctuations in value.
Valuations of water rights, inventory and farm asset machinery must be done first and the land valuer can then take that into account when they are assessing the farm usability and what the forecast looks like in terms of the farm’s market value.
If only a single expert is appointed to do a valuation on a farm, this often doesn’t take into account any goodwill with existing suppliers which, depending on which side of the separation you are on, can have a detrimental impact.
Overall, farm valuations can be hard to ascertain due to valuations impacted by seasonal effects and different valuation methods. A farm that is one day worth $30 million, could easily be valued at $25 million after unpredictable issues such as a natural disaster, impacting farm finances and the overall valuation. Timing is a key consideration of these issues.
When family farm divorce impacts the business & farming families
When a farm is owned by more people or entities beyond the two people who are separating, then anyone with an interest in the farm, where their rights will be affected by the terms of any proposed property settlement, including entities themselves, can join family law proceedings relating to the terms of the property settlement, or be added to the Court proceedings.
Often we see this resulting in trusts, companies, grandparents and siblings and their spouses added as parties to the proceedings, so the involvement and impact extends far beyond the separating couple. A key consideration is when these people should be joined. If you are the person with an interest in the farm, you should look to join the other interested parties at the outset. If you seek to join the other interested parties following the institution of the proceedings, their joinder to the proceedings is not automatic and the court is required to make a decision, in their discretion, as to whether they should be joined to the proceedings.
Will the farm need to be sold?
Most times there is a lot of pressure to keep the farm intact as it currently is. However, if the farm is asset rich but cash poor, like it is for many farming families, the farm may need to be sold to fulfil the terms of the property settlement. This can be a devastating outcome, particularly where most farms are owned inter-generationally.
While other avenues may be available to avoid selling the family farm, this creates significant stress and impacts all people and families who rely on the farm business for their income and often includes family homes.
Other detrimental effects
Another common issue to be aware of when a business partner is going through separation or divorce, whether they are family or not, is the possible impact on business plans.
Until the terms of any property settlement for any owner of the farm is determined, this can disrupt or put plans on hold that would have otherwise rolled out. For example, farm diversification, controlled environment structure development, technology related initiatives and upgrading of machinery.
When there is uncertainty about how a settlement could impact on the farm and its, months, even years can go by without an outcome. For this reason, amongst others, seeking advice from a family lawyer early is important to learn your options and minimise the risk to your farm business.
The impact on children
Another issue we see in farming families, while not about property, is a scenario where the children are in boarding school and the separation is occurring during the term, while the kids are at school.
We’ve seen this happen time and time again where a metaphorical noose is put around the neck of the farm and suddenly school fees cannot get paid and subsequently, children are being pulled out of boarding school, a core element that creates stability for those children.
Where to from here?
For anyone reading this who is in the position of being able to be proactive and minimise the risks that separation and divorce can bring to farming families, read the section directly below.
For anyone reading this who themselves is considering separation, or is looking for advice to understand their options, jump to this section below.
Family farm divorce – proactive protection mechanisms
In order to avoid the consequences of disruption to the children’s schooling, family stress, pressure to keep the farm in one piece, as well as the ripple effects on everyone involved, there are a few ways in which the farm can be more protected.
We work closely with our clients’ accountants and financial advisors who can recommend the best entity structures from a risk minimisation standpoint.
What is equally important is for families to learn about the protection that the creation of a Binding Financial Agreement for anyone who is an owner or shareholder of the farm and related businesses, to establish with their spouse. So too for anyone who is not married but living with their partner.
A Binding Financial Agreement is the best way in Australia to reduce the broad and potentially catastrophic impacts that a separation or divorce without one, brings on families and farm shareholders.
While often referred to colloquially as a Prenup or Prenuptial Agreement, the benefit of having one drawn up effectively is that the terms of any property settlement are determined already, minimising the disruption and uncertainty that otherwise casts a metaphorical heavy cloud over the future of the farm and those that rely upon it staying intact.
What is important for a Binding Financial Agreement to be not only legally enforceable but also effective (if it ever needs to be used at all) is the quality of its composition.
Not all Financial Agreements are made equal so it is important that the family lawyer you select to help put the Agreements together, has significant expertise and experience in both simple and complex financial financial structures, and understands the nuances of farming businesses.
Navigating family farm divorce or de facto separation
For anyone reading this who is considering separation, already separated, or has a financial interest in a farm and wishes to determine current vulnerabilities and possible avenues available to them to reduce risk, seek specialist family law advice.
When coupled with advice from an accountant and/or financial advisor with experience in farming businesses and asset protection, the financial risk and the emotional toll that comes with separation and divorce can be significantly reduced.
We often also involve commercial lawyers to establish clear terms in Shareholder’s Agreements as to what will happen to decision making powers if one shareholder is tied up with family law proceedings.
Family farm divorce entitlements: Take a strategic approach
Just like some weather events cannot be predicted, no one can predict the end of a marriage or de facto relationship, but it is always a possibility.
And just as recommendations for diversification, water management optimisation, or checklist and recovery planning might be what’s required to mitigate farm risk, so too is the development of a strong strategy and plan ready to roll out, that takes into account your specific circumstances, in the event that a relationship breakdown of any family member or shareholder were to occur.
