Prenups can help preserve family farm
Are you marrying into a multigenerational farming operation? Is your nonfarming fiance just learning to appreciate the sweat and commitment that goes into farming? Do you have personal assets coming into a marriage that you want protected in case there are marital issues later? Creating a prenuptial agreement together may be the solution that would best serve all of these situations.
• Prenuptial agreements can be part of risk management for farm operations.
• Setting up the agreement will cost some dollars.
• Establishing fair market value for assets helps make agreements fair.
Angela Gloy, Purdue University Extension ag economist, defines a pre-nuptial agreement as a document signed prior to marriage that typically outlines property and financial rights upon death or divorce of a spouse. She says the agreement may cover a broader range of concerns, such as guardianship of children.
While many farm families may be leery of involvement of outsiders, including attorneys, in farm finances, Gloy emphasizes prenups should be considered as an important part of a farm’s risk management plan. “Farm business assets tend to be highly illiquid, and in instances of death or divorce, there are certain cash outlays required for settlement,” she says. “If funds aren’t readily available, it is difficult to partition many farm assets, such as equipment or land, and/or the sale of assets takes time.
“So unless farm families have a standing cash reserve, the prenups help by stipulating how property transfers occur at the lowest possible time and dollar cost to the family, personally, and to the farm business.”
In instances where a spouse is married to a shareholder or party to other business agreements, prenups can help disentangle potential conflict between owners’ marital and professional problems, Gloy says. “They can also help avoid the problem of owners not wanting a partner’s former spouse to assume co-ownership,” she says.
Fair market value
Prenups frequently include fair market value of farm assets, according to Becky Linville, a certified public accountant in Terre Haute.
“Most of the time when I’ve seen a prenup, they ask for fair market value of farm assets so farm business assets are known up front,” she explains. “When increases in assets happen after that, they can be subject to division or divorce. You have to know all assets going into marriage and get fair market value from someone who has knowledge in the farm industry.”
Secure someone who does business evaluations, including appraisals from implement dealerships and real estate specialsits, she adds. “Appraisals cost money, but then it helps the attorney write up the prenup. All of this can save you a lot in the end.”
Gloy suggests one way to alleviate the problem of asset value escalation is to update the agreement on a regular schedule, about every two years, and update the prenup to reflect the changes.
“In getting appraisals I often suggest both parties get their own estimates, and the couple average or find a means of addressing any value difference,” she adds. “I also hear folks complaining about having to spend $500 to appraise farmland. Is spending $500 too much to pay to save the risk of losing $2 million of farmland?
“Go with a reputable appraiser with agricultural experience. A team approach of attorney, accountant, insurance agent and others yields an improved plan for the family’s benefit.”
Hayhurst writes from Terre Haute.
This article published in the December, 2011 edition of INDIANA PRAIRIE FARMER.