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Plan for divorce to protect the farm financially, just in case

Plan for divorce to protect the farm financially, just in case

Farm Scene divorce planning story

Typically, couples co-mingle their assets, so it may be wise to go a step further when gifting farmland and set up a trust, says attorney Curt Ferguson.

Just as a farmer buys insurance in case of a crop failure, there should be a plan in case of a marriage failure — with the hope that neither has to be used.

No one wants to think about the possibility of divorce, but it happens. It can be particularly devastating if the family farm is lost in the distribution of assets as a result.

“It can be a disaster when planning hasn’t taken place,” said Curt Ferguson, an attorney at the Estate Planning Center in Salem, Ill.

Generally, inherited properties are not considered marital assets, as long as the recipient retains the land in his or her name, said Lorraine Zenge, a financial planning consultant with Country Financial. If it becomes joint property, that changes things.

Ferguson said when one generation gifts to the next, it may require an extra step to keep the gift in the hands of the intended recipient.

Typically, couples co-mingle their assets, so it may be wise to go a step further and set up a trust.

“I encourage clients not to leave the land to someone outright. Leave it to the recipient in trust for the benefit of a son or daughter,” he said. “Give them broad control of the trust.”

That will separate the farm from “the marriage, a lawsuit or a nursing home,” said Ferguson.

He recommends a “beneficiary controlled, third-party created, asset-protection trust.”

That simply means the person receiving the land has the flexibility to make decisions about the property, but it still has the greater degree of protection the parent wanted.

Prenups have purpose

In estate planning, Ferguson also advises people to make provisions in the case that a surviving spouse may remarry. The inheritance could move to the second spouse’s family instead of the first couple’s children. That could be addressed during succession planning — requiring a pre-nuptial agreement (prenup) in the case of a second marriage, he said.

Prenups allow for farm families to create a “game plan” that makes sense to them, said Cari Rincker, a family attorney based in Champaign Illinois.

“Nobody gets on an airplane thinking that it will crash, but you still go over the safety instructions,” Rincker said. “A prenup is simply the ‘safety instructions’ for a divorce, which can be especially important for farm families.”

“A family farm is a business,” she said, and the business itself may be subject to equitable division in the divorce. 

“A prenup could clearly address what part of the farm business or its assets is marital and how the farm business and assets will be valued and divided,” Rincker said.

The art of gifting

Kristine Tidgren, an attorney with the Center for Agricultural Law and Taxation (CALT) at Iowa State University in Ames, Iowa, regularly gets calls about gifts and inheritance.

Iowa courts, as in most states, handle divorce matters. When a judge decides how to award assets, both the marital and separate property is considered, with the judge making an “equitable division or distribution” of the marital property.

Sometimes there is concern judges making the decision about a farm’s distribution may not have an agricultural background, Tidgren said. Farms are so dependent on assets, some decisions could put a farm out of business.

In Iowa, if someone comes into a marriage with property, it is usually considered separate. Likewise, a gift to an individual while married is usually not considered marital assets, but it can be.

“You never know for sure,” Tidgren said.

The CALT website cites the case of a couple that had been married for nearly 30 years. During that time, they accumulated substantial wealth. The couple’s assets included farmland and two farm businesses that owned the machinery, grain and hog confinement barns.

Before the marriage, the husband owned farmland, rented additional land and raised hogs. Part of this land had been gifted to him by his parents. In addition, the husband inherited land from his parents during the time of his marriage.

During the marriage, the wife took care of the children, kept the books and helped on the farm on a part-time basis.

In divorce proceedings in 2007, the court awarded property the husband inherited during the marriage to him, but not the property gifted before marriage. It was considered a marital asset. The husband appealed. 

“The court found that the wife had contributed to the improvement of the property and helped with the farming operation by planting and harvesting, walking beans, helping with livestock chores and by doing bookkeeping and participating in marketing decisions,” the case synopsis stated.

The gifted land was considered a marital assets because of the wife’s contributions to the partnership; the husband lost the appeal.

Family dynamics have changed over the years. Sometimes both spouses work off the farm and share duties on the farm, Tidgren said. There are also more women leading farms today. There are many considerations in making sure assets are divided equitably, she said.

Planning now and making it legal “can save some grief in the future,” Zenge said.

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Phyllis Coulter is Northern Illinois field editor, writing for Illinois Farmer Today, Iowa Farmer Today and Missouri Farmer Today.

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