My clients frequently ask: “What happens to the farm if my kids get divorced?” Once we dig into the contingencies of divorces, most folks want to work in more layers of protection.
A marriage certificate includes statutory property rights under state law, giving surviving spouses the right to assets upon divorce and death. Prenuptial (and postnuptial) agreements contractually waive those statutory rights.
A typical prenup provides any interest in the family farm to be classified as separate property and not subject to division during divorce or available for any spousal elections following death. Then, any assets the couple builds during marriage is marital property and equitably divided in the event of a divorce.
Prenups in Golden Years
Prenups are vital for farmers in their golden years. A typical contract would say each party’s assets are identified as separate property, with a focus on preventing the surviving spouse’s election to take assets at death. These contracts tend to be more restrictive because each party has separate property, and many older couples don’t commingle funds.
Prenups make estate planning much easier. We can flex the benefit of the marital deduction by using certain types of marital trusts, while ensuring the farm stays “in the blood.” A prenup provides the baseline, and clients make other benefits with wills and trust agreements.
Of course, my clients’ children are typically already married and do not have prenups in place. Most don’t want to bring up postnuptial agreements, and their effectiveness varies by state. For them, we use trust agreements and entity documents to protect the farm.
Often, little good can come from your child owning farm assets. For example: He could die young and his spouse could remarry. He could get divorced. He could cause an accident and get sued. These could all financially harm the farm.
If your child doesn’t inherit farm assets at your death, then they are not on your child’s balance sheet and are not at risk for these pitfalls. Instead, your plan could put your child’s share of the assets in a trust. Your child can receive income and have a right to farm whatever real property is owned by the trust.
If farm assets are in business entities, such as a limited liability company, partnership, corporation, etc., the governing documents can help protect the ownership so it stays within the family.
The biggest question used to be: How can I protect my farm from estate taxes? Taxes aren’t your biggest problem. Blended families, kids’ future divorces and lack of communication cause big problems. All can be avoided with proper planning.