Farm succession planning is complex. The transition of the family farm to the next generation raises several questions, including how you ensure the farm remains in the family.
The legacy within a family farm may span several generations. But what happens if along the way a separation or divorce occurs and the family farm is in dispute? If family property law is not considered as part of succession or estate planning, family farms are ripe for attack during a separation or divorce.
Let’s look at an example.
Mom and Dad own a family farm valued at about $10 million. Mom and Dad wish to engage in succession planning to transfer the family farm to their son, Dave. At the time the farm is transferred to Dave, Dave is married to Mary. Several years later, Dave and Mary separate and a family property claim is initiated.
Dave received his interest in the family farm during his marriage to Mary, so that means the Family Property Act (Saskatchewan) starts with the presumption that the value of Dave’s interest in the family farm is equally sharable with Mary.
It doesn’t matter if the family farm is only in Dave’s name. It doesn’t matter if Dave received the family farm by way of shares in a corporation. It doesn’t matter if the entire value of the family farm was generated by Dave’s mom and dad.
Once the farm is transferred to Dave, it is Dave’s property and becomes subject to a family property claim by Mary.
If the family farm is the only material asset owned by Dave and Mary, if Mary makes a family property claim, Dave has three main options:
- He can transfer half of the ownership of the family farm to Mary.
- He can sell the family farm and use the sale proceeds to provide an equalization payment to Mary.
- He can obtain financing to pay Mary for half of the value of the family farm.
In each scenario, the impact to the family farm is significant. Separation or divorce between Dave and Mary may result in half of the family farm no longer staying in the family. Or, to keep the farm, Dave must finance significant debt to pay out Mary.
The situation would be no different if Dave inherited the family farm during his marriage. Inheritances received during a marriage are also family property subject to division in Saskatchewan.
However, if Dave and Mary were not legally married, the available options depend on several factors. If Dave and Mary reside together in a spousal-like relationship for a period of two years or more, they have the same property rights as married spouses. If the family farm is received by Dave after the two-year mark, the same rules apply as if they were legally married.
As part of their succession and/or estate planning, farm families should consider the use of interspousal contracts to protect the family farm. An interspousal contract is an agreement between spouses that can specify the ownership or division of property should spouses separate.
An interspousal contract can be drafted to address all property held by a couple, or only focus on specific property, such as an ownership interest in a family farm or an anticipated inheritance.
An interspousal contract can only be agreed to by the spouses. An intention expressed by Mom and Dad that they intend the farm to remain with Dave will not be enough should Mary pursue a division of family property.
As such, as part of succession or estate planning discussions, it may be prudent for Mom and Dad to discuss such an agreement with Dave and Mary. An interspousal contract can be entered into at any time (it does not have to be before the marriage).
An interspousal contract can specify that in the event of a separation, the family farm remains with Dave. It can further specify whether Mary is entitled to any payment from Dave regarding the value of the farm. In this regard, some couples choose to protect the value of the family farm at the time Dave receives it but agree to share any growth in the value from that point on. In this scenario, the value of the farm as generated by Mom and Dad remains with Dave, but any future growth that Dave and Mary build together is shared should they separate.
Interspousal contracts do not have to dictate how Dave and Mary manage the family farm or how they use any profits generated during their marriage. Rather, the interspousal contract is a form of insurance that should something happen, and Dave and Mary no longer remain married, Dave will not be faced with selling the family farm or incurring significant debt to equalize family property with Mary.
Family property law should be reviewed as a key part of farm succession or estate planning. The use of an interspousal contract can minimize the impact to the family farm should a separation occur and maximize the ability to keep the family farm in the family.
Kimberly Visram is a lawyer and partner with Stevenson Hood Thornton Beaubier LLP in Saskatoon. For more information, contact firstname.lastname@example.org.