Why death and divorce should be part of your transition plan
Avoiding worse-case scenarios starts with having tough conversations and documenting decisions.
The death or divorce of a farm owner can have devastating effects on farm businesses and have far-reaching effects on the transitioning to the next generation.
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.
Here are three (potentially uncomfortable) questions to consider in transition planning discussions:
- How much time and money has the next generation committed to the business?
Establishing each party’s expectations — including family not involved in the farm who might still expect some portion of the estate — can help prevent future conflict.
- Did you document intentions and the reasons behind them?
Oral agreements are difficult to prove in court. Even if possible to prove, the process can be costly.
- Do the parties involved have marriage contracts?
Such legal agreements detail how assets will be divided in the event of divorce, helping to ensure business viability.
The value of a transition plan
Formalizing a transition plan is the best way to help eliminate financial confusion and conflict after a farm owner’s death. Yet not all farm families take this approach. According to Statistics Canada, 125,492 farms have no plan in place for how to turn the farm over to the next generation.
Scriven says farmers tend to fall into three transition categories:
- Those who do everything to ensure a smooth transition for younger family members
- Those who seem to prepare for transition but don’t want to share their wealth
- Those who genuinely want to transition but never get around to it.
Meanwhile, younger generations can sometimes find themselves in a position where they contributed capital and years of work but feel like they lost the opportunity for fair and full payment. At the same time, heated discussions can easily arise on farms where more than one child wants to take over the operation, or there is a split between who will take over the farm and who feels entitled to a portion of the farm assets.
Brian Kaliel, a partner with Miller Thomson Lawyers, says estate planners recommend starting the transition process early and with open dialogue between parents and all children.
“There may be fear that dialogue will create family rifts. But dialogue may also lead to 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 when planning the farm’s future. 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.”
Where divorce does happen, Scriven says looking for creative solutions can help reduce the financial burden and stress of litigation.
3 tips for transition success
- Formalize transition intentions to help eliminate financial confusion and conflict after a farm owner’s death.
- Have a marriage contract outlining how the farm will be shared in the event of divorce. If you don’t have one, seek creative resolutions to dividing assets to help reduce financial burdens.
- Keep talking and bring in a transition expert. Transition conversations can be uncomfortable and may stir some heated family discussions.
Article by: Matt McIntosh