Divorce and the Farm
When discussing succession and estate planning, we usually focus on ensuring the farm passes on to the next generation before or after the current operator’s death. Although the hope is that every marriage is successful and lasts until the spouse’s death, divorce can happen and create issues for a succession plan. A divorce may cause one of the parties to the succession plan to have to buy out a divorcing spouse if issues are not resolved before the marriage or during the marriage’s life.
Succession planning can also be useful if a party to the plan gets divorced. Tools such as prenuptial agreements and postnuptial agreements can help prevent issues that could arise regarding how assets are distributed during a divorce and impact a farm succession plan.
Marital v. Non-Marital Assets
In Pennsylvania, marital assets are subject to equitable distribution in the event of a divorce. It’s important to note that the law requires equitable distribution, not equal distribution. Equitable distribution can often become equal, but it may not always. With equitable distribution, the court can consider several factors, including the length of the marriage, the opportunities for the parties for future wealth acquisitions, the standard of living during the marriage, tax implications, and more. Those factors can be found in 23 Pa. Cons. Stat. § 3502(a).
To determine what assets would be subject to equitable distribution, we would need to determine if the property was acquired during the marriage or the increase in value of property acquired before the marriage. Property that would be excluded would be gifts, except for gifts between spouses, property taken under a will to one party, and property acquired after the divorce is filed.
Let’s consider a scenario where Taylor and Travis each owned 100 acres of farmland before marriage. Each farm is worth $600,000. After their marriage, they invest in a dairy farm and significantly improve their farmland. The improvements raise the farms’ value to $800,000. In this case, the dairy farm and any increase in value, here $200,000/farm, to their respective 100 acres would be considered marital property, as they were acquired or improved during the marriage. At the same time, both are still part of respective family farming operations. What can Taylor and Travis do to prevent loss in their respective farmland, or can one continue on the dairy farm in case of a divorce?
Prenuptial and Postnuptial Agreements
The first thing that should be considered is a prenuptial agreement. A prenuptial agreement is a legal agreement between the two parties before marriage regarding handling assets brought into the marriage. This agreement is a good way to limit risks to family farmland or other farm assets before marriage and prevent issues in distributing those assets in the event of a divorce. These agreements can be structured in ways that allow the spouse to be integrated more and more into the existing agricultural operation as certain milestones are hit, potentially the length of the marriage.
To be valid in Pennsylvania, both parties must enter the prenuptial agreement voluntarily before the marriage. At the same time, the parties need to have adequate knowledge of the property and financial obligations of the other party. It’s crucial that both parties seek legal representation when negotiating these agreements. This ensures that all aspects are considered and the agreement is fair and comprehensive. At the same time, the parties can voluntarily waive in writing any right to disclosures of the property and financial disclosures of the other party.
What if Taylor and Travis did not consider a prenuptial agreement before marriage? Pennsylvania law allows for the couple to consider a postnuptial agreement after marriage. A postnuptial agreement is a legal agreement between spouses on what assets remain outside of marital property and what assets are considered marital assets. The agreement operates similarly to a prenuptial agreement but is entered into after marriage. In the case of a postnuptial agreement, the parties should talk with legal counsel to ensure the document is valid when drafted.
Postnuptial agreements can often be used as couples mature together. For example, if Taylor and Travis married in their early 20s and entered a prenuptial agreement that considered assets they brought into the marriage, those assets and goals may have changed over time as they entered their 40s. A postnuptial agreement that modifies the prenuptial agreement would allow the couple to contemplate what has changed over the marriage.
Both documents can also be integrated into farm succession plans that contemplate an heir taking over an operation. For example, if Taylor is going to take over an existing farm from her family, the prenuptial agreement would be a way to ensure that limited issues will arise if she gets divorced. At the same time, if Travis becomes active on the farm and helps the farm grow over time, the family may want to consider a postnuptial agreement to modify the prenuptial agreement to consider how the situation has changed.
Principal Faculty Specialist and Extension Specialist, University of Maryland.