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Four divorce and death protection strategies for your dairy farm

Progressive Dairyman Editor Dave Natzke Published on 07 August 2017

As hard as it may be to initiate legal and business strategy conversations related to divorce or death, a family farm successor and his or her spouse or intended spouse have good reasons to openly discuss and plan for their financial relationship.

Those discussions can help create a better understanding on how the couple will develop their joint financial security while ensuring the farm and farm assets aren’t impacted too negatively in the event of a divorce or death.

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“Marital property agreements sound nasty, but they aren’t,” according to attorney George Twohig. “Marital property agreements are actually ways of ensuring both the successor and the spouse will be treated fairly.”

Developing marital property agreements in advance provides a window of objectivity. “Many times, in a divorce, people are trying to punish each other in the negotiations,” Twohig said.

There are many planning methods available to ensure a farm succession plan continues in the event of a successor’s divorce or death:

1. Limited liability company (LLC) or other legal structures

Farm assets and related debts can be placed in one or more LLCs, limited liability partnerships or corporations (company) that hold the assets and assume the debts. Ownership interests (units), rather than specific farm assets, can then be transferred to the successor.

Company units are more effective in maintaining transferred interests as the successor’s individual property and may be subject to a buy-sell agreement between the company’s owners. A minority interest (less than 51 percent) in a company may be transferred to the successor or valued in a divorce or at death at a discounted value. Minority interests lack marketability and control – and may qualify for valuation discounts in the 30 to 45 percent range.

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2. Agreements restricting transfer of interests

Company operating agreements and buy-sell agreements should restrict the transfer of interests in the company to qualified family members. The agreement may provide for the purchase of an owner’s interest in the event of death, disability, termination of employment, divorce, insolvency or other triggering events.

Upon his or her divorce, the successor should have the right to acquire the spouse’s interest, if any.

The agreement should include a method for determining the value of the company and an owner’s units (including a discount for minority interests), and practical payment terms.

The agreement may permit the continued ownership by the successor’s spouse if he or she is a manager within the company or if there are qualified descendants (children) in the business.

3. Irrevocable trust

If the spouse is unwilling to enter into a suitable marital property agreement, the parents can place assets into an irrevocable trust rather than transfer the farm assets directly to the successor. An irrevocable trust can be established during the parents’ lives or upon their deaths.

The trust seeks to give the successor only a beneficial interest in the trust assets, rather than an ownership interest, and to prevent the spouse from acquiring an interest in the trust estate. The goal is to prevent an ex-spouse from penetrating the trust in divorce but may provide for a plan of distribution (that may include the spouse) in the event of the successor’s death.

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Asset protection trusts must be carefully drafted and must fully consider a state’s laws regarding divorce and creditor laws.

4. Marital property agreements

By a marital property agreement, the successor and his future or present spouse can contract with each other concerning their obligations for support and rights in the ownership and management of their marital property and their respective individual property during their marriage and upon the termination of their marriage by divorce or the death of either of them.

The agreement can govern both property currently owned or acquired later. State laws regarding individual and marital property and divorce vary by state and may be complex, Twohig warned.

To be enforceable, marital property agreements must be fair, both at the time they are created and at the time they are implemented.

An agreement should provide the spouse with reasonable financial security, recognizing his or her needs and contributions to the family and business.

The successor and parents will want the successor to maintain the transferred farm assets as his or her individual property. Most often, the agreement will maintain – as a party’s individual property – property acquired before the marriage and property received as a gift or inheritance, including related income and appreciation. A party will maintain management and control over his or her individual property and liability for all related debts.

An agreement should detail the arrangement in the event of the couple’s divorce, usually giving each party the right to retain his or her individual property and providing for the division of other property accumulated during the marriage, such as co-titled assets, retirement accounts and other outside investments.

If most of the assets are farm assets held by the successor, the agreement should reasonably provide for the spouse’s financial security and may include a reasonable payment to the spouse (often based on the number of years of marriage or the spouse’s contributions to the farm).

In the event of the successor or spouse’s death, the agreement will usually provide that the surviving spouse receives all marital property but may limit the surviving spouse’s rights to receive the deceased spouse’s individual property. The successor may be required to pay to the surviving spouse and their children, outright or in trust, a substantial value of the successor’s farm equity but may retain the right to transfer farm equity back to the other active family members or otherwise.

An equitable marital property agreement can effectively provide for the financial security of the spouse and children while also recognizing farm assets were gifted or otherwise transferred to the successor to continue the farm legacy rather than an investment.  end mark

Dave Natzke
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