At a meeting this winter I sat down with a friendly group of farmers. The conversation turned from the weather to crop prices and slowly shifted into the personal, mostly about children. We shared our farms’ stories, our wins and our defeats.
Then the man with tuffs of white hair beside me bent quietly toward my ear as he told me about how a woman had stolen his heart and then his farm, a farm that had been in his family for five generations. His hands shook in anger and despair.
It happens. Relationships do break up, whether you’re a farmer or not. According to Statistics Canada in 2009, the probability of divorce in this country is about 41 per cent. With second marriages and people living together, the rate of split-ups is even higher. Although there’s no official data, says Mike Rosmann, a farmer and psychologist from Iowa, it appears the divorce rate for farmers has become more equalized to the general population.
So let’s not kid ourselves. Farms are big assets that hold generations of emotional punch and can be instrumental to the business. It can take the legs right out from under a farm if a key section of good land or half the quota is lost.
But most people simply don’t think of getting a prenuptial agreement signed. They don’t want to consider or talk about anything that might imply their partnership might not succeed, says Rosmann. “When people get married or decide to live together, they want and expect to make their relationship work, so most don’t even think about creating a prenuptial agreement.”
From his office in London, Ont., Mike Bondy, a chartered accountant and national director of succession planning with Collins Barrow, says the divorce rate of his farm clients in southwestern Ontario is much lower than the average population, only about five per cent. However, that doesn’t lighten the emotional and financial impact of breakups on farms.
“Divorce is the No. 1 thing I hate to deal with, and prenuptial agreements are the second-worse thing to deal with, so I try to do prenups,” Bondy says.
Prenuptial agreements are basically a way of negotiating a divorce settlement ahead of time, before you even get married. Each party has to have their own independent lawyer and those lawyers tend to tell the person marrying the farmer to not sign the contract. It can be hard to get everyone to see the benefits of preplanning for something negative.
“It’s difficult, but I tell many clients really, you should have a marriage contract,” says Bondy.
Planning becomes even more important if you have substantial assets at the time of marriage, whether inherited or earned. Bondy says it’s more common to have prenuptial and cohabitation agreements in second marriages, where one or the other partner owns significant assets. This is often because they’ve been through a divorce or know someone who has been through a nasty breakup and want the assets to go to the next generation.
So what are the laws?
The specifics of divorce and separation law vary from province to province and from state to state. The laws on their own are complicated, and then there’s the additional complicating factor that the facts of each case are unique. However, the essential idea behind all these laws is that value created or property acquired during the relationship will be equally shared on separation.
The value of the property a spouse owns on the date they get married is not part of the net family property, just the increase in value during their marriage. In Alberta, for instance, if you’re married, the Matrimonial Property Act applies, and the increase in the value of property acquired during the marriage is equally divisible, says Gayle Langford, lawyer and registered family mediator at Red Deer. It doesn’t matter whose name the property is under.
In law, the term property means everything that can be transferred — shares of a family farm corporation, inventory, quota, land, equipment, homes — even if it’s in your own name or valued as part of your farm corporation.
Gifts and inheritances received during the marriage are excluded and, in most provinces, any growth on these gifts is excluded.
The matrimonial home has a special status. There might be complicated issues, such as children or an established right to occupy the home. Contact a family lawyer if you’re in that position. It’s way beyond this article.
Nuptial means legally married, and cohabitation means living together but not legally married. You will be considered common law for taxes after certain lengths of time, depending on where you live.
As long as the property is still in the farmer’s name only, it will remain that person’s after the common-law relationship breaks up, subject to the claim for the increase.
However, the rules for settlement after living together are changing. Recently, the Supreme Court of Canada decided where there’s a “joint family venture,” such as a farm, the value created during the relationship may be split.
To protect against this, the common-law spouse who doesn’t own the property needs to be compensated fairly for what they were doing on the farm so they don’t have a claim. It’s common for farmers not to pay themselves well and not to pay for labour from wives and children.
“Absolutely, pay the cohabitating partner a reasonable salary all along for what they were doing on the farm,” says Bondy.
The law regarding living together in Alberta is quite a bit broader than most other provinces. If you live in a relationship with another person outside of marriage, and if you share one another’s lives, are emotionally committed to one another and function as an economic and domestic unit for a period of not less than three years, there could be legal obligations between the parties.
“That one might catch a few farming families by surprise,” says Langford. “I know of siblings, and family members, for example, elderly mothers living with their children, that may fall under the legislation and have ongoing obligations.”
So what can we do to protect the farm? Written agreements, and prenuptial and cohabitation agreements can be structures to help ensure the family farm legacy will be intact and the leaving partner will be taken care of if the couple split.
A prenuptial agreement can be modified later if both partners agree, even after they marry, or you can write an agreement while married, in which case it is called a postnuptial.
These agreements can help reduce the impact of divorce, but if not handled properly, they can also cause more problems. “The term prenup has too much baggage: images of the gold-digger versus the controlling patriarch. A better name would be Family Farm Legacy Agreement,” says John Mill, succession specialist and tax lawyer from near Windsor, Ont.
In a family farm, the goal is to protect the family aspect of the farm itself, so an agreement might want to acknowledge the family intends to keep the farm in the family for generations, says Mill.
To demonstrate it’s a fair agreement, it has to protect a legitimate interest and make sure the spouse is taken care of as well. When it’s unfair, such agreements get set aside. Separate lawyers should review the completed agreement, since one attorney cannot represent both parties in the event of a divorce or dissolution of marriage. “A lot of prenups are tossed out of court because they aren’t done properly,” says Bondy.
Over the 40 years he’s been helping farmers with succession, Bondy has seen a couple of ugly emotional cases just trying to work out a written agreement. “I’m a big believer in them (prenups) but I hate, hate, hate to do them,” he says.
When individuals with large interests in separate assets are planning to marry, prenuptial agreements can help achieve clarity and trust and they can dispel suspicion. However, they can sometimes be very hurtful and add stress to new family relationships. Bondy has seen too many tears hit the floor over this discussion and says it’s important to manage the process with fairness and sensitivity.
Prenuptial and postnuptial agreements simply divide the net assets if separation occurs. These agreements typically list all the property each person owns along with all debts, and they specify the rights each will have if the marriage ends in divorce, dissolution, or death of a spouse.
Bondy advises his client to ensure fairness. For example, the matrimonial home is valued like a house in town, and cash settlements for the spouse can be written right in the agreement. Often on farms the house is owned by the family farm corporation or is on a large property or the property has a barn on it.
When done properly, the great thing about doing a formal prenuptial or cohabitation agreement is that couples and families fully discuss the couple’s present finances and future goals. “The discussion around a prenuptial or cohabitation agreements is what is valuable,” says Langford. “Anything that helps families discuss all the what-ifs and to come to an agreement before the what-if occurs makes things more predictable and easier when those what-ifs happen.”
For the agreement to be enforcible, each party must completely and accurately disclose all assets and liabilities existing prior to the marriage, including copies of tax returns, balance sheets and deeds. The ones Langford has done listed the assets each party brings into the marriage with an agreed value, and an agreement that if the asset increases in value, then the increase is divisible if the marriage lasts a set amount of years.
In her experience with farm families, Langford finds there are two key issues, the farm as a business and the emotional context of the family farm. For example, the home quarter might have family history tied to it. It may be the site of the original sod hut.
“If you don’t want to have to sell off a particular parcel of land in case of a divorce to pay out the other spouse, then an agreement might be of benefit,” says Langford.
As farms increase in size and new family members become a part of the business, either directly or indirectly, Langford says a real need emerges to discuss how assets and liabilities will be divided.
For these agreements to be effective, they need to address all the what-ifs and formalize their informal agreements. If families want to protect the farm as a business, then they need to formalize all the agreements, not just prenuptials, says Langford. For example, land and farm assets can be held in family trusts, which if done properly can provide some protection for family-owned operations. To protect the farmland from divorce, then a “gift” might be better to be a subdivided acreage and an agreed value as of the date of the gift, or loaning formally the funds to buy land, she says.
For more information Ohio state has a helpful fact sheet on prenuptial agreements for farmers.
Protect your farm from divorce
The following are some ways, other than written agreements or not getting married, to mitigate your farm’s vulnerability to divorce. Check with your trusted advisers, lawyer and accountants before doing anything, and whatever you do, don’t spring any surprise arrangements on your family.
- Consider not transferring gifts to a child until after marriage. In most provinces, gifts or inheritance after the wedding date are not joint property.
- Some pieces of land are more important to the operation than others, so keep them in the married-farmer’s name only, especially if it was a gift. Sometimes you may be encouraged to put joint names on property to avoid probate fees, but remember, if it’s in joint names, the spouse legally owns half.
- Encourage the new couple to buy a house or small acreage as their matrimonial home instead of a house on larger acres or on land with barns essential to the operation.
- Pay partners or spouses a reasonable salary for what they are doing on the farm.
- Another way to exclude farm property from net family property is to use the tools available through your farm corporation, says Bondy. If the farmer gets married, the increase in value of his or her shares is included in the calculation of net family property. So Bondy suggests an estate freeze just before marriage. The farmer exchanges his or her common (normal growing-in-value shares) for fixed-value preferred shares. Then a parent subscribes for the new common shares and the day after the wedding, gifts the shares to the newly married, next-generation farmer. The new common shares have little or no value at that time and when gifted, the parent indicates in writing that the gifted shares, any substituted shares and any income from the shares are to be excluded from the calculation of family property. The preferred share value is frozen and is an asset at the date of marriage (so their value is excluded in a divorce), and the growth in value of the new common shares is not included in family property for divorce purposes.