SPOUSAL BREAKDOWN AND THE FAMILY FARM

How to protect the Family Farm
The Family Property Act does permit spouses to enter into an Interspousal contract (or prenuptial agreement) to permit spouses to exempt property from the distribution rules set out in the Act. This applies to all family property, including a family home and household goods. The only restriction or limitation imposed upon spouses is that the Interspousal contract must not be unconscionable or grossly unfair; otherwise, the court has the discretion to disregard the Interspousal contract and to distribute the property or its value in accordance with the rules set out in the Act as though there was no Interspousal contract.

The law states that, generally, assets are equally divisible
The farm residence (the home quarter consisting of no more than 160 acres) is equally divisible (with a few limited exceptions - for example, a marriage of very short duration) regardless of whether the home quarter was purchased or gifted either before or after the spousal relationship commenced.

All household goods are equally divisible no matter when or by whom the household goods were acquired. Household goods are defined by The Family Property Act as 'personal property that is ordinarily used, acquired or enjoyed by one or both spouses for transportation, household, educational, recreational, social or aesthetic purposes, but does not include heirlooms, antiques, works of art, clothing, jewellery or other articles of personal use, necessity or ornament or any personal property acquired or used in connection with a trade, business, calling, profession, occupation, hobby, or investment.'

The family farm is not given any special considerations under The Family Property Act as, for example, is the case under taxation laws. The family farm is a business, not unlike any other business, and is subject to equal division, but it is also subject to certain permitted exemptions. The most common permitted exemptions are when farm property (other than the farm residence and household goods) is:

1. acquired before commencement of the spousal relationship by a spouse by gift from a third party, unless it can be shown that the gift was conferred with the intention of benefiting both spouses;

2. acquired before the commencement of the spousal relationship by a spouse by inheritance, unless it can be shown that the inheritance was conferred with the intention of benefiting both spouses;

3. owned by a spouse before the commencement of the spousal relationship; or

4. exchanged for property enumerated in 1, 2 and 3 above. It is important to note that the net fair market value (asset value less debt) is exempt on those assets which are subject to exemptions. Therefore, any appreciation in value of an exempt asset from date of commencement of spousal relationship is subject to equal division. The asset is not itself exempt; the net fair market value of the asset is only exempt;

5. educational, recreational, social or aesthetic purposes, but does not include heirlooms, antiques, works of art, clothing, jewellery or other articles of personal use, necessity or ornament or any personal property acquired or used in connection with a trade, business, calling, profession, occupation, hobby or investment.

Net asset value may appreciate in value from the date of the commencement of a spousal relationship, by

• appreciation in the value of the asset; and/or

• reduction in the debt owing against the asset.

The court has an overriding discretion not to permit an exemption where the court considers it unfair and inequitable to do so
It is important to note that farm property, which may be entitled to an exemption, may lose its exemption if the asset is sold and the sale proceeds are not kept in a separate account, separate and apart from any other account that is used to pay family expenses.

Also, an exempt asset may loose its exemption once it is converted to cash/savings if any portion of the sale proceeds, even if kept in a separate account, is used for family expenditures. The law implies that the spouse entitled to the exemption has relinquished the complete cash value of the exemption if any part is used for the benefit of the family. As you can note, there is a bias, either positive or negative depending upon your point of view, for an equal division of family property unless spouses strictly adhere to the rules permitting very limited exemptions.

Machinery and Equipment
Like farmland, there are exemptions. The machinery exemption is equal to the fair market value of the machinery at the date of marriage. Since farm machinery depreciates, the exemption at date of marriage cannot exceed the depreciated fair market value at the date of separation.

If a piece of machinery is sold, the monetary exemption will only be allowed if the money can be traced directly from the old piece of machinery to the new. Again, if the money from the sale was deposited into a "family" account, the exemption will likely be lost as it has been mixed with "family" funds.

For farmers who own machinery prior to the commencement of their spousal relationship, the better procedure for replacing exempt farm machinery is to trade the machinery on the purchase of any replacement. If you sell the exempt machine and then apply the sale proceeds to the purchase price of a replacement, you run the risk of intermingling the sale proceeds of the used machine with funds in another bank account, thereby losing the exemption.