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Farm business safeguard: The role of a pre-nup in divorce protection

Posted on May 21st, 2024 by Jennifer Hannan

Farm business safeguard: The role of a pre-nup in divorce protection

The following fictional case study was created by BDO.

“Are you sure you want to marry a farmer?” It was a question that George asked his fiancé Monique many times. The reason George kept floating the question, asked mostly in jest, stemmed from the history surrounding the family farm.

George’s father Andrew and uncle Guy farmed together. They inherited the farm from their father and were dairy and cash crop producers. George grew up watching the farm grow and saw how well his dad and uncle worked together. From an early age, he knew farming was what he wanted to do. But when George was in his early twenties, Uncle Guy went through some marital issues that ended in divorce.

Divorce challenges farm finances

Settling the divorce was a nightmare and things got nasty between Guy and his wife. It also affected the relationship between Guy and Andrew to the point that they almost ended the working partnership. There was no plan in place to protect the business or assets from a divorce. The corporate ownership structure of the farm meant that everything, including land and quota, was on the table for the divorce settlement.

The financial stress was intense and big decisions had to be made to comply with the settlement and keep the farm afloat. Some land and equipment had to be sold and expansion plans were scaled back.

It took years before the effects of the divorce were fully processed financially and emotionally.

Pulling money out of the corporation meant tax implications for Guy. It took years before the effects of the divorce were fully processed financially and emotionally.

George and Monique had started dating during that troublesome time and they felt the ripple effect of the divorce. When they finally decided to marry, they were well aware of what a divorce can do to a family business. George’s cousin Angela was also involved in the farm so there would eventually be multiple generations and multiple families involved.

Monique had witnessed the fallout from Uncle Guy’s divorce and respected the discussion, but her parents were concerned that she would be signing away her rights as a partner in the marriage.

Safeguarding the farm business

Both Guy and Andrew had strong feelings about a pre-nuptial agreement and had already put a stipulation into the shareholder agreement that an agreement was required for anyone acquiring ownership in the farm corporation. Monique and George knew they had no choice if they intended to buy into the farm.

As the wedding was a year away, Andrew and Guy held meetings with their lawyer and accountant to review the business structure and develop a suitable plan. It brought George and Monique into the business but protected the operation from divorce fallout.

The basic plan went as follows: The farm’s lawyer, who was experienced in family law, would prepare a draft of the agreement, which would now would serve as a template for future unions. George and Monique would obtain independent legal advice to ensure they fully understood what was being asked of them.

The goal of the agreement was simple – to ensure that the farm corporation would not be vulnerable to the financial burdens that arose in Guy’s divorce. It would also document a plan for how a settlement would be addressed if the marriage ended.

The plan ensured that a settlement would be straightforward and avoid delays that could impede the ability of the business to make decisions. It would allow both George and Monique to plan for their cash flow needs in the event of a divorce. The agreement would only address assets within the corporation. Land and assets held personally by Andrew and his wife that were to be transitioned to George and Monique were not bound by the agreement.

The lawyer explained that without an agreement in place, any increase in the value of the corporation would be considered part of the net family property and attributed to both George and Monique. The bulk of the farm’s value was in land and quota so a divorce could force the sale of these assets to fund a settlement.

The pre-nuptial agreement would dictate that the shares of the farm corporation would not form part of the net family property. This meant that any increase in value of the corporation would not be subject to division with the departing spouse.

Acknowledging the younger generation

To recognize that the young couple would be making a significant contribution and commitment, Andrew and Guy amended the agreement slightly. They wrote into the agreement that ten percent of any increase in farm value would be part of the net family property and would be divided between the young couple if they divorced. The amount would be paid out to them over a 10-year term.

While there are many ways to mitigate exposure to another divorce, Guy and Andrew knew that if they wrote the pre-nuptial requirement into the shareholder agreement, it would take the decision out of their children’s hands.

The children all knew the deal and could be open about it if they were in a serious relationship. It removed the awkwardness of having to ask a partner to sign a pre-nuptial agreement and ensured the farm would not have to survive another messy divorce.

BDO is a trusted advisor for agricultural accounting, tax planning and business consulting. 

From an AgriSuccess article.

 

Photo by https://www.pexels.com/photo/brown-field-and-blue-sky-46160/

 
For More Information: Farm business safeguard: The role of a pre-nup in divorce protection https://www.fcc-fac.ca/en/knowledge/farm-business-safeguard-prenup-divorce-protection, May 2024.