By: Gary J. Heim, Esq.
As part of the succession planning process, most farm owners anticipate the challenge of balancing the older (transferring) and the younger (receiving) generations’ financial needs. And, they know that a difficult decision about the fair distribution of assets among the on-farm and the off-farm children is inevitable. However, equally important in the succession planning process, discussing prenuptial and postnuptial agreements (“marital agreements”) comes as a surprise or is uncomfortable for many from a family or moral perspective.
Marital agreements are used to establish the rights of a married couple in the event of a divorce, and sometimes death. By statute, Pennsylvania provides what the financial rights of spouses are in the event of divorce and also in the event of death. Just as a person has the right to alter the will that Pennsylvania has written for each of its residents (intestacy law), marital agreements can be used to alter the terms that otherwise apply in the event of a divorce of a married couple.
The financial effect of divorce in the farm community is severe due to the high value of farm assets in comparison with the relatively low net farm income. The forced liquidation or distribution of some or all of the family farm assets due to divorce is especially troubling when those family farm assets have been accumulated and preserved over multiple generations at great sacrifice, both in terms of the sweat equity invested and the relatively modest income paid to those farm family members. Further, the involvement of multiple family units in the family farm business means a single divorce can have wide-reaching effects beyond the individual family unit.
While most people think of the younger generation in the farm family business when the topic of marital agreements arises, they also need to be considered by the older generation, particularly with a remarriage following the death of a prior spouse. In one instance with which we were involved, for example, an on-farm child, who was to inherit the farm as a gift from his father, had to pay his step-mother over 30% of the value of the farm. This result could have been avoided through a properly-drafted prenuptial agreement.
It is the farm family members, not the attorneys or other advisors, who need to decide whether marital agreements will be used. However, if you decide that marital agreements are needed in your situation, consider some of the following general rules:
1. A comprehensive disclosure of financial information is required.
2. Each of the two parties to the agreement should be represented by separate attorneys.
3. Without a marital agreement, the income from and appreciation in value of gifted/inherited assets and of pre-marital assets become marital property, subject to equitable distribution in a divorce, even if the assets are only titled in one spouse’s name.