Succession planning for farming families – the impact of divorce

Succession planning for farming families is the topic of this week's Experts in the Field Podcast. Planning for the future is difficult and one of the challenges is the risk of one partner getting divorced.

We strongly recommend that a proactive approach is essential to succession planning when there is a farm involved, particularly if you are thinking about planning for the future and the succession of a farm. Given what is at stake, the attention that farming families rightly give to their succession planning should also include consideration of their relationships, families, and marriage as part of that process.

Typically, the intention is to keep the farm in the family so it can pass down through the generations. A divorce or relationship breakdown can potentially jeopardise that. Division of assets as part of a settlement in a divorce for example, can carve up the property or result in a sale of part to release equity which can potentially make the farm unviable as a business.   

It is of course natural when in a long-term relationship to want to at least consider bringing your partner into the farm business in some way. Whilst those decisions are usually made when everyone is getting on well, it is important to think about what could happen in the future if the couple wish to go their own separate ways.

If a couple are considering marriage, one of the recommendations we suggest is to enter into a pre-nuptial agreement. If they are already married, we recommend a post-nuptial agreement which can be put in place before any separation. In the UK, a prenuptial agreement (or prenup) is a legal agreement that sets out how assets should be divided between a couple in the event of a divorce.

This legal contract is entered into before marriage, unlike a postnuptial agreement which can be entered into when a couple have already married but still want some protection. These agreements set out a couple’s rights regarding property, income, debt and other assets acquired individually (such as inheritance) or together (such as joint purchases).

A pre-nuptial agreement can help give weight to ring-fencing a family farm. Although, this will have to fairly balance the wider needs of the family at the time of divorce which will help uphold any future pre-nuptial agreement.  A pre-nuptial agreement is more likely to be upheld if the terms of it are considered fair upon a divorce. The court has provided guidance to how pre-nuptial agreements should be treated.

If you are already married, but not separated, then a post-nuptial agreement is recommended and can seek to achieve the same outcome as a pre-nuptial agreement would.

If neither have been done, and you would like to protect your farm or family business upon divorce, there can be solutions adopted to reach a fair settlement between you and your spouse, such as a separation agreement or a financial order by consent. The terms of these arrangements can be dealt with in an amicable way to best protect your business.

Before inviting your spouse/partner to join any farming partnership we also recommend that advice is sought on how to document this. In particular, if the farm is an asset of the partnership, care needs to be taken to ensure it is clear whether the new incoming partner would receive any share in that capital asset if they were later to retire from the partnership or if the partnership was dissolved. It is possible to assign a capital asset to one or more partners so that it is effectively ring fenced and the other partners are not entitled to its capital value. However, this does need to be clearly documented in the partnership agreement. Therefore, we strongly recommend that legal advice is sought to draft the Deed of Appointment for the new partner and vary the written partnership agreement accordingly to make sure if the farm is a partnership asset that it is protected.

Whilst these conversations are understandably daunting to have, in our experience, the partner marrying or moving into the business is usually very understanding of why the family wish to try to ring fence and protect the family farm and business so it can be passed on to the next generation. Having these conversations early on and making sure the correct documents are in place is certainly more straightforward in the long run than trying to unpick these things following a relationship breakdown. Therefore, we strongly recommend that advice is sought on succession planning at an early stage.

As well as the podcast mentioned at the beginning of this article, Jessica Pitt, head of the Family team and Private Wealth Sector previously produced this guide to prenuptial agreements in the UK for further insight.