Piggy in the middle - farms in divorce

To mangle a phrase of Tolstoy’s, all divorces are tough but farming divorces are tough in a particular way.

Farms may have been a family-run affair for a number of generations: land prices and stock may have considerable intrinsic worth but remain largely illiquid assets, whilst income streams may be relatively low. A farmer may be a good financial manager or a poor one, so that borrowing capacity might be in question. The taxation issues arising from dissolution of partnerships or part-sale of lots can be headache-inducing.

A sale of an entire farm in divorce is a rarity; but the courts have to ascertain the value of the assets and ensure that the departing spouse (usually the wife) has received a fair outcome. In practice, this means trying to find a way to extract a capital sum or sums to buy her out of the farming venture.

Equal sharing of assets?

The factors that a Court must take into account when considering the appropriate financial orders to make on divorce or civil partnership dissolution are set out in statute, but the landmark case of White v White [2001] 1 A.C. 596, about a farming couple, carries great weight. Equal division of the capital assets was to be “departed from only if, and to the extent that, there is good reason for doing so.” There is no automatic presumption of equal division but it is the benchmark against which a court will test a final order.

But what, a farmer might say, if my farm has been passed down through many generations? Surely it remains mine?

Inherited farms/land

Inherited assets are not automatically excluded or ring-fenced from the matrimonial “pot”, unless a couple has had the foresight to do a Pre-Nuptial Agreement taking them out of the kitty. If financial needs mean that an inherited asset or land has to be used to provide an exiting spouse with cash, then the court has the power to order land and property sales, transfers or part-sales.

A recent case, AR v AR [2011] dealt with exactly this issue. The couple had been married for 25 years. The vast majority of the £20 - £23 million fortune consisted of two separate farms, land, a share portfolio, company interests and other investments which been received by gift or inheritance from the husband’s father during the course of the marriage.

The wife argued that the assets should be shared fairly rather than limited to her strict financial needs, in order to achieve “fairness” (like beauty, in the eye of the beholder). She also pointed out that the wealth had been used during the marriage and had not been kept intact or separate in any way.

The husband argued that the inherited assets were not “fruit of the matrimonial tree” but came to him from his family and therefore represented an unmatched contribution he had made. He felt that his farms should only be shared if “needs” required it. The wife had offered to settle for £6 million. The husband had offered her a lump sum of £1.3 million. Whilst the Judge thought that a strict enforcement of the husband’s approach was too rigid, applying the fairness principle and taking into account all of the circumstances, he made an award to the wife of £3.2 million leaving her with £4.3million including her own assets. This came to roughly 20% of the overall assets. A division of assets in the proportion of 80/20% was considered fair, taking into account the husband’s unmatched contribution and the wife’s reasonable needs.

The court made clear that it will consider the source and nature of assets; if assets have been inherited during the marriage this may provide a good reason for departing from equality and the principle of sharing. The length of the marriage and how that property has been treated during the marriage are clearly also important. (For example, in the case of K v L [2010] EWHC 1234 (Fam) the parties had lived modestly on share income deriving from the wife’s inherited shares. It was decided by the Court that after a 20 year marriage the fact that the shares were inherited by the wife 13 years before the parties met and were kept intact were the key factors).

Conclusion

Matrimonial law continues to evolve. There are few hard and fast principles. Whilst you cannot guarantee the future of your relationship, you can think about the following:

  • Have a “joined-up” approach when it comes to the estates and trusts of farming family members. Remember that when you are determining the future of your hard-won assets, that family breakdown can undo all of your planning. Ensure that you speak to one of our family experts with your wealth advisors when considering your testamentary and tax-planning.
  • Pre-Nuptial Agreements now carry great weight: romantic they may not be, but neither is the untangling of a farming marriage if a relationship breaks down. If a couple trust each other enough to marry and raise a family, surely financial planning can form part of that trust?
  • If a relationship does end, do consider resolving the financial and other issues by using the collaborative law process. This is a no-court option which involves the couple and their collaboratively-trained lawyers meeting regularly to agree asset values, to jointly take advice from accountants or valuers if needed and to work together to construct an outcome they both think is fair. The beauty of the collaborative process is that it allows the couple control over their own destinies as well as avoiding the inevitable stress and costs of litigation.