Farm Ireland
Independent.ie

Friday 28 July 2017

How a pre-nup agreement can save the farm

Case study...

(Stock picture)
(Stock picture)

Mik Brady

Jack and Aoife are engaged to be married next autumn. Jack (35) has just taken over the family 100-acre dairy farm and farm house from his parents.

Aoife (32) is a primary school teacher - she has just been made principal in the local school. They plan to live in the farmhouse as Jack's parents have bought a new house away from the farm. The land is all in one block with very little road frontage. Aoife has an apartment in the local town, which she plans to let out.

They have decided to put a pre-nuptial agreement in place before their wedding. This example only considers the division of assets; the agreement would also cover other issues such as maintenance, custody, etc.

Jack is worth €1.5m and Aoife €100,000 when loans are deducted from their individual assets; this is called their Net Worth (see Table 1 and Table 2).

If, for example, Jack and Aoife have two children, experience marital difficulties after say 15 years of marriage and decide to separate/divorce, we look at how a pre-nuptial agreement might be of benefit in their case. In a family matter like this, both sides usually engage legal representation - ie, solicitor, barrister and agricultural consultant/valuer.

Read also: Advice: Tide is turning in favour of 'pre-nup' deals

Negotiations between the parties are conducted, resulting in an agreement or not. If the parties cannot agree, the case will be heard in court and the presiding judge will make an order which will include a division of Net Worth.

Let's assume the judge decided a 60:40 spilt of Net Worth between Jack and Aoife.


For simplicity, I assumed Jack and Aoife have the same assets after 15 years of marriage but they have paid off all their loans. Their combined Net Worth has now increased from €1.6m to €2.03m (see Table 3). A 60:40 split means Jack gets €1.218m and Aoife gets €812,000. Aoife's original assets (apartment, etc) are valued at €255,000; therefore the farm has to come up with €557,000.

In this example, Jack would either have to borrow the money or sell around 47acres of land, or come up with some combination of both. Any option would make the farm business unviable, thereby increasing the risk of the entire farm being sold - massively increasing the level of tension in the family at this already difficult time.

The farm business can support a viable level of farm debt in the region of €275,000; therefore the pre-nuptial agreement could include a plan to sell Aoife's apartment (€200,000) and Jack borrows the €275,000 - the combined sum of €530,000 allows Aoife to purchase a detached house (€325,000) suitable for her and their two children as well as have a sum in the bank (€205,000) for emergencies.

This solution protects Jack's 100-acre dairy farm and also provides proper provision for Aoife and their two children.

Yes, Aoife received a lower level of Net Worth but surely this has to be a better solution than an all-out war resulting in high legal fees, the loss of a viable family dairy farm and bitterness between two families.

Pre-nuptial agreements would be of benefit to all married and co-habiting farmers in Ireland. They should be updated on a regular basis, at least every five years or when there is a major change in Net Worth of the farm business or income-earning capacity of the spouses/partners.

Every case is different, so there is no 'one template fits all' solution, and today it may sound unromantic but in time it could be the cornerstone of a relationship.

Mike Brady

Mike Brady is an agricultural consultant and managing director at Brady Group. Email: mike@bradygroup.ie

 

Table 1

Net Worth calculation for Jack

ASSETSValue (€)

Land (100 acres)1,200,000

Dwelling250,000

BPS entitlements* 32,000

Livestock assets158,600

Machinery60,000

Vehicles15,000

Cash (incl shares and investments)39,400

Debtors20,000

Total assets1,775,000

LIABILITIES

Bank liabilities200,000

Finance leases/HP50,000

Trade creditors25,000

Total liabilities275,000

Net Worth1,500,000

Table 2

Net Worth calculation for Aoife

ASSETSValue (€)

Apartment (2 bed)200,000

Vehicle15,000

Cash (incl shares, etc)40,000

Total assets255,000

LIABILITIES

Bank liabilities (Invest Mortgage)150,000

Finance lease/HP5,000

Total liabilities155,000

Net Worth100,000

Table 3

Projected division of assets in event of divorce after 15 years of marriage, with pre-nup (73:27 split)compared to no pre-nup (60:40 split):

 

Net worth

DateTotalJackAoife

Year 11.6m1.5m100,000

Year 152.03m1.775m255,000

No pre-nup1.218m812,000

Pre-nup1.473m557,000

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