Agricultural Estate Planning: A Prenup Could Save the Ranch
By Katherine E. Merck
The term “estate planning” brings to mind wills, trusts and complicated tax implications, but it also includes protecting families from the worst circumstances. Unfortunately, prenuptial agreements are a tool that must be considered to protect yourself and your family.
While most farmers and ranchers are not eager to discuss what will happen after their death, they are even less eager to diminish the joy of their wedding preparations with talk of a prenuptial agreement. This uncomfortable discussion is far less awkward, however, than dividing or losing the family ranch due to divorce or remarriage.
Divorce and remarriage can be extremely difficult to deal with in any family business, particularly a closely held, multi-generational business like an agricultural operation. Prenuptial and postnuptial agreements are powerful tools for protecting assets in divorce and remarriage.
A prenuptial agreement is essentially a contract entered into prior to marriage that allows for a predetermined distribution of assets. Postnuptial agreements, on the other hand, are the same type of agreement, simply made after the couple is legally married.
Most states have statutes which dictate the distribution of assets upon divorce or death, but a prenuptial agreement may be used to waive statutory elective shares and community property rights.
In community property states, including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, property acquired during marriage is owned equally by each spouse. While property that is inherited or gifted is not considered community property, property purchased during the marriage, including land and assets that contribute to the existing inherited ranch, are considered community property. This has the potential to lead to a sticky situation in the event of a divorce.
Although prenuptial agreements are often considered to protect the parties in the event of a divorce, they can also be used to protect the farm or ranch in the case of a death or remarriage. In the case of a blended family, for example, the second spouse may be entitled to a portion of the ranch upon the death of the owner, even when the owner intended for the entire ranch to pass to his or her children from the first marriage. The second spouse may then transfer their share of the ranch to his or her kids from a prior marriage, dividing the ranch between two families rather than between siblings as intended. Therefore, it is important for a landowner to understand statutory estate distributions that would occur without any type of estate planning, which may include the distribution to a second spouse against the landowner’s wishes.
Nuptial agreements can be used to essentially opt out of statutory community property rights, which should be considered in blended family situations. Divorces and marriages that blend together families with children become even more complicated in situations involving multiple rights and encumbrances such as easements and federal grazing permits. In such cases, nuptial agreements should specifically address ownership of different property rights including mineral rights and water rights, as well as any entitlement to income from leases and other encumbrances.
As with all aspects of estate planning, it is essential to have clear, long-term goals in mind. Prenuptial and postnuptial agreements are important tools that can be used for the benefit of keeping the ranch viable and ensuring that it remains in the family for future generations.
Katherine E. Merck is an associate attorney with Budd-Falen Law Offices, LLC with a primary focus on property rights, estate planning, environmental and natural resources law. Budd-Falen Law Offices, LLC, has attorneys licensed to practice law in Colorado, Idaho, Illinois, Montana, Nebraska, New Mexico, North Dakota, South Dakota and Wyoming.