A. Farmland and Divorce
Traditionally, farms are acquired by gift or inheritance by or through family members. These family farms tend to be owned by multi-generational farming families that may or may not have formal or informal agreements regarding the allocation of operating expenses and the division of profits. This means that, while the younger generations may have ownership interests in the growing crops or livestock, the older generations may actually own the land. Traditionally, legal title is protected and, even in long term marriages, the non-owning spouse may not acquire any direct ownership interest in the land. In divorce proceedings, there is longstanding legal precedent that protects family farms and, although the non-owning spouse may have devoted time, labor, and significant financial contributions, that spouse may not be compensated for those efforts.
When dealing with farmland in a divorce proceeding, an important first question to ask is whether the family farm is included in the marital estate or if it is one party’s separate property. Generally, farmland acquired by gift or inheritance is not included in the marital estate. Therefore, conflicts surround the question of whether the increase in value of farmland owned prior to the marriage or acquired by gift or inheritance during the marriage, should be included in the marital estate.
Depending on the jurisdiction, when a court is attempting to determine whether separate property has become part of the marital estate, the contributions of both the non-owner spouse to the farm and the owner spouse must be examined. Courts look to whether the property has appreciated in value during the marriage as a result of active or passive forces. Active appreciation includes actual labor, contribution of funds, etc., while passive appreciation includes market forces, inflation, and efforts by third parties. However, determining what a person can actually do to increase the value of land is complicated and varies by state. Passive forces tend to be the primary factors that cause the value of farmland to fluctuate. This is a potential source of conflict when a non-owning spouse has significantly contributed to the farm, but the value of the farm has increased solely due to those passive forces.
In Iowa, for example, the Iowa Supreme Court has identified a number of factors to consider when determining whether gifted or inherited property should be divided based on the contributions of both the non-owning and owning spouse. Some of these factors include the:
1. Length of the marriage;
2. The parties’ contributions to the improvement of the property;
3. Whether the property served as the family home and provided a source of the family’s livelihood; and
In In re Marriage of Antoine, the Iowa Court of Appeals determined that setting aside the current value of a parcel of farmland, acquired by the farmer as a premarital gift, would be inequitable considering the length of his marriage and the significant contributions by his former spouse. There, the farmer attempted to argue that he should have received greater credit for the property he brought into the marriage because, without his significant premarital assets, he and his former spouse would not have accumulated over seven million dollars in assets. The Court found that the farmer’s former spouse helped prepare the fields for planting and harvesting, helped raise hogs, cleaned the barns and grain bins, attended meetings, kept the books, and was in charge of marketing the farm. Furthermore, she was the primary caretaker for the children and was in charge of the majority of the household chores. Thus, the Court determined that his farmer’s former spouse was entitled to the value of the parcel in question, regardless of whether he received it as a premarital gift, due to her contributions to the farm and the family.
In Van Newkirk v. Van Newkirk, the Nebraska Supreme Court determined that a lack of active appreciation would prevent separate property from becoming marital property. There, the wife’s parents gifted her a farm in 1963. Years later, upon divorce, the trial court awarded the value of the farm in 1963 as the wife’s separate property, but included the appreciation of the farm in the marital estate. In Nebraska, property acquired by one of the parties through a gift or inheritance is not considered part of the marital estate. However, if both spouses have contributed to improvement or operation of the property or the non-owning spouse significantly cared for the property during marriage, a court may find an exception. Furthermore, the non-owning spouse’s actions will be scrutinized even more carefully than the owning spouse. In Van Newkirk, because the wife and husband did not expend any significant effort towards the farm, the increased value of the farm was to remain the wife’s separate property. The Van Newkirk decision illustrates that passive appreciation in separate property is non-marital and that active appreciation can only be marital if the non-owning spouse significantly cares for the property and the property increases in value.
On the other hand, in Missouri, a Court needs to determine whether active appreciation is caused by marital funds and marital effort. Not only do Missouri courts require a showing that marital funds and marital effort were expended, they require a showing that the appreciation of the separate property is directly attributable to the expended marital funds and effort. Furthermore, the performance of usual spousal duties by the non-owning spouse is not a sufficient enough contribution to cause the increase in value of the separate property to become marital.
Divorces that involve farmland may require appraisals and valuations of land, growing crops, stored crops, and livestock. When valuing farmland, it is essential that the appraiser be knowledgeable about the location, agronomy, future development plans, the farm’s access to transportation, soil characteristics, weather patterns, and the history of the farm itself. Hiring an appraiser that is not familiar with issues unique to farming could potentially diminish the value of the property or give the opposing party a reason to call into question the appraiser’s credibility. Additionally, an experienced appraiser should be familiar with soil types, the soil’s productivity, and be able to appropriately consider environmental factors that can adversely affect the farmland’s value. Environmental concerns have the ability to drastically impact the value of the farmland, thus, an appraiser must be familiar with these concerns and understand how they can affect the value of the farmland.
Like real estate appraisals, it will also be necessary for an appraiser of farmland to assess the value of improvements as well as the degree to which they enhance the farmland’s market value. An appraiser will need to calculate the value of the improvements and their enhancement of tract based on comparisons of the sales of similarly improved land to pure or unimproved land. Finally, a determination needs to be made as to whether the land being valued is farmland or an ongoing farming operation. An ongoing farming operation requires an additional business valuation of livestock and crops in cultivation.
Depending on jurisdiction, income from a farm business could be considered marital property even if that income is earned from non-marital property. Therefore, when appraising a farm, crops, machinery, and livestock should not be overlooked. For example, in In re Marriage of Ballay, the Missouri Court of Appeals found that the herd of cattle on the parties’ farm was marital property despite the fact that they were descendants from cattle that the husband acquired before marriage. In that case, the wife argued that the remaining descendents of their original herd were marital property because they were born during their marriage and because the husband failed to present evidence to the contrary, the Court agreed.
In addition to a credible appraiser, it is also prudent to hire a forensic accountant to assist an attorney in determining the true value of an ongoing farming operation. A forensic accountant can help trace cost flow which can be an underutilized approach to asset discovery. Livestock and growing crops present valuation difficulties due to judicial aversion toward speculative values. Additionally, the season and calendar year must be taken into account because these both affect farm budgets and expenses.
For example, in Johnson v. Johnson, the Supreme Court of Nebraska rejected an argument that prepaid expenses were an asset which could be included as marital property. There, Mrs. Johnson claimed that the trial court failed to award her one-half of the value of prepaid farming expenses. Specifically, she argued that the $50,000 put toward preparing the land for planting the following season was marital property subject to division. However, the Supreme Court of Nebraska disagreed holding that the expected return on such an expenditure was too speculative given the fact that a harvest of those crops would not occur for approximately six to seven months. Therefore, it could not be considered an asset subject to division.
B. Residential Property:
In many cases, real estate is a family’s most valuable asset. The success of obtaining exclusive possession of the marital home is fact specific. Therefore, it is important to be aware of the title history and status of the property, as well as the details of the mortgage, taxes, details regarding any homeowner’s insurance, and any maintenance issues or needs of the property. Additionally, according to real estate lawyers, recorded titles often differ from how a client believes the title held. Therefore, an attorney must obtain a title report on each parcel of real property identified by their client. A title report should include information regarding how the title is vested, the proper legal description of the property, all mortgage liens on the property, all easements, restrictions, and all involuntary liens against the property.
Another key step an attorney should take is having the real estate property properly appraised. A credible appraiser is essential in all parties having confidence in the valuation of their real estate. This means, at minimum, the appraiser should possess a state license or certification in the state in which the property is located. Additionally, while the appraiser may possess the appropriate license for the property in question, it is also important that the appraiser have experience in appraising properties similar in location to a client’s. Furthermore, it is important to keep in mind that the economy may significantly impact the evaluation of real estate assets. This is further complicated by the fact that, at times, a significant amount of time may pass before a case goes to trial or is settled. Therefore, it may be necessary to consider that the property valued at the date of the commencement of a divorce proceeding may differ greatly from their value at the time the case is heard. Finally, not only could the value of the property change drastically during a divorce proceeding, the property could also acquire federal tax liens or other involuntary liens. Thus, having the property appraised a second time at a later date and constantly updating records is essential to getting the best outcome for your client.