Pre-nuptial agreements are still a delicate subject, but they could save your farm’s bacon, suggests Richard Wright.
Some people claim the goal for a business should be to grow the value of balance sheet assets over a generation. This means a business is handed on to the next generation in a stronger financial position. In farming this means maintaining reasonable profitability, while growing the asset value – something that rising farm land values have helped to achieve.
In general farm land values can be assumed to increase, but there are still threats to passing on a stronger balance sheet. Top of the list is trading in a way that exposes the business to the risk of a bank forcing the sale of some or all of the asset. The second is a more sensitive issue – the loss of some or all of the business as the result of a marriage breakdown. This goes back to the old joke about a farmer being someone who walks up the aisle with a farm, and walks back down with a new spouse and half a farm. Even after the White v White legal precedent case of a farming divorce, where the concept of a 50:50 split of assets was established, this is an exaggeration, since a spouse has to show a contribution to the value of the assets.
That said, there’s no escape from the concern in families about this. It can damage relations, as suggesting to a son or daughter a relationship will fail isn’t likely to go down well. Yet 40% of marriages do end in divorce and a property settlement over the assets.
Farmers are classically asset-rich and cash-poor, making it difficult to fund a divorce settlement. Pre-nuptial agreements were given legitimacy in UK law, when a German heiress, Katrin Radmacher, had her pre-nuptial agreement upheld by the Supreme Court. Now legislation is being considered in the wake of that to give these agreements legal standing. That this needs to happen is clear, based on a suggestion that 80% of family solicitors have been consulted over a pre-nup in the past year.
The idea of such an agreement would be to ring fence assets to each party at the start of the marriage. The aim isn’t to deny someone a fair share of their contribution to growing a business, but to avoid costly court battles.
This has been debated for three years, but it’s only a matter of time until it comes into legislation. It will make clear that any agreement shouldn’t seek to leave one party with nothing in the event of a divorce. Both parties will also be told to take independent legal advice before signing a pre-nup. This would have to be passed as legislation, and it’s still possible that this could happen before the 2015 general election.
Meanwhile, the Radmacher case set a precedent that judges should give ‘decisive weight’ to an agreement made before marriage that neither party would make a claim against the assets that existed at the time of the agreement. In the Radmacher case it led to the husband of the German heiress having his divorce settlement reduced from £5 million to just £1m.
Bringing pre-nups into law won’t necessarily make this an easier issue to raise, and the potential is still there for an enormous family row. But when the legislation is passed it’s something a solicitor could legitimately raise with a son or daughter as part of the succession planning discussion, common on most farms.