By Sarah Everhart
It is common knowledge that nearly half of all U.S. marriages end in divorce, according to often cited statistics, but how do these divorces impact farmers? What can farmers do to protect themselves from the financial devastation of divorce? How can an extended family plan to protect the family farm from divorce?
Prenuptial Agreements
The most effective and decidedly unromantic way a farmer can protect himself or herself from the financial ravages of divorce is to have a valid prenuptial agreement signed prior to marriage. A prenuptial agreement is a simple document that a qualified attorney specializing in divorce and family law can prepare. Prenuptial agreements should be considered by both men and women with significant assets such as property, expensive equipment, businesses, or substantial retirement savings. A prenuptial agreement should contain a full disclosure of assets it seeks to protect which exist as of the time of execution of the agreement. Parties who challenge prenuptial agreements often claim they were unaware of the full extent or value of the assets involved. Therefore, a full disclosure of all assets, including an approximate value of each asset, is highly recommended.
A valid prenuptial agreement must not be overreaching; in other words, it cannot be either substantively or procedurally unconscionable.[i] If a prenuptial agreement faces legal challenge, a court will review it to make sure it is a not an extremely unfair agreement signed under unfair circumstances and/or with terms which clearly favor one party over another. An agreement will most likely not be found procedurally unconscionable or unfair unless the person signing retains little to no rights. For example, if a party to a prenuptial agreement waives the right to certain real property owned by their significant other but retains other rights such as the right to seek alimony and/or a monetary award upon divorce, the prenuptial agreement will most likely not be viewed as substantively unconscionable because the party signing the agreement retained some rights.[ii]
A way to avoid a procedurally unconscionable prenuptial agreement is to provide it to a party for review and execution with sufficient time to retain counsel to independently review the agreement before the wedding. A valid prenuptial agreement is one that is entered into freely and with full understanding of its terms.[iii] A prenuptial agreement given to a bride or groom the day before or the day of a wedding can be easily voided in the future based on procedural unconscionability because there was insufficient time for legal counsel to assist the party in understanding and/or negotiating the terms. Although prenuptial agreements like all other legal documents can face legal challenge, if a prenuptial agreement contains the elements described above, it can be a very powerful shield to protect assets from the division associated with divorce.
Marital vs. Non-Marital Property
When divorce is imminent, the first questions most people ask is what property is marital or shared property which needs to be divided and what property is solely owned by one party or another? Maryland law defines non-marital property as property 1) acquired before the marriage, 2) acquired either before or during the marriage by inheritance or gift, 3) excluded by valid agreement such as prenuptial agreement as described above, or 4) directly traceable to any of these sources.[iv]
By contrast, marital property is defined as property, however titled, acquired by one or both parties during marriage, including but not limited to any interest in real property held by parties as tenants by the entirety unless the party is excluded by valid agreement.[v] For example, if a wife purchases some farm land after marriage, it is irrelevant whether she uses income that she alone earned and/or whether the land is deeded to her alone; the land will still be marital property. Additionally, if property is acquired during marriage, even if it is only acquired by one spouse, such as one spouse’s work-related retirement savings or pension, it is marital property subject to division.
An ownership interest in a business entity like a corporation or limited liability company is valued and included as marital property if it was acquired during the parties’ marriage. Valuing a farming operation can be a complex exercise because the land, livestock, equipment, and operation itself all have independent values and may require the use of separate appraisers for both husband and wife if the parties can’t agree as to values. Further, any appraisers who provide values in a divorce also have to be prepared and qualified to testify as expert witnesses, should the case go to trial.
Spouses often unintentionally blur the lines between non-marital and marital property. Property might start out as non-marital but it can quickly become partially or wholly marital. For example, if one spouse owns 50 acres of farm land before marriage it is clearly non-marital property. However, if after marriage, husband and wife both contribute towards the mortgage for the property, work to jointly maintain the property, and use marital funds to build a barn on the property, then a substantial marital interest is created in that property and it becomes partially marital property. In the example above, the owner of the 50 acres could have avoided the creation of the marital interest if the property had been protected by a legally binding prenuptial agreement or if no marital funds had been used to maintain or improve the property.
Estate Planning and Divorce
Farm families working on estate planning should take note of the non-marital nature of inherited property. If a family’s intention is to keep a farm within a family and protect the land from sale or division due to divorce, then all bequests should be made solely to the blood relative as opposed to the relative and spouse. If the blood relative receives an ownership interest in the farm through inheritance, it will be non-marital. However, a person who acquires property from inheritance can create a marital property interest in the property if he or she retitles or gifts the property after inheritance to his or her spouse or if marital funds are used to maintain or improve the property. Therefore, it is vital for a party who receives property through inheritance and wishes to protect the property from division to prevent commingling of the property with marital assets.
Separation vs. Divorce
It is important to realize that the concept of marital property continues until the day of the legal divorce. There is no such thing as a legal separation in Maryland. One may acquire a “limited divorce” which is similar to a legal separation in that it is awarded prior to the final or “absolute divorce,” but it does not change the nature of marital property. Until parties receive a judgment of absolute divorce and are legally divorced, no matter how separate the parties are truly living, all property acquired or purchased is marital property. For example, if parties have been separated for 10 years and one party proceeds to buy a piece of farm land, the property is marital property.
Alternatives to Litigation
How can a farm operation survive division due to divorce? Typically, the best chance an ongoing farm operation has to survive a divorce is if the parties can agree on their own marital property division. Parties to a divorce can come to a voluntary agreement on the division of their marital property or a buy-out of one party, either immediately or over time, and memorialize the terms in a marital separation agreement or similar document using attorneys and/or a mediator. Courts encourage parties to resolve their own marital property valuation and division and often instruct parties that, if left to a judge, things may be divided in a non-desirable way. If parties choose to attend mediation and seek the assistance of a trained mediator to come to an agreement about dividing marital property, they should be aware that the Maryland Department of Agriculture offers the Agricultural Conflict Resolution Service (ACReS) mediation program for marital property issues and valuation when the parties have issues regarding agricultural credit or lending or USDA-related programs and loans.
One way a party can protect his or her farming operation from divorce if it employs both spouses is to make sure he or she fully understands all aspects of the operation, especially those duties performed by their spouse. For example, it is not uncommon when both spouses work on a farm for duties to be divided such as the wife handling the paperwork (payroll, insurance, permitting, contracts, etc.) and the husband doing the actual farming, and this arrangement can work well until one spouse leaves the marriage and the operation. Both spouses in a farming operation should understand all aspects of the business so that the operation doesn’t suffer in the wake of a divorce.
Valuing and Dividing Marital Property
If parties cannot agree upon a voluntary valuation and division of marital property, then the court handling their divorce must determine what property is marital, the value of the property, and either divide the property or equalize the assets of the parties by ordering a monetary award or both.[vi] Alimony is an additional form of relief handled separately from the valuation and division of marital property but is a part of the consideration as explained below. The division of marital assets in a farm family can be challenging because typically the parties’ wealth is tied up in land or farm related infrastructure or equipment, leaving limited liquid assets to be easily divided or used to form the basis of a monetary award.
When deciding the amount of any monetary award or the terms of property division or transfer the court considers:
(1) the contributions, monetary and nonmonetary, of each party to the well-being of the family;
(2) the value of all property interests of each party;
(3) the economic circumstances of each party at the time of the award;
(4) the circumstances that contributed to the estrangement of the parties;
(5) the duration of the marriage;
(6) the age of each party; (7) the physical and mental condition of each party; (8) how and when specific marital property or interest in property was acquired, including the effort expended by each party in accumulating the marital property or the interest in property, or both;
(9) the contribution by either party of non-marital assets to the acquisition of real property held by the parties as tenants by the entirety;
(10) any award of alimony and any award or other provision which the court has made with respect to family use of personal property or the family home; and
(11) any other factor the court considers necessary or appropriate to consider in order to arrive at a fair and equitable monetary award or transfer of an interest in property.[vii]
Although in most cases, judges appreciate the nature of privately held businesses such as farming operations and try not to issue orders which would destroy a business, their role is to value and divide marital property and equalize the parties’ assets in consideration of the factors listed above. Therefore, it is not always possible for parties to survive a divorce without their farm-related assets being sold or divided. Many parties, when faced with a potential sale of farm land or equipment, may prefer to offer a spouse alimony which prolongs the financial commitment of divorce but may prevent an immediate division of assets, or to offer a buy-out of the spouse’s interest spread out over a course of years. This publication does not address divorce and children but if the parties’ have children to support, it is obviously of the utmost importance to maintain the farm if it is the family’s source of income.
Marital Debt
When considering the economic circumstances of each party the court will consider the parties’ marital and non-marital debt. A marital debt is directly traceable to the acquisition of marital property.[viii] It does not need to be in the form of secured debt such as a mortgage. By contrast a non-marital debt is not directly traceable to the acquisition of marital property such as premarital student loan debt.[ix] The part of marital property acquired by marital debt has not been “acquired” for the purpose of equitable distribution. Therefore, the value of that marital property is adjusted downward by the amount of the marital debt.[x] As part of the divorce case, the parties’ attorneys must submit to the judge a statement of the parties’ marital and non-marital property and marital and non-marital debts. If one party attempts to get rid of marital assets or to lower the value of marital assets in anticipation of a divorce through debt or otherwise, this is considered a dissipation of marital assets and is not favored by the courts. If an intentional dissipation can be proven, the pre-dissipation value of the assets will be used by the court as the true value.
In conclusion, the best way to prevent the division of farm assets is to protect them before marriage through a prenuptial agreement. Once married, it is important to understand which assets are marital versus non-marital and to prevent the creation of a marital interest in non-marital property if it can be avoided. It is also important to understand all aspects of a farming operation and not to fully rely on a spouse to run one aspect of the business which will suffer if he or she leaves. Further, if a divorce is unavoidable, parties are usually better served when they are able to come to their own agreed upon division of marital property rather than asking a judge during a contested divorce trial to value and divide the assets.
[i] Stewart v. Stewart, 214 Md. App. 458, 470 (2013)
[ii] Id. at 472-473
[iii] Id. at 475
[iv] Md. Code, Family Law Art., §8-201(e)(3)
[v] Md. Code, Family Law Art., §8-201(e)(1)(2)
[vi] Md. Code, Family Law Art., §8-205(a)(1)
[vii] Md. Code, Family Law Art., §8-205(b)
[viii] Schweizer v. Schweizer, 301 Md. 626, 636 (1984)
[ix] Id. at 637
[x] Id.