Many attorneys write numerous marital property agreements prior to (or sometimes after) marriage that seek to determine the parties’ economic relationship under Wisconsin’s marital property law. Such marital property agreements are especially important for attorneys who work with farm families wishing to transfer their farms to committed successors.
A Need to Educate
Today, farms operate with high dollar-value assets, a large debt load, and small net profits. For this reason – and sometimes also for tax reasons – most farm transfers are based primarily on the transfer of “earned equity” to the successors by gift or bargain sale, rather than a sale at fair market value.
Thoughtful family farm attorneys should educate the farm successor’s spouse or intended spouse about the family and the farm. Attorneys should adequately explain the farm’s finances and management, the role of the successor and his or her compensation, the expected hours of work, and how the farm will transfer to the next generation.
Attorneys should also explain that farm assets will be gifted or otherwise transferred to the successor with the expectation that they will stay in the family. As such, attorneys must explain why, in a farm succession plan, there needs to be reasonable protection from divorce and for the repurchase of farm assets on the successor’s death at a price the farm can afford to pay.
Marital Property Agreement Provisions
In drafting the marital property agreement itself, the attorney should clearly define the farm assets that will remain the successor’s individual property.
If most assets are farm assets held by the successor, the marital property agreement should provide for a reasonable payment to the spouse upon divorce (often based on the number of years of marriage and/or the spouse’s contribution to the farm and the successor’s opportunities on the farm).
- a specific dollar amount multiplied by the number of years of marriage; or
- a specific percent of the value of the successor’s individual property times the number of years of marriage (from date of gift); or
- a maximum amount or percent.
When drafting the marital property, the attorney will likely also include provisions as to what would occur on the death of the successor or his or her spouse. A successor will likely wish to provide for the security of his or her spouse and children. Farm assets held as individual property could distributed to a spouse at an agreed upon amount or percentage value of individual property.
Alternatively, the marital property agreement could provide for a required trust to hold an amount or percentage of value of farm assets for the benefit of the spouse and/or children. The trust could provide for the health, support and maintenance of a spouse and/or children and could even include provisions to help a child become a future successor.
There are several other strategies the attorney should also consider, in addition to marital property agreements, to assure that the farm succession plan continues in the event of a successor’s death or divorce.
One strategy is to form an LLC, LLP, or corporation to hold farm assets. A minority interest in such an entity may be transferred to the successor and valued in a divorce or at death at a discounted value due to lack of marketability and/or control discounts.
Another strategy is to draft agreements, such as operating or buy-sell agreements, to restrict the transfer of interests in the farm entity to qualified family members. The agreement should provide for the purchase of an owner’s interest in the event of death, disability, termination of employment, divorce, and other triggering events.
A final strategy is to place farm assets and/or interests into an irrevocable trust, rather than transferring such assets or interests directly to the successor. However, asset protection trusts must be carefully drafted and must fully consider Wisconsin’s laws regarding divorce and creditor laws.
Eliminating Future Confusion and Misunderstanding
A good family farm attorney will promote discussion and planning between a successor and his or her fiancée or spouse regarding the family farm business.
The attorney facilitating such discussion can help the couple understand how they will develop their joint financial security while assuring the farm continues in the family. A good plan will eliminate confusion and misunderstanding in the future, especially in the event of divorce or the successor’s death.