Make death and divorce part of your transition conversation
The death of an owner or divorce can have devastating effects on farm businesses, in some cases wiping away generations of accumulated equity.
Given these stakes, Robert Scriven, a lawyer specializing in agricultural law and litigation on behalf of farmers and farm businesses, says avoiding worse-case scenarios starts with having tough conversations and documenting decisions.
It costs money to die
In a presentation given during the Canadian Association of Farm Advisors 2018 farm tax update conference, Scriven says formalizing succession or transition intentions is the most effective way to help eliminate financial confusion and conflict after the death of a farm owner. Not all farm families take this approach, however.
Scriven says in his experience, farmers fall into two broad transition categories. The first does everything to ensure a smooth transition for younger family members. The second includes farmers who “buy a coffin with false walls to pack their cash into it,” and those who genuinely want to transition but never get around to it.
Scriven says the younger generation can sometimes find themselves in a position where they’ve contributed capital and years of work but could lose the opportunity for reward. When more than one party is involved or feels entitled to a share of the farm – say, for example, a sibling that has not been involved but still feels entitled to a portion of farm assets – discussions can get heated particularly quickly.
And while there is precedent for oral succession plans holding up in court, Scriven says they are hard to prove. Filing a constructive trust claim can help. It focuses on finding “what’s fair” given the person’s investments, but there’s no guarantee if it will work in favour of the claimant.
“I cannot stress enough how expensive litigation is,” Scriven says.
In a blog published in 2017, Brian Kaliel, a partner with Miller Thomson Lawyers, reflects Scriven’s sentiments, but adds estate planners often recommend starting the process early and with open dialogue between parents and all children.
“There may be fear that dialogue will create family rifts. Dialogue may also lead to somewhat different but more acceptable estate plans, and prevent lawsuits,” Kaliel says,
Prepare for divorce
Scriven says establishing a marriage contract based on independent legal advice is also critical, and adds agreements are more common than most of us realize – about half of his small- and medium-sized clients, and nearly all larger ones use them.
“It’s probably the best money (you) can spend,” Scriven says. “Marriage contracts, if they are properly done, cannot be overturned.”
According to Statistics Canada, the national average of Canadian farms with a written succession plan is 8.73 per cent.
Where divorce does happen, Scriven says looking for creative solutions can help reduce the financial burden and stress of litigation.
Always seek legal advice when preparing transition. Formalizing succession intentions is the most effective way to help eliminate financial confusion and conflict after the death of a farm owner. And when divorce happens at the farm, seek creative resolutions to dividing assets to help reduce financial burdens.