Is a Prenuptial Agreement Right for Your Farm Business?

Building for the Successful Transition of Your Agricultural Business Series
ANR-51
Agriculture and Natural Resources
Date: 
04/11/2018
Chris Zoller, Extension Educator, Agriculture and Natural Resources/Community Development, Tuscarawas County
David Marrison, Extension Educator, Agriculture and Natural Resources, Ashtabula County

Farm and agricultural businesses often have high capital investments in land, machinery, livestock, and miscellaneous equipment. The typical Ohio farm has over $1 million in capital assets. These assets are usually owned and held by multiple members of a family. With the rising divorce rate (almost 60%), it is in the long term financial interest to protect business assets from a divorce of one of the business partners.

A prenuptial agreement is something many couples do not discuss (or dare to discuss) as they make their wedding plans. However, such an agreement can help minimize the financial stress on a family business in the event of a divorce. This agreement can also help determine the disbursement of assets, responsibilities for liabilities, and care of minor children.

A marriage is intended to be a life-long commitment; however, a significant number of marriages end in divorce. In fact, statistics from the Ohio Department of Health show that in 2011 Ohio had a divorce rate of 58.1 per 100 marriages.

In addition to the escalating divorce rate, family businesses should also discuss the impact of a second marriage.  When a farm widow or widower remarries, the assets may be at risk if they pre-decease their new spouse.  

As farms increase in size and new family members become a part of the business, either directly or indirectly, there becomes a real need to discuss how assets and liabilities will be divided in the event of a divorce, dissolution, or death.

 

An example of how one farm was affected by not having a prenuptial agreement:

John and his parents, Ida and Levi, were partners in the family's dairy business. Together they milked 100 cows and farmed 500 acres. This little farm's assets were worth $2.5 million at this time. John was in partnership for five years with his parents prior to marrying Elizabeth. John and Elizabeth were married 11 years. They had an okay marriage, but life on the farm wore on Elizabeth. As a result of the divorce, Elizabeth was awarded one-quarter of the net worth of the farm at settlement. During the time they were married, the business's assets grew by $1 million. Elizabeth was awarded $875,000. In order to pay, John and his parents sold 50 acres of their prime farmland and took out a second mortgage. This hampered the financial stability of this operation for many years following the divorce.

What is a prenuptial agreement?

A prenuptial agreement (prenup) in its simplest form is a written contract between two people before they are married. This agreement typically lists all of the property each person owns along with all debts and specifies the rights each will have if the marriage ends in divorce, dissolution, or death of a spouse.

Marriage without a prenuptial agreement

In the event of a divorce, dissolution, or death, and without a prenuptial agreement, state law will determine who owns property acquired during marriage (known as marital or community property) and what happens to the property. Marriage is viewed by the court as a contractual relationship and with it comes certain rights for each spouse. In the absence of a prenuptial agreement, a spouse usually has the right to:

  • Share ownership of property accumulated during the marriage with the expectation that such property will be divided between the spouses in the event of a death, dissolution, or divorce.
  • Incur debts during marriage the other spouse may have to pay.
  • Share in management and control of any marital or community property.

Preparing a prenuptial agreement

A prenuptial agreement should be discussed and completed well before the wedding day. This will require the couple to fully discuss their present finances and future goals. In order for the agreement to be enforced, each party must completely and accurately disclose all assets and liabilities assumed prior to the marriage. Once the agreement is written, copies of tax returns and balance sheets should be attached to the agreement as an appendix. The completed agreement should be reviewed by separate attorneys to add validity and because one attorney cannot represent both parties in the event of a divorce or dissolution of marriage. Ohio law also requires two witnesses to be present for the signing of the prenuptial agreement.

Enforcement of the agreement

Only in cases of divorce or dissolution will the court enforce a premarital agreement. In these instances, either party can ask the domestic relations division of the common pleas court to enforce the agreement. Factors that may impact enforcement include: if either party failed to fully disclose information prior to the signing of the agreement or where there is fraud or the terms of the agreement are contrary to law or against public policy. Interestingly, the court is not likely to enforce agreements presented and signed the eve of the marriage.

Examples of prenuptial agreements

Sample prenuptial agreement forms are available online. Simply type “prenuptial agreements” into any search engine and you will locate several resources. Once the agreement is written, it should be reviewed by an attorney. It is important that each party understands the agreement prior to signing. No one should sign an agreement unless she or he understands the terms.

Summary

A prenuptial agreement can help farm and agricultural businesses protect their business assets from a costly divorce. Many businesses are including a clause in their organization agreements that states a prenuptial agreement is required for any married partner before entering the family business. This allows the partners to be assured that a separation or death does not interfere with the future success of the business. It is crucial this planning is done in consultation with an attorney. Writing a prenuptial agreement does not mean a couple believes their marriage will fail but rather they are planning for the continued success of their agricultural business.

References

Marriage and Divorce Rates and Other Selected Statistics, by County, 2011. Ohio Department of Health, Center for Vital and Health Statistics.

Premarital Agreements. (1998). Oregon State University. Fact Sheet #318. A. M. Morrow and M. Goetting. Accessible at: ir.library.oregonstate.edu/concern/administrative_report_or_publications/n870zr319

Prenuptial Agreements—An Overview. family.findlaw.com/marriage/prenuptial-agreements.html

Ohio's Marriage Laws. ohiobar.org

Prenuptial Agreements Protect Pre-Marital Assets. ohiobar.org

Acknowledgment

This fact sheet was originally developed as a result of a grant received by Ohio State University Extension from the North Central Risk Management Education Center, 2006-2007. The reviewer of this document was Peggy Kirk Hall, OSU Extension.