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Relationship Issues and the Family Farm

By Richard Lang, Partner & Amanda Bradley, Solicitor

First published The Press 18 June 2011

Family farms have always given rise to issues around relationship property claims.  The trick is balancing family expectations that family farms will be passed from generation to generation with the expectations of a partner or spouse to some property on separation.  

Take James, a fourth generation farmer from mid-Canterbury. The farm has been in his family for more than 85 years and was originally owned by his father, Harry. James worked on the farm with his father Harry. James had a cottage at one end of the farm and Harry lived in a house at the other end of the farm.

James then met and married a city girl, Sue, who moved into the farm cottage with James.

Harry had concerns about Sue and saw a lawyer about keeping the farm in the family after his death. He was advised to put the farm into a Trust for James’ benefit and was told that if a trust is set up to take over ownership of the farm, the farm would never be James’ legal property and it would be protected from Sue if she and James separate. Harry’s lawyer told him that putting the farm into a Trust has some tax implications that would have had to have been dealt with. 

Harrywas a bit concerned about the tax and considered just leaving the farm to James in his will - but he ultimately decided to transfer the farm to the trust. A few years later he died and James continues to farm the property.

James and Sue stay married almost 10 years and have two children who James hopes will one day keep the farming tradition alive. However, they eventually separate and Sue takes the children and heads to the city where she sends James a letter claiming her rights in the farm.

James is sure that the family farm safely belongs to him as it was handed down his family line for generations. He also knows that the farm is in trust so he does not think that Sue has a claim but he sees a lawyer to double check.

James’s lawyer confirms that his father’s lawyer was correct with his advice to transfer the farm into a trust. The farm property has never been owned by James and so it cannot be classified as relationship property and consequently there can be no compensation for relationship property being transferred into a trust. By Harry transferring the farm into trust rather than leaving it to James in his will, he has avoided the situation where Sue may have had a claim for half of the equity in the farm.

James’ lawyer, however, is aware that there is a loop hole for married couples which allows a court to look behind a trust. Where there is a nuptial settlement on one of the parties, the court has the power to vary the trust. When the property was transferred to trust, James was already married to Sue. This may be considered a nuptial settlement. Under this loophole, there is no presumption of equal sharing. The court may only vary the trust to restore Sue’s reasonable expectations.  It will be a question of what these were?

In farming situations it is difficult to divide property when parties separate. The farm and the plant and equipment are usually the only assets. Everything earned from the farm generally get put back into the farm to continue its development. In the event of a relationship property claim, the situation may arise where one party has to sell off part of the farm which has been in the family for generations.

Setting up the trust to own the farm was the correct thing to do to achieve a reasonable level of protection.  However, in order to completely  protect the farm James should have also signed a contracting out agreement with Sue at the same time the trust was established. Although James did not own the farm at the time he married Sue, he knew that he was going to inherit the farm. The contracting out agreement could have dealt with any beneficial interest James had in the farm and/or any future inheritances. The contracting out agreement could have also dealt with any expectations Sue had.

Forward planning with family farms and succession is essential.  However,  there are pitfalls in every plan and the fine print of a trust deed and a contracting out agreement. Make sure you see an expert so everyone is clear what will happen to the family farm in the event of a death or separation.

Richard Lang is a partner of national and trans-Tasman lawyers Duncan Cotterill. r.lang@duncancotterill.com

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.