Protecting the family farm

from the outlawsIn-laws

Unintended consequences

Pre- and Post-Nuptial Agreements

March 7, 2013Presenter: Miriam Robeson, Attorney

Agreements specifically in anticipation of (or resolution of) a marriage “contract.”

Also called “Pre-Marital Agreement” or “Ante-Nuptial Agreement”

Post-Nuptial Agreements are contracts that happen after marriage Much more limited – only enforceable under certain

conditions

Purpose – provide for distribution of assets upon divorce or at death Helpful in second marriages, too

What are Pre/Post-Nuptial Agreements?

Estates – 1st or 2nd (or more) marriages

Indiana Code 29-1-4-1 – a surviving spouse is entitled to a $25,000 “spousal allowance”

Indiana Code 29-1-3-1 – a surviving spouse can “take against the Will” up to ½ the net property (personal and real estate)

2nd spouses can take up to 1/3 the personal and ¼ the real property

This is true regardless of what you put in a Last Will & Testament

Starting Point - Estates

Divorce

Indiana Code 31-15-7-5 says that an equal division of marital property is “just and reasonable”

This is a “rebuttable presumption,” but can be expensive and unpredictable to overcome

Divorce can be catastrophic to a farm family, where the primary asset is land – a divorce might require that the land be sold or mortgaged to pay the “departing spouse”

Starting Point - Divorce

Two Types Reconciliation Agreement – Intended to preserve marriage

Flansburg v Flansburg, 581 NE2nd 430, 433 (Ind Ct App 1991) – valid pre-nuptial agreements must be enforced as written.

Applies in situations where the parties seek reconciliation after Court intervention (divorce or separation pending)

“Adequate Consideration” is deemed to be the reconciliation of a marriage that would have otherwise dissolved

Dissolution Settlement – Agreement made when parties are contemplation divorce with no attempt to reconcile Enforceable per the discretion of the Court This means that the terms can be changed by the Court

Do not rely on Post-Nuptial Agreements to preserve the Farm!

Post-Nuptial Agreements

Requirements1. Must be in writing2. Signed by both parties3. Each party must have independent legal counsel

May be amended or revoked by mutual agreement of the parties

“Consideration” (quid-pro-quo or “something for something”) not required

Pre-Nuptial Agreements

Introduction – RecitationsDescription of property owned by the partiesTerms and events of disposition of propertySchedule of Husband’s propertySchedule of Wife’s propertyDisclosures must be full and accurate and the

parties must understand the agreement“Potential inheritance” need not be disclosed,

but “already-inherited” property must be disclosed

Elements of Pre-Nuptial Agreements

“Rights and obligations of each of the parties in any property of either of them or both of them whenever and wherever acquired or located” IC 31-11-3-5

Includes rights with respect to: Buy, sell, use, exchange, encumber, etc. Disposition of property upon separation,

dissolution or death Modification or elimination of spousal maintenance

(Indiana does not have “alimony”) Making estate planning documents (Wills, Trusts) Ownership rights with respect to life insurance

CANNOT – affect child support obligations

Rights Covered in Pre-Nuptial Agreements

Comes at termination of marriage (death/divorce)

Dissolution – controls distribution and division of property

Estate Administration – Become a waiver of statutory elements (spousal allowance/taking against the Will)

Enforcement of Pre-Nuptial Agreements

When is Pre-Nuptial Agreement Unenforceable? Not voluntary (spouse or wedding day held

“hostage” to the Agreement, or spouse otherwise feels “compelled” to sign the document)

Unconscionable “offends a sense of justice” Example: Spouse agrees to give up all right to any

assets in the marriage, with the effect of reduction to poverty

If the marriage is void (then, other common law rights may apply

Failure of Pre-Nuptial Agreements

When can a Pre-Nuptial Agreement FAIL? If the Farm Spouse voluntarily (or carelessly)

violates the terms of the Agreement

Example – Farm Spouse transfers stock assets into spouse name – the Pre-Nuptial Agreement “fails” to the extent of that gift.

Example – Farm Spouse specifically “bequeaths” farm ownership to spouse in Last Will & Testament – the PNA “fails” to the extent of that gift. Make sure your children understand this! Last Will &

Testament should support the Pre-Nuptial Agreement

Failure of Pre-Nuptial Agreements

“Tenants in Common” versus “Joint tenants with rights of survivorship” versus “husband and wife”

Restrictions in Transfer in Operating Agreements (LLC)

Buy-Sell Agreements (Corporations, LLCs)

Assets in Trust (versus outright ownership)

Other factors affecting farm property rights in the marital

relationship

Real Estate Assets held in joint ownership with children are especially vulnerableCan be claimed by creditors (and divorcing spouse) to the extent of ownership

Can be “tied up” by a court proceeding or bankruptcy involving the co-owner child

Creditors (or spouse) might require “partition” of real estate and you may lose that real estate out of the farm

Joint Ownership with Children

Put Real Estate in an entity (LLC or Corp)Operational Documents restrict transfer -

To Trust – Ancestors/Descendants – Spouse (?) Involuntary transfers (to creditors or divorcing spouses) result in “piece of the action” but no voting

Buy-Sell AgreementsRestricts transfer to certain conditions, controls price, and controls “control”

Makes the asset of limited value to creditors (and spouses)

Restricting Access to Assets

Trusts Allows access to income Provides protection against creditors (and

spouses) Beneficiary does not “own” assets Can be “tiered” with LLC to severely limit access

to the farm by creditors (and spouses)

Issue – These devices only work when you plan ahead! Once the creditor (or spouse) claims the asset, it is too late!

Restricting Access to Assets

Family structure Parents Three children

Two married, one engaged to be married

Issue If willing to sign Pre-Nuptial Agreement

Be sure it fully discloses farm interest Be sure prospective spouse understands it Be sure prospective spouse has independent

counsel (you can pay for it)

Case Study – Goodacre Family

Issue If Prospective Spouse is NOT willing to sign Pre-

Nuptial Agreement Cannot force the issue Avoid co-ownership of assets with the child who

marries that spouse Use alternate devices to get “value” to child

Buy-Sell Agreement, Trusts, Restriction on Transfer “Skip” to next generation (which skips the current

generation of problems – could create a whole new set of problems in 20 years)

Case Study – Goodacre Family

Pre-Nuptial Agreements work better than Post-Nuptial Agreements

Requires GOOD COMMUNICATION to child and prospective spouse

Works best if used hand-in-hand with other devices (Entity Ownership, Buy-Sell Agreements, Trusts, and Last Will & Testament!)

May not be available if - Prospective spouse does not consent Spouse is already married (barn door – horse)

Summary – Pre/Post Nuptial Agreements

Thank you for your kind

attentionQUESTIONS?

Contact information: Miriam RobesonEmail: MiriamRobeson@lawlatte.comWebsite: Lawlatte.com