In advising farming clients, I frequently encounter business structures, which have unintentional consequences when divorce happens.
When parents decide to bring their son or their daughter into the farming business they need to be very careful about what it is they are giving away. If the farming business operates as a partnership, it is vital that a partnership agreement is entered into between all of the partners. This provides clarity and certainty as to the partnership share, the ownership of partnership capital, whether the land holdings are to be held within the partnership and whether the incoming younger generation are to become joint owners of that land. If it is intended that the son or daughter is to become a partner in the trading part of the business – rather than a joint owner of the fixed assets (usually land) – it is important that this is properly provided for.
Some farming businesses operate separate structures – with the parents continuing to own the land being farmed and the incoming younger generation sharing in the profits of the trading business only.
Likewise, if the business operates within an incorporated limited company structure, it is vital that a Shareholders Agreement is entered into between all parties to secure certainty in the event of a separation or a divorce of one of the business owners.
Parents should also be cautious about paying lip service to their percentage interest in the profits of the farming business. Often, the parents who may not need the income stream, allow the younger generation to take more than their strict profit entitlement. If this has been the case for a period of time it is very difficult on divorce to suggest that this extra income will not continue to be made available to the divorcing younger generation into the future. The divorce court look at the realities on the ground, and if the divorcing son or daughter has benefitted from the generosity of his or her parents in terms of enhanced drawings from the farming business, the court may well find that such generosity will continue to be made available.
Caution is also needed when inviting the partner or cohabitee of a son or daughter to live in a property owned by the farming business – or by other members of the farming family. A straightforward Cohabitation Agreement is advisable to ensure that all parties understand and acknowledge that by virtue of living in the property (often on a rent free basis), the cohabitee does not acquire a legal or beneficial entitlement to the property at any stage. Care needs to be taken regarding contributions made to the property by the non-owning cohabitee and it needs to be clearly understood whether any investment he or she makes to the property is intended to allow them to acquire rights.
If the younger couple plan to marry, give some thought to the preparation of a Pre-Nuptial Agreement. This sets out the way in which the couple’s finances will be dealt with in the event that the marriage hits difficulties and separation or divorce occurs.
If it is intended that the farming family business is to be kept intact and not divided up in the divorce courts, a Pre-Nuptial Agreement , properly entered into with both parties fully aware of the implications of its terms, is a valuable tool in these circumstances.
The working life of a farming family is often very busy. They forget to take the time to consider these issues in a timely fashion. In my experience, it is when things go wrong that they realise that they should have made time for frank and open discussions within the family as a whole before taking steps to transfer assets across, or to introduce their children to the family business.
It is important to take specialist advice for what can be a complex issue.
This blog first appeared as Margaret’s column in the Yorkshire Post’s Country Week.