Can the farm survive a divorce?
The following fictional case study was created by BDO Canada.
By the end of their marriage, there was only one thing that Jake and Alice agreed on. They both wanted their daughter Rebecca to have a chance to farm.
They had married right after university, with Jake excited about returning to the family grain operation. With some help from Jake’s parents, they purchased one farm, and then another a few years later. For the past 10 years they’d been working towards buying all the land and some equipment from Jake’s parents, essentially buying the assets of the corporate farm entity.
Now in their mid-fifties, with a viable mid-sized grain operation and two adult children, it was time to make some hard decisions and negotiate a divorce settlement with as little acrimony as possible.
Jake knew there would be concessions to Alice and he was prepared for this. But he was not ready to quit farming, and Rebecca, in her mid-20s had always planned on coming home to farm. After completing a degree in agriculture, she took a job with a major crop protection company to get experience and earn some money.
A second daughter, Brittany, was still in university but destined to become a dentist and had no interest in farming as a vocation.
While Jake and Alice both wanted the farm to be there for Rebecca, Alice was determined to receive her fair share in the settlement. She was 50 per cent shareholder in the corporation that she and Jake had formed for the farm business soon after they were married.
The two farms they had purchased were not held in the corporation. They were close to paying off the mortgages on these two farms, but they carried significant debt because of major equipment upgrades, grain storage and a new shop – all done with the idea that Rebecca would be returning to farm.
The arrangement to buy the corporation’s shares from Jake’s parents had allowed them to make incremental payments and slowly build equity. They were about 40 per cent paid and there was about $300,000 in RRSPs, but not a lot of other assets that could be liquidated.
Jake and Alice had come into their marriage with few assets. No pre-nuptial agreement had been completed and while happily married, they never considered a shareholders’ agreement to be necessary, despite their lawyer’s recommendation. So, with no predetermined direction for how to divide their wealth, they would need to negotiate a settlement.
Jake set to work with their accountant to look at some options.
It became evident very quickly that paying Alice her share of the equity immediately would not be possible. So much of the value was held in the land and so little in liquid assets.
The accountant left Jake with some questions to consider:
- Could Alice’s settlement be paid out over time?
- Could the debt to the bank or to his parents be adjusted to a longer term?
- Could any operational efficiencies be implemented?
- Were there any idle or under-used assets?
She also recommended that Jake obtain proper valuations for the real estate and the corporation, and that he and Alice communicate with Rebecca and Brittany as they went through this process.
A month later, armed with current appraisals for the land and equipment, comments from both of their daughters and information from their lenders, Jake and Alice met with their lawyers and accountant to begin discussions.
It was painful, but a viable plan started to take shape. Jake would borrow $500,000 against the home farm to provide enough for Alice to get settled in town. The bank would also provide a longer term on the grain storage and equipment loan to minimize monthly payments. Jake’s parents offered flexibility on future payments. Some under-used equipment, including a grain truck, would be sold.
Rebecca had saved some money since graduation and would use that as a deposit to purchase her mom’s shares of the farm corporation. Jake would continue to own the land but start transferring ownership to Rebecca in 10 years, after she had paid the balance of the share purchase price to Alice.
In addition, Jake would transfer all RRSPs to Alice, using tax provisions that did not trigger current tax. Alice was able to use her capital gains exemption in the transactions.
The goal was for Alice to be paid the settlement in full over a 10-year period. She was willing to take a second mortgage on the farm properties to secure the unpaid amount and would transfer her ownership immediately to Jake.
Cash flow would be tight for everyone. But the plan allowed Jake to continue farming, Alice to separate from the farm and an opportunity for both of their daughters to pursue their career aspirations.
The entire process was emotionally draining for all three generations, with endless opportunities for negativity and conflict. Perhaps the only upside was that through their interactions with accountants and lawyers, Rebecca and Brittany saw firsthand the necessity for shareholder agreements, wills and power of attorney documents. Both girls also vowed that a pre-nuptial agreement will be happening before any wedding bells ring.
From an AgriSuccess article (June 2018).