Courting disaster

When farm families end up in court, winners are few and very far between. Still, more and more families are ending up before a judge

Judge's legal gavel and Family Court nameplate
Photo: Thinkstock

The British press has given Welsh farmer Eirian Davies her own nickname, the “Cowshed Cinderella,” even though the court case that she brought against her parents, claiming they had reneged on a promise that she would inherit the family dairy farm, certainly didn’t have a fairy-tale ending.

When the courts awarded a C$2.2 million settlement to Davies, the family was left broken, even though the settlement was later reduced to C$855,000. Davies was still evicted from her home on the farm, and the six-figure legal costs took a huge bite out of the farm and the family’s fortunes.

Does it happen in Canada?

Rarely do farm cases in Canada get such high-profile treatment in our national media, but that doesn’t mean that there aren’t plenty of such cases out there. Feed the search terms “constructive trust” and “farm” into the Canadian Legal Information Institute’s online database and almost 2,000 cases pop up.

And those are just the minority of cases that end up in court.

Probably 80 to 90 per cent of such cases settle out of court, says Don Good, an Ontario lawyer who has dealt with plenty of farm litigation cases over a career spanning more than 30 years.

Understandably, (if you have ever lived in a small, rural community), in most cases, when the parties settle, whether it’s in court or outside of court, they have a non-disclosure agreement in place so they don’t end up in the press or the public eye.

“I was never encouraged by my clients to say, ‘Well you know, farmers could learn from this, put it in the paper,’ because they really didn’t want that publicity,” says Good. “Usually, when it gets to the point of litigation, the family is pretty badly damaged. They’re terrible cases to have to handle, and nobody wants this to become public, especially in a small community.”

There are no winners except the lawyers when a dispute over the family farm leads to litigation.

“When I took these cases on, because I’m a farm boy myself, I always tried to make sure the client understood I was going to do the best I could for him or her as my client, but I would also try to do the least amount of damage to the family and the farm,” Good says. “If the client didn’t agree to that, often I didn’t take the case on. But there were times, when positions were so entrenched, that I thought this doesn’t make sense. There are no winners coming out of this, everybody’s going to lose.”

What is “constructive trust?”

Most of these farm legal cases involving a dispute over who is entitled to what are brought under the principle of constructive trust or unjust enrichment, which doesn’t just apply to farms, but is more common in a farm situation, especially when there are no wills, written business agreements or farm transition plans.

Constructive trust refers to a situation where somebody has contributed to the value of property and has not been compensated for it. As an example, a son works on the farm for many years with little compensation expecting that he will inherit the farm upon his parents’ death. That doesn’t happen either because the parents change the will to make someone else the beneficiary, or there is nothing at all in writing to say this was their intention, so others make a claim on the property after the parents’ death.

“In this instance, the son would sue for constructive trust because the work that he did was directly related to the value of the property involved,” says Good.

In some cases a person may provide a service that provides a benefit for which they are not paid, such as caring for a sick parent or relative. The principle behind “unjust enrichment” is that people shouldn’t take advantage of other people’s work and effort and not pay for it.

Constructive trust is also unjust enrichment, with the difference is that property or land is involved.

Litigation is costly

Many of the early farm family litigation cases involved common-law spouses, but one of the most common today is a child who works forever on the farm but then at the last minute, wills are changed or are found to be inadequate when other siblings come racing home to claim a share in the farm.

There is always a financial burden to bringing litigation, which can put additional stress on individuals and the farm business. Cases that go to court can quickly amass legal fees in excess of $200,000 to each party.

“When people settle out of court, at least the costs are usually blended across the parties,” says Good. “Courts pick winners and losers, so the loser really takes a hit.”

Unfortunately, non-farming siblings often have an overly romanticized view of the farm that leads them to demand their fair share without stopping to think what “fair” really means in terms of the farming sibling who is taking all the risks on a daily basis.

“Often what happens is the children who went out and made their fortune in life in the non-farm world still perceive of that farm as being idyllic and that their brother or sister was lucky to get the farm,” says Good. “They forget about BSE, and rain this year and drought the next, and the prices are bad, and all the things that farmers go through, the risks they take and the hazards they run up against. He got the farm in the first place, whereas we had to go work for a living. All they see is he or she is getting all that money.”

There is also rarely any consideration for the fact that the value of land and other farm assets, while they undeniably have increased, and continue to increase dramatically, is tied up as the equity needed for the farm to obtain financing and continue to operate.

Farmers know that it’s not just cash in the bank, but non-farm siblings often want to treat it that way.

Transition starts today

It’s unfortunate that more farm families don’t realize that transition starts with the living and encompasses what’s happening today. It’s key to avoiding conflicts that could harm the family farm, and the family itself down the road.

“Quite often, farm families, from a legal point of view, are operating in circumstances which are more complicated than they realize,” says Laura McDougald-Williams, who practices law in the small, rural community of Souris in western Manitoba. “In the first place, when there are siblings or parents and children farming together, they should have some sort of written document to clarify everyone’s intentions about the current situation that they are in. As an example, it’s common for children to trade labour in exchange for using their parents’ machinery as a way to get them started. Those types of arrangements can cause conflict if there is a misunderstanding at the end of the year about how the expenses and profits are shared.”

McDougald-Williams is also a farmer, and because she understands the risks of farming, she spends a lot of time trying to help her farm clients develop written agreements to preserve harmony in the farm operation over the long term. “It’s important that how land and farm assets are to be transferred is documented so that, in the event of a disability or a death, for example, it tells the whole story clearly for other family members, or a power of attorney or executor that has to step in,” she says.

The first time someone comes into the lawyer’s office to talk about succession planning, they often think they just need a will that sets out how they want to distribute their personal and/or farm assets upon their death.

But in almost all cases, the transition plan needs to be a lot clearer than a will that says simply “I divide my estate equally amongst all my three children.” That probably works if someone dies with a million dollars in the bank that the kids can split three ways. But when that one million dollars is tied up in farm land, machinery, buildings, homes and inventory, not to mention the addition of sweat equity in the case of farming children, it’s a lot more complex.

“Particularly in families that have non-farming children, the succession plan should make specific provision for an equitable, not necessarily equal distribution of assets among all the children, that allows the younger generation to continue farming without having to sell a half or third of the farm to satisfy testamentary instructions,” says McDougald-Williams.

Are you headed for court?

With the value of land and farm assets escalating, are we going to see more of these kinds of cases, or is that increase in value making more farm families aware that they need some sort of written agreement?

Good doesn’t think the message is getting through to the extent that it should. According to the 2016 Canadian Census of Agriculture, only 25 per cent of farms have written business plans and just eight per cent have a formal, written succession plan.

Accounting firm BDO Canada says three out of four farms will change hands over the next 10 years, and with 48 per cent of farms reporting that they have no chosen successor, the perfect storm appears to be brewing for many more legal battles over valuable farm assets.

“As long as that situation continues, I have no reason to believe that the number of cases will drop off,” says Good.

The average age of Canadian farmers is 55, which means we can expect a lot of farm assets to transfer over the next couple of decades. That opens up the potential for a huge amount of farm litigation if farmers don’t get the message that they need to plan for succession and get things written down.

“A farmer will save a thousand dollars by not getting his wills or any agreements done and that could cost him or his estate $200,000 plus when it isn’t done right,” says Good. “Many just don’t see the value of that first thousand dollars and what it could save, not just in money but in family disputes. We’ve got to get farmers to believe that that initial investment is worth so much more to them, and certainly worth an awful lot to the next generation.”

The value of mediation

Things have to be pretty bad before farm families end up in court because in most provinces, the court process usually involves both a mediation and pre-trial step to find a way to settle the case.

Farmers can also reduce the risk of court action by understanding the drivers that can make legal action more likely, and by trying to reduce the possibility that the farm will head in that direction.

When it comes right down to it, legal niceties aren’t the only issues to be on the alert for.

Both Good and McDougald-Williams encourage farm clients working on a transition plan to seek the advice of a good farm family coach early in the process, because it’s often the emotion and family dynamics that are the stumbling blocks to a good, workable plan.

“I think the key is a family coach who helps the family organize a plan. If you go to the experts first, nine times out of 10 tax considerations drive the process, and that’s often a poor driver because it doesn’t take into account the mental element and the family dynamics,” says Good. “But a family coach can concentrate on those family dynamics, particularly if there are any conflicts.”

It’s likely that families already know what those conflicts are or will be, long before they get into decisions about transitioning the farm, and in some cases, it’s actually a reason why they don’t want to do it, because they fear having to face up to what can be long-standing family issues.

But a do-nothing strategy instead of trying to reconcile those issues and moving on to develop a plan that works for everyone is just setting up the surviving members of that family for tough times ahead.

“Most often we hear the biggest barrier to farm transition planning is fear — fear of conflict, fear of life after transition for the current farm owners or managers, fear of ‘opening up a Pandora’s box,’ as we recently heard from one farmer,” says Heather Watson, executive director of Farm Management Canada.

Transition can happen faster than expected

Besides evolving roles and responsibilities, farms can face sudden, unexpected change such as a death or disability that accelerates or forces the transition process, but which many transition plans don’t even consider. These events in themselves put tremendous stress on the family and the farm operation.

Advanced planning can help prevent additional stress by taking care of key operational issues ahead of time.

One of the common issues that farms face in these situations starts at the bank. If the farm account has only one partner’s name on it, and that person dies or is unable to sign, the bank will often freeze that bank account until new arrangements can be put in place. Meanwhile, the bills still have to be paid and some kind of cash flow maintained, which can be stressful and costly.

“I always encourage farm clients to have two signing authorities on the farm account as well as that joint account and to also have their own account with their own name on it, because I have had situations where joint accounts got frozen until one partner’s name was formally removed and a new account opened,” says McDougald-Williams. “It was useful for the surviving spouse to have an account in his or her own name for depositing life insurance cheques or whatever to keep the family afloat.”

Another common challenge has to do with estate administration costs, such as probate tax, which can mount up. As an example, if a farmer passes away and has farmland worth $1 million with only the one name on the title, the spouse has to pay $7,000 probate tax to have their name added to the title, and the lawyer fee would be $10,000 or $13,000 on a million-dollar-valued estate if they follow the government prescribed tariff.

If both partners names are on the title, these costs are avoided, but there are sometimes good reasons why that doesn’t happen.

“It’s often a question of balancing a variety of competing risks,” says McDougald-Williams. “A reason that people often don’t add their partners on the title is the fear of a family separation and the effect that would have on the farm.

The next generation will drive change

If you do choose to add a spouse to a title, that is deemed to be an irreversible gift of 50 per cent of that land, whereas if there was a divorce and the person was not on the title, they wouldn’t necessarily be entitled to half of the value.

Of course, there are spousal or cohabitation agreements which can be drawn up that ensure someone marrying into the family has no claim to the farm’s assets, but that can be a thorny issue in itself. The key point illustrated by such issues is that transition and estate planning is an ongoing process that changes as people go through different stages of their lives. “Every estate plan is unique and you really need to sit down and plan it all out, and take into consideration all these unique circumstances,” says McDougald-Williams.

The next generation will be the drivers to get written succession plans in place, and many will learn from their own experiences that they need to begin the process early.

“Young people are the key, because you should plan to transition the property when you’re 60 or 70 back when you’re in your 20s and 30s because there are tools you can use, like life insurance,” says Good. “There can often be a huge capital gains issue, or farming siblings may have to pay out non-farming siblings. One of the ways that can be done, without having to sell off part of the farm itself, is for Mom and Dad take out life insurance at an early age, when it’s still affordable, to cover those future costs to the non-farming children.”

If the aim is to keep the farm and family intact, it seems achieving open, honest communication is the first, vital step, so when it’s time to bring in the trusted professionals to figure out the legal and financial aspects, everyone is on the same page.

“I can tell people what happens if they don’t do it right,” says Good. “I can tell them about the cases where families spent $200,000 on me when they could have spent $2,000 on getting it done right in the first place. I can relate some of the dark side of this whole process if people decide they want to be hard-nosed about it.”

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