Using Prenuptial Agreements to Protect the Family Farm

By and
January 8, 2018

The family farm is a special asset. The family may have worked hard through decades, maybe even generations, to accumulate and develop the farm’s land, equipment and livestock.

The children may be grown and successors to farming operations. The older generation may be worried what would happen to the farm if a child were to divorce or die. The best form of protection is for children to execute prenuptial agreements to protect the farm and income in the event of divorce or death.

Wisconsin law classifies most property of spouses as marital property, with the following exceptions:

  • property owned by a spouse as of the marriage date;
  • gifts and inheritances received by a spouse;
  • assets acquired with the proceeds of individual property;
  • appreciation in the value of individual property; and
  • some personal-injury awards.

In order for any of the above-listed properties to maintain their individual-property classification, the property cannot be mixed with marital property unless the individual-property component of the mixed property can be traced. That can be an issue because income earned on individual property is marital property and often reinvested into the individual property, resulting in a mixed asset.

For example, a farmer gifts a child money that is invested. Interest and dividends are earned on the investments and reinvested into the account. The interest and dividends are marital property. When they are reinvested into the individual-property account, the investment account becomes a mixed asset. It can be difficult to trace the source of assets in that case, making it difficult during a divorce or death to protect the gifted or inherited property.

A child and his fiancé may enter into a prenuptial agreement to alleviate those issues. The agreement allows the child and fiancé to create their own rules regarding classification of assets and division of assets in the event of divorce or death. By signing a prenuptial agreement, a child can protect the family farm and ensure preservation of the farm possibly for many more generations to come.

There are a few requirements for a prenuptial agreement to be enforceable.

  • Both parties must disclose their assets and liabilities, and exchange copies of their most recent tax returns.
  • Both parties must sign the agreement freely and voluntarily, which means each person is represented by his or her own attorney and has adequate time to review the agreement.
  • The division of property upon termination of marriage by divorce or death must be fair and equitable to both parties, considering both current circumstances and those reasonably foreseeable.

In the context of family farms, it’s common to classify current and future ownership interests in the farm as individual property, as well as classify any income generated from the farm as individual property to prevent a mixed asset. In the event of divorce, prenuptial agreements involving the family farm usually provide that ownership interest in the farm will not be subject to property division but rather will be allocated to the farming child.

There is a chance the child may be required to pay spousal support or maintenance based upon the amount of income generated from the farm. However a prenuptial agreement may also address the waiver of maintenance or a cap on the amount of maintenance.

On the other hand the marriage can be terminated by a child’s death but with his spouse surviving. The child may have agreed to transfer his ownership interest in the farm to a trust for the spouse’s benefit over the spouse’s remaining lifetime or until the occurrence of some stated contingency, such as the spouse’s remarriage.

Implications of prenuptial agreements need to be carefully considered with legal and tax advisers. The benefit of protecting the family farm should be weighed against any “side effects” of classifying property as the individual property of one spouse.

For instance, individual property will not benefit from a basis adjustment upon the death of the non-owning spouse, which may impact the amount of income tax on the disposition of such property between the death of the non-owning spouse and the death of the surviving spouse.

In a stable long-term marriage, spouses may choose to amend their prenuptial agreement in order to take advantage of the basis adjustment if there is significant appreciation in the value of property formerly classified as individual property by the agreement — particularly if the spouses anticipate disposing of such property before the death of the surviving spouse.

Anyone who is part of a multi-generation farm and is contemplating marriage should consider a prenuptial agreement to protect the family farm.

© 2018 Agri-View.  Madison, WI.  Reprinted with permission.

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