Divorce and the Family Farm
By Sonja Trom Eayrs, Jill Frieders, and D. Patrick McCullough
Today’s farming operations present unique challenges—the complexities of weather, fluctuating commodity prices, international trade agreements, tax implications, depreciation, farm subsidies, and other distinctive challenges. But these challenges become particularly thorny when a divorce occurs and threatens continued operation of the farm. Unlike other closely held business interests, farming operations not only serve as commercial ventures but also as the family home, complicating division of the estate. Considering the longstanding ties to the land that come into play, efforts to preserve the family farm take on renewed importance in a divorce.
Certainly, not all farming operations are alike, which adds to the complexity in marital dissolution proceedings. The myriad kinds of farming operations include cash crops such as corn and soybeans; livestock and dairy operations; contract growers who do not own their own hogs, chickens, or turkeys, but sign contracts with an integrator and are contractually bound to raise animals in industrial-sized operations; farmland that is set aside as part of the Conservation Reserve Program (CRP); community-supported agriculture (CSAs); as well as farm families who opt to rent their land to a third party.
In addition to partnering with a lending institution, many farmers essentially partner with the federal government. Local USDA Farm Service Agencies provide access to federally sponsored farm subsidies, crop insurance, and lending programs through the Commodity Credit Corporation. Terms of these programs frequently change in order to accommodate changing circumstances, such as recent farm subsidy programs specifically designed to provide covid-19 relief to farmers.
Family dynamics & ambiguous business arrangements
Family dynamics add to the complexity of most farming operations, as many farm families wish to preserve the family farm and pass it on to future generations. Many farms in Minnesota pass from generation to generation. There may be an unwritten plan to transfer the farm to one or more of the children—frequently creating backlash for the spouse seeking to end the marriage. If a wife, for example, seeks a divorce and requests her marital share, her actions may threaten the continued operation of the family farm and will likely damage her relationship with the parties’ children and grandchildren.
Farm divorces are further complicated by ambiguous business arrangements unique to the family, including “understandings” or handshake agreements. Ambiguous arrangements involving parents, siblings, or a child are common, frequently lacking the formalities found in other closely held businesses such as partnerships or LLCs (such as partnership or membership agreements, operating agreements, and buy-sell agreements). For example, while parents may continue to own and operate the land, a son may be engaged in the farming operation and commingle equipment, grain storage, and expenses with his parents, contributing to the difficulty surrounding the divorce of any party or child involved in the farming operation.
These informal arrangements can cause havoc if a divorce occurs. In some cases it may be necessary for third parties affected by a divorce to proceed with a declaratory judgment to establish that equipment or crop belongs to the third party, not the divorcing party. It is not uncommon for parents to engage a child to work the land for next to nothing, with the promise of eventual ownership of the farm. In those instances, if the parties eventually divorce, they may face claims of unjust enrichment by the child promised the land. Farmers often rent land to others or from others—arrangements that are not always detailed in a rental agreement. In addition, farmers sometimes pay their workers in kind or in cash.
Non-marital claims in farm divorces
Farm families share a special connection with the land, as it ties family members not only to the land but to prior generations who worked the land. There is a sense of pride for families who boast several generations on the same land, with many farm families in Minnesota achieving Century Farm status. In order to transfer the family farm to the next generation, farm families often transfer the land via gift or inheritance to the next generation. They may sell the land below market price and/or retain a life estate.
Given the goal to maintain the family farm, non-marital claims commonly arise in divorce proceedings, as one party asserts ownership of the land prior to the marriage or perhaps acquisition of farmland below fair market value. Classifying and conducting the necessary non-marital tracing to establish a non-marital claim is essential, as courts generally award non-marital property to the party who acquired the property as a gift, bequest, or devise, or acquired the property prior to the marriage in accordance with Minn. Stat. §518.003, subd. 3b.
A common mechanism to transfer the family farm to the next generation involves part sale/part gift transactions. Part sale/part gift transactions frequently enable a child to purchase the family farm on reasonable terms, thus allowing the child to eventually assume responsibility for the entire operation. Upon divorce, part sale/part gift transactions create non-marital as well as marital claims to the family farm, complicating any property division that involves a child benefiting from this special arrangement. However, in a 2012 unpublished decision, Riopel v. Riopel,1 the Minnesota Court of Appeals affirmed award of the family farm, which had been in the Riopel family since 1906, to husband as his separate non-marital property, following a part sale/part gift transaction between husband and his mother.
In order to maintain the farming operation and keep the farm in the family, the court may award a disproportionate property division to the farmer-operator in order to sustain the operation. In Minnesota, courts are required to make a “just and equitable division of the marital property.”2 In making this determination, the court shall base its findings on all relevant factors, including the length of the marriage, any prior marriage of a party, age, health, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, needs, and opportunity for future acquisition of capital assets.
Determining and tracing non-marital claims are often key inquiries in farm divorces. Were gift tax returns filed at the time of the original gift that validate and quantify the original gift? Were improvements made to the land after the gift, thereby adding to the complexity? Was the land encumbered at the time of or after the marriage? Of course, for families contemplating transfer of the family farm to the next generation, parents are encouraged to transfer land through a trust or other legal instrument. If a farmer’s son or daughter is contemplating marriage, a valid antenuptial agreement should address the family farm.
While it is easy to track ownership of the land prior to and during the marriage, the value of the land at the time of marriage and the time of dissolution may be more difficult to determine. Improvements to the land such as tiling (an underground drainage system that drains excess water away from the land) enhances productivity and adds to its value. Even if the land was tiled at the time of the marriage, it is possible that additional tiling or other improvements occurred after the marriage, thus increasing the fair market value of the land.
Building the farm balance sheet
Farmland is generally the most valuable asset on a farm balance sheet. Farmers need tillable land, and as they frequently observe, “God isn’t making any more.” It is essential to obtain an appraisal of farmland, not only at the date of valuation but also at the time of marriage. Not all farmland is created equal, as tillable acres are generally much more valuable than non-tillable acres. Another consideration: Depending on the proximity of agricultural land to commercial or residential development, determination of the fair market value based upon highest and best use may be appropriate. Depending on the farming operation, it may be necessary to appraise tillable land separately from the building spot.
A critical first step regarding valuation is to ensure that accurate legal descriptions of all parcels exist and to list all encumbrances. This is usually best achieved by obtaining an Owners and Encumbrances Report (O&E). While an O&E report will disclose owners and encumbrances against the property, it will not disclose easements against the property—such as wind towers, cell phone towers, or manure easements. It’s important to determine whether there are any recorded easements against the property, which may impair transferability.
Farmers often have a name for each parcel of land, such as “the home place,” “the northwest 80,” “the Brown farm,” or some other identifier. Encouraging the real estate appraiser, accountant, or other experts to use the name commonly associated with a specific parcel will simplify identification, valuation, and other considerations as the divorce proceeds, as there will be a common understanding among the parties, counsel, expert witnesses, and the court. A color-coded map may be beneficial to identify select parcels, including identification of parcels subject to non-marital claims.
The value of Minnesota farmland varies, depending upon tillage, soil type, yield (bushels per acre), location, topography, drainage, and other considerations. Given these unique considerations, selection of a qualified real estate appraiser may be one of the most important decisions during the dissolution proceeding. Some counties maintain detailed information regarding all sales in the county, which may be obtained for a small fee from the county recorder or land records director.
Due to significant increase in the value of farmland, substantial capital gains taxes may be triggered in the event of sale, particularly if low-basis farmland is sold to satisfy the terms of a property settlement upon dissolution of a marriage. Capital gains taxes—an outcome that most divorcing couples do not wish to deal with—may be avoided by awarding land to a wife subject to an agreement to rent the land back to husband at fair market value.
Depending on the type of farming operation, additional appraisals may be necessary. For example, production agricultural operations typically include a grain drying and storage facility, grain bins, and other improvements (such as tiling of the land). Livestock operations may include specialty buildings, registered livestock, stored semen, stored eggs, or other assets requiring appraisal.
Equipment is generally the second most valuable line item on a farm balance sheet. Farming operations are capital-intensive, involving extraordinary costs to acquire equipment such as tractors, planters, diggers, disks, plows, combines, rippers, wagons, trucks, and semis. Appraisal of equipment is crucial:
The fair market value of a combine purchased for $500,000 that now carries a zero value on the depreciation schedule is clearly not zero. It is not uncommon for farmers to pay over $300,000 for a single tractor or over $500,000 for a new combine—equipment that includes sophisticated technology, such as auto-steer and GPS to track coordinates and yields, and a range of sensors to measure moisture and other data points. Many depreciation schedules are not accurate, as farmers love to trade equipment and do not always update their depreciation schedules to reflect sold or traded equipment. Unlike over-the-road vehicles, farm equipment is not registered with the state but carries a serial number unique to each piece of equipment.
Given the capital-intensive make-up of farming operations, it is essential to review depreciation schedules. Several farm assets have recovery periods that are different from those of their nonfarm counterparts. The Tax Cuts and Jobs Act of 2017 (TCJA)3 changes some of those recovery periods and increases the rate of depreciation. The TCJA provides that new farm equipment and machinery placed in service after December 31, 2017 are classified as five-year MACRS property, while used equipment is still classified as seven-year MACRS property.
The maximum amount a farmer can elect to deduct for most section 179 property placed in service in 2020 is $1,040,000. This limit is reduced by the amounts by which the cost of the property placed in service during the tax year exceeds $2,590,000.4 Many state cooperative extension services conduct farm tax workshops in conjunction with the IRS. The rural tax education website at www.ruraltax.org is a source of information concerning agriculture-related income and deductions and self-employment tax.
Grain is another key line item on the farm balance sheet and may include corn, soybeans, or other grains. In western Minnesota and the Dakotas, wheat and sugar beets are more common. Sugar beet shares are a unique asset that requires expertise to value. Determining the number of bushels of grain may be a difficult task, as grain may be stored on the farm, on a neighbor’s farm, or at the local elevator. Measuring grain bins to determine the estimated number of bushels may be appropriate, as sales may occur throughout pendency of the divorce, making it difficult to establish this moving target and agree upon the value included on the balance sheet. Of course, grain prices fluctuate daily, further complicating the value of grain reflected on the balance sheet. If grain sales continue throughout the pendency of the dissolution proceeding, it may be necessary to file a temporary motion with the court to provide verification of all grain sales, including the number of bushels sold and price received as well as possible escrow of sale proceeds. This is especially important in those counties where the valuation date is delayed until the date of the initial pretrial, typically several months after commencement of the dissolution proceeding.
For farmers who own livestock, those operations can vary significantly. While cows are cows to most people, there’s a real difference between a dairy cow and a beef cow. (If you fail to understand the difference, try milking a beef cow.) If a farmer says, “I have 100 cows and calves,” how many bovine does the farmer have? Also, silage and hay are assets unique to many livestock operations.
Other assets unique to farming operations may include prepaid expenses for the next growing season, shares in the local co-op or ethanol plant, sugar beet shares, and even manure: Some contract growers sell animal waste from their turkey, chicken, or hog operations to neighboring farmers to apply to their land in lieu of commercial fertilizer.
Income associated with farming operations varies according to the type of operation. Determining the cash flow available for payment of spousal maintenance, child support, or funding a property settlement is not an easy task, as depreciation may reduce the farmer’s available income. After adjusting available net income by reducing or eliminating depreciation altogether, dollars may be available to fund these obligations.
Available sources of income may include:
income from the sale of grain or livestock;
income from the sale of milk;
Contract payments, typically associated with hog, chicken, and turkey industrial operations;
federal subsidies, as farmers are essentially silent partners with the federal government and may be eligible to receive federal subsidies that vary from year to year. During the pandemic, a number of covid-19 relief packages were directed to farmers and enhanced their bottom line;
non-cash income from the USDA for price loss coverage and agricultural risk coverage—federally subsidized programs to protect farmers in the event of price loss or natural disasters such as drought or floods;
long-term agreements with the USDA, agreeing to less intensive use of highly erodible or other specified cropland through the Conservation Reserve Program (CRP);
custom work, such as combining beans or picking corn for other farmers;
trucking or hauling grain or livestock for other farmers;
miscellaneous income in connection with easements granted for construction of windmills or cell phone towers;
miscellaneous income (likely unreported) in connection with easements granted to neighboring farmers to allow spreading manure from industrial operations on the land;
dividends from the local co-op or ethanol plant; and
other miscellaneous sources of income.
Sources of farm debt
Farm debt typically includes a mortgage that may encumber all or a portion of the land. Each year, most farmers are required to provide their lender with a balance sheet and cash flow projections to obtain an operating loan. Typical financing sources include agricultural lenders, local banks, and local co-ops—financing arrangements that are secured with UCC filings.
In some unfortunate situations, divorcing couples face not only the end of their marriage but also considerable farm debt. In those situations, the lender will need to be involved in any work-out and must approve the terms of a settlement. Depending upon your relationship with opposing counsel, it may be wise to meet jointly with the loan officer.
Discovery tips for the farm divorce
Farm divorces can be quite complex and require review and analysis of documents that need to be tailored to the specific operation. Work with your expert witness to identify appropriate documents.
A number of documents may provide key information regarding the farming operation. They include: (a) income tax returns, including Schedule F (Farm Income), which details farm-related income and expenses for at least a five-year period; (b), estate and gift tax returns (for those parties asserting a non-marital asset claim); (c) depreciation schedules to provide to the equipment appraiser as well as an expert to ascertain cash flow available for payment of spousal maintenance and/or child support as well as sums available to satisfy the terms of property settlement; (d) copies of contracts for the purchase or trade of equipment; (e) copies of balance sheets, cash flow projections, officer notes, and other documents provided by a farmer to a lender (this inquiry may produce a treasure trove of information); (f) documentation of the amount and value of grain, including the location of all grain (many combines include an on-board computer that tracks yields per acre and may serve as a resource to estimate yields); (g) records of prepaid expenses such as fertilizer, seed, and other input costs for the new crop year; (h) copies of all grain checks or other sums received during the pendency of the action (was grain sold through a trucking company or other third party?); (i) copies of contracts involving contract growers, which are common in the hog, chicken, and turkey industries; (j) documentation of all debt, including outstanding mortgages, operating loans, loans through equipment dealers or the local co-op, federally subsidized loans through Commodity Credit Corporation, and other sources of credit; (k) documentation relating to any crop insurance claims or other losses. In matters involving livestock operations, it may also be necessary to retain a specialty appraiser who can assist with discovery.
SONJA TROM EAYRS is a partner with Barnes & Thornburg LLP. A recognized family law attorney with over 30 years of experience, Sonja has been granted fellowship in the American Academy of Matrimonial Lawyers and has been named to The Best Lawyers in America. In addition to her legal practice, Sonja serves as business manager of the Trom family farm in southern Minnesota. SEAYRS@BTLAW.COM
D. PATRICK McCULLOUGH was born and raised on a farm in northwestern Minnesota. Even before tractors, he and his family farmed for many years with horses. Pat presently lives on his farm in Washington County, which is primarily a cow/calf beef operation. He is celebrating his 50th year in the practice of law with primary concentration in family law and personal injury. DPMCCULLOUGH@MCCULLOUGHLAWYERS.COM
JILL FRIEDERS was born and raised in rural Indiana. She grew up on a small farm raising sheep and horses. Jill and her family are avid equestrians, competing in dressage, endurance, and reining. Jill’s family law practice in southeastern Minnesota deals with several farm divorces each year. She is celebrating 37 years of practice. JIFRIEDERS@OBRIENWOLF.COM