The inter-generational nature of farms, and the need to keep enough farmland to make the farm viable, pose several unique challenges when families decide to separate.
Farm families often experience the law in unique ways, and divorce is no exception. The inter-generational nature of farms, and the need to keep enough farmland to make the farm viable, pose several unique challenges when families decide to separate.
Last month, I wrote a two-part article about what happens when business owners divorce. Part 1 focused on the different ways in which a spouse is bought out and whether a spouse has a claim against a corporation’s assets. Part 2 talked about ways to protect a business, and how child and spousal support are calculated when a parent is self-employed. That general information also applies to farms, which are a type of business. However, there are many other aspects and potential solutions to think about when it comes to farms.
How are spouses bought out of farms?
The usual options to buy out a spouse discussed in What happens when a business owner divorces? Part 1 are a useful starting point. That said, while it is easy to divide money in the bank, it is not so simple when we are talking about a family farm. You may have planned for your children to inherit the farm. The farm might have been in a family for generations. Because farming is only workable when you have enough land, selling land can make it impractical to continue farming. Many farmers tend to be asset-rich but cash-poor. That lack of cash can make it difficult to pay or qualify for a large enough loan to buy the other spouse out. For many traditional families, if the farm does not survive, that might mean the only significant income stream dies. Fortunately, there are a few potential solutions.
One thing to keep in mind is that the law does not always require divorcing spouses to divide assets equally. The spouses also need to consider farm debts, as well as capital gains tax and other adjustments. Often the most impactful adjustment for farms is exemptions. In Alberta, exemptions are credits a divorcing spouse receives for inheritances, gifts, property owned prior to the relationship, personal injury proceeds, or insurance proceeds. Farmland is often inherited, gifted by a spouse’s parents, or owned prior to the relationship. The divorcing spouses typically share the increase in equity during the relationship, although not necessarily equally. That means that for a short relationship, there might not be any payout as exemptions would apply. But, for decades-long relationships, exemptions might not have as much impact. The credit is typically also halved if the couple transfers the property into both their names. The law of exemptions is a lot more complicated than I make it sound here, but you can see how it can have a big impact.
If the family had planned to leave the farm to the children, sometimes spouses will simply agree that should still happen. Through proper succession planning involving trained professionals, the spouses can gift the farmland to children on a tax-free basis, called an “inter-generational rollover”. Another option is to implement an “estate freeze”, where the parents get paid out by the children over time for the current value of the farm, but the increase in value of the farm goes to the children on a tax-free basis. Often one spouse pays spousal support to the other to divide the income from the land in the meantime.
Because the home quarter is often worth significantly more than other quarters of land, sometimes the spouse who is being bought out (who I will call the non-farming spouse) will receive the home quarter. Or we might subdivide it and sell the home to generate proceeds to buy out the non-farming spouse. While it is not ideal for the farming spouse to live farther away from the farm, at least leaving the farmland intact keeps the farming operation viable.
Sometimes both spouses continue to own the farm and divide farming income through child and spousal support, postponing dividing the equity in the farm until they retire. This is not ideal because it is usually simpler to pay out a spouse upfront. It also means former spouses must continue to interact. If land continues to go up in value, the farming spouse will have to pay out more to the non-farming spouse. The non-farming spouse usually prefers to receive their share early so that they can put it towards something like their own house.
Sometimes an early buy-out just is not practical. While the non-farming spouse usually wants cash up front, sometimes they must decide whether that is worth killing the farm, and potentially receiving less child and spousal support. The farming spouse would often receive some benefit for the effort they put into the farm as spousal support does not necessarily divide income equally. However, the non-farming spouse is unlikely to agree to this if the farming spouse claims their income is minimal and they should pay little or no spousal support. From the non-farming spouse’s perspective, why keep money tied up in an unprofitable farm if they would make more money through an investment like mutual funds?
How are child and spousal support calculated for farm families?
How someone’s income is calculated when they’re self-employed is discussed in What happens when a business owner divorces? Part 2, which still applies to farmers. There are a few differences though.
For farmers, business and personal expenses tend to be very intertwined. Most farmers tend to live on the home quarter, which can mean that their vehicle, utilities, property tax, phone, as well as many debts and other payments usually benefit the farm and their personal life. For example, they may have bought a quad for rock-picking, but the family also uses it for recreation. While accountants usually do not deduct the full amount as a business expense, the amount claimed often makes the farmer’s income look very low compared to their lifestyle. Family courts do not have to recognize deductions just because tax rules allow them. Instead, family courts typically aim to calculate a farmer’s income as if they were a normal employee working somewhere else, paying all their own personal expenses. That means trying to figure out what portion of each expense should be personal and which portion is a pure farming expense.
Many farm families only work at the farm which can make finding work elsewhere especially difficult. Once farm families separate, one of them is often left unemployed and has difficulty finding work elsewhere because of their lack of experience in other industries. That is what spousal support can address.
However, when deciding spousal support, courts, within limits, must encourage the spouse asking for support to contribute to their own expenses. That usually means the non-farming spouse will have to go through the difficult journey of re-entering the workforce. Even when they find work though, their income may not be much higher than minimum wage. Spousal support paid by the farming spouse can help, although it depends on the circumstances. Sometimes we try to find a way to finance the non-farming spouse to enroll in training and increase their employment prospects, although that might not be possible closer to retirement.
As I previously noted, one of our top priorities in dealing with divorcing farm couples is making sure the farm stays profitable. Otherwise, a major income source can disappear if the farm does not survive. Paying for two households is more expensive than one. When a farm couple separates, we need to consider all these issues to come up with financial arrangements that let each spouse survive, while recognizing the history and individual efforts.
Thinking outside the box
As with businesses, when farm couples separate, there are better alternatives than the courts. Farm divorces are often too complex for most types of court hearings to address. Your judge is unlikely to have any farming experience. Mediation, arbitration, and their hybrid med-arb are excellent alternatives. Through these processes, you can select a family law mediator/arbitrator with experience addressing farms who can help facilitate a resolution that can be fairer, more attentive, less costly, and faster than through the courts.
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Disclaimer
The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
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About Ken Proudman
