Family farms present a difficulty in family law property settlements. Often, farmers are asset rich, but cash poor. It may not be viable for the farm to remain intact in the course of dividing matrimonial property. The farm itself may need to be sold and its value realised. However, in so doing, one or both parties will be deprived of their livelihood.
Each family law property matter (whether or not it includes a family farm) broadly involves a four step process:
- identify the assets and liabilities of the relationship;
- identify the financial and non-financial contributions of the parties;
- The Court then assesses a range of additional factors (called “future needs” factors) under section 75(2) of the Family Law Act 1975. These factors take into account the needs of each party, both now and in the future.
- consider whether the proposed division is fair to both parties in all the circumstances.
Since the 1985 decision of Lee Steere, there are no separate rules relating to farms. However, the characteristics particular to farming cases are:
a) dealing with initial contributions compared with other contributions during the marriage;
b) dealing with significant needs at the end of the marriage;
c) the small size of the net property; and
d) while it is desirable to mould orders around one party keeping the farm, that is only possible where such orders do not intrude upon the legitimate rights of the other party.
Step 1: Is the Farm in the Asset Pool?
If a farm is owned in the names of the parties in their own right, then it will be included in the asset pool.
Where the farm is held by a company or a trust, and one of the parties has a controlling position in that entity, then the farm is likely to fall into the asset pool. However, some trust structures prevent the trust assets from being considered a part of the asset pool. The test that the court uses is whether one of the parties has actual or de facto control of the trust. If one of the parties has control, then it is matrimonial property and will very likely be included in the asset pool.
If the trust is designed for the specific purpose of defeating Family Court Orders, then the court is likely to deem that trust a sham and draw assets of that trust into the matrimonial pool for division between the parties.
An expectation of an inheritance at some point in the future is not property, and the Court will not take any testamentary promise into account. A father’s promise to gift the family farm to his son upon the father’s death does not increase the size of the property pool available for division.
Step 1: Value of the Assets
Once the property pool has been identified, the assets must be attributed values.
Farms have particular types of assets, in addition to the farmland itself, that add value to the pool. For example:
a) crops in ground and crops harvested;
b) plant and equipment;
c) water rights; and
d) electricity sold back to the grid.
The collective values of these operational assets can be significant, and therefore it is important for any valuations to be clearly itemised.
Step 2: Contributions to the Farm
Traditionally, family farms are passed down from generation to generation. If one spouse has inherited the farm, then the Court will consider the farm to be a financial contribution of that party. This will likely increase the percentage of the asset pool to which that spouse is entitled, but the significance of that initial contribution will decrease over time.
One or both spouses will very likely have performed labour on the farm, for little or no wages. The Court will take these non-financial contributions into account when calculating each spouse’s entitlements.
Step 3: Future Earning Capacity
One of the factors that the Court will consider is the effect of the property division on a party’s earning capacity. If the property settlement calls for the farm to be sold, for example, then one or both parties will be deprived of their earning capacity. If the property division calls for the party retaining the farm to borrow additional funds, that will increase their debt, but will not per se affect their earning capacity.
Where possible, the Court will prefer settlement options that keep the farm intact. However, those arrangements must also do justice to the spouse who is not living on the farm. One such option may be for one spouse to retain the farm and pay a lump sum to the other spouse. Indeed that is a very common scenario in settling farming matters, and in the Court’s determination of these types of matters at trial.
However, there is a limit to this line of thinking that the farm must be preserved intact. The court in Lee Steere rejected the notion of preserving the farm at the wife’s expense. In that case, the husband was given the opportunity to keep the farm and had an arrangement for delayed payment (with interest) to the wife. In such arrangements, the court must be satisfied of the wife’s immediate financial security if they are to make orders for delayed payment such as that ordered in Lee Steere
While the Court does not have to preserve a family farm, it prefers to do so where possible. However, the Court’s priority at all times is to ensure that the division of property is just and equitable to both spouses.
The Court will not force a sale unless it is unavoidable in order to do justice to both parties, based upon:
a) the contributions of each party;
b) the future needs factors of each party; and
c) any prejudice to the party waiting on funds.
This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.