Divorce Issues for Farm Families

For the Iowa Association of Justice

Family Law Seminar

April 23, 2015

Presented by:

Jane Rosien Melissa Larson

Flander, Casper & Rosien David L. Jungmann, P.C.

223 E. Court Ave. #1 113 W. Iowa St.

Winterset, IA 50273 Greenfield, IA 50849

Ph. 515-462-4912 Ph. 641-743-6195

jrosien@fcrpc.com melissal@jungmannlaw.com

Special thanks to Hon. Chad A. Kepros for use of his outline titled Farm Issues in Divorce.

2

I. Introduction

A. Farm divorces have a unique set of issues when compared to non-farm divorce.

B. A farm is not just an asset to be divided – it is a way of life that is passed from generation

to generation. See John S. Slowiaczek and David A. Domina, The Equitable Distribution

of Farms, 18 J. AM. ACAD. MATRIM. LAW 357 (2003).

C. Particularly with family farms, there are emotional ties to farm land, livestock, and even

equipment that come into play in a farm divorce. There are also considerations about

keeping the family farm going for future generations, as it has been done in the past.

D. The million-dollar question when it comes to property division: how do you let the

farmer be a farmer, and still fairly compensate the non-farming spouse?

II. Child Custody and Visitation

A. Child Custody

i. Keep in mind the sensitive issue of the children in a farm divorce (as in any

divorce), particularly those who may wish to continue the farming operation and

therefore feel compelled to “take sides” with the farming parent.

ii. A child’s interest in and enjoyment of a parent’s farming operation has been cited

as one factor in determining which custodial arrangement is in the child’s best

interests. In re Marriage of Grabill, 414 N.W.2d 852 (Iowa Ct. App. 1987).

B. Parenting Plan and Parenting Schedules

i. An open or flexible parenting time schedule with a farming parent may be

beneficial to the children during the busy seasons of a farming operation. This

type of schedule has been allowed, factoring in a fallback agreement as to

visitation in the event that relations and communication between the parents

breaks down. See e.g. In re Marriage of Freund, 814 N.W.2d 622 (Iowa Ct. App.

2012).

ii. Despite the demands of a farming schedule, the farming parent still has hope of

liberal visitation or even primary physical care given the right circumstances and

a favorable best interests analysis. See e.g. In re Marriage of Collingwood, 460

N.W.2d 486 (Iowa Ct. App. 1990) (farming father granted primary physical care

in part because of the stability of his plan to continue residing on and operating

the farm where the children had lived their whole lives, and because of the close

proximity to grandparents with whom the children had developed a close

relationship).

C. Extraordinary Visitation

i. The noncustodial parent may wish to benefit from the reduction in child support

afforded when such a parent exercises an extraordinary number of overnights with

a child in the period of a year.

ii. Concerns may arise as to whether or not the noncustodial parent has the ability to

actually exercise those overnights due to the demands of a farming schedule.

III. Child Support and Spousal Support

3

A. Child Support

i. The Child Support Guidelines apply to farmers.

1. There is a rebuttable presumption that the amount of child support

determined under the guidelines is the correct amount of child support to

be awarded. That amount can be adjusted upward or downward, but only

if the court finds that adjustment is necessary to provide for the needs of

the children or to do justice between the parties under the special

circumstances of the case. See Rule 9.4 and 9.11.

2. The guidelines apply to farmers. In re Marriage of Cossel, 487 N.W.2d

679 (Iowa Ct. App. 1992) (mere fact that person is a farmer does not

justify a departure from the guidelines; impact of fluctuating income may

be compensated for by averaging income over a reasonable period); see In

re Marriage of Freund, 814 N.W.2d 622 (Iowa Ct. App. 2012) (trial court

failed to apply child support guidelines to income of farmer; case

remanded to trial court for determination under the guidelines).

ii. Under Rule 9.5, “net monthly income” (NMI) means gross monthly income less

specific deductions, including federal income tax, state income tax, and social

security deductions.

1. The guidelines do not limit the definition of gross income to federal

taxable income. See e.g. In re Marriage of Howell, 434 N.W.2d 629 (Iowa

1989).

2. Court must determine income from the most reliable evidence presented.

In re Marriage of Knickerbocker, 601 N.W.2d 48 (Iowa 1999); In re

Marriage of Powell, 474 N.W.2d 531 (Iowa 1991); In re Marriage of

Cossel, 487 N.W.2d 679 (Iowa Ct. App. 1992).

3. Parties must put on evidence of income. See In re Marriage of Hansen,

514 N.W.2d 109 (Iowa Ct. App. 1994) (it is not the Court’s responsibility

to search the record for proper figures to use in applying the child support

guidelines); Lessinger v. Lessinger, 258 Iowa 170 (1965) (case remanded

to determine income of farmer because no credible evidence was

presented at trial).

4. A farmer’s income, rather than net worth, is generally relevant for

determining child support under the guidelines. A substantial increase in a

farmer’s net worth can justify a departure from the guidelines, but when

changes in net worth are due to changes in commodity prices, the change

usually does not justify a departure. In re Marriage of Cossel, 487 N.W.2d

679 (Iowa Ct. App. 1992) (court not required to trace increases and

decreases in value of farm commodities; rather, value is established upon

sale at which point commodity is reflected in farmer’s income).

4

5. Farm subsidy payments may be either included as additional forms of

income, or may be considered indirectly as a reason to vary from the

guidelines.

iii. Depreciation

1. Depreciation is an income tax deduction that allows a taxpayer to recover

the cost or other basis of certain property. It is an annual allowance for the

wear and tear, deterioration, or obsolescence of the property. Most types

of tangible property (except land) are depreciable. I.R.S. Publication 946,

How to Depreciate Property (2014).

2. Although the child support guidelines do not specifically provide for

deduction for depreciable expenses, the Court has adopted the view that

“depreciation should not categorically either be deducted as an expense or

treated as income, but rather that the extent of its inclusion, if any, should

depend on the particular circumstances of each case.” In re Marriage of

Gaer, 476 N.W.2d 324 (Iowa 1991). See also In re Marriage of

Knickerbocker, 601 N.W.2d 48 (Iowa 1999); In re Marriage of Starcevic,

522 N.W.2d 855 (Iowa Ct. App. 1994).

3. The court will generally allow a deduction from income for reasonable

depreciation (calculated as though taken using the straight-line method)

because depreciation is a valid cost of doing business.

a. If the farmer has elected to expense certain depreciable assets or

depreciated assets using an accelerated method of depreciation,

these expenses will usually be reallocated as through straight-line

depreciation has been taken. See In re Marriage of McDermott,

827 N.W.2d 671 (Iowa 2013) (Court cited the trial court’s failure

to recalculate Section 179 expense deductions that averaged

$11,204 per year through straight-line depreciation as a reason why

it was fair for the trial court to include a one-time gain of $9,176

from the sale of timber in the party’s income); In re Marriage of

Vogl, 797 N.W.2d 131 (Iowa Ct. App. 2010) (husband’s farm

losses ignored in determining income because losses only shown

because of Section 179 elections; if Section 179 elections were

recalculated on a straight-line basis he would not have had losses);

In re Marriage of Nelson, 789 N.W.2d 437 (Iowa Ct. App. 2010).

b. Under the straight-line method of depreciation, the cost of the

property, less its estimated salvage value, is deducted in equal

amounts over the period of its remaining useful life. In re

Marriage of Gaer, 476 N.W.2d 324 (Iowa 1991).

c. Many cases allow for the deduction for depreciation. See In re

Marriage of Knickerbocker, 601 N.W.2d 48 (Iowa 1999)

5

(reasonable depreciation of personal property farming assets using

a straight-line method of depreciation allowed deduction to do

justice between the parties;; reasonable depreciation on farm

machinery and other assets related to the farm business is an

expense reasonably necessary to maintain the business); In re

Marriage of Hoksbergen, 587 N.W.2d 490 (Iowa Ct. App. 1998)

(farmer elected to deduct $17,116 for GDS and ADS assets which

the court found to be excess depreciation that should instead be

amortized over 7 years thereby increasing the farmer’s income by

$14,500 for purposes of child support); In re Marriage of Cossel,

487 N.W.2d 679 (Iowa Ct. App. 1992) (expenses converted to

straight-line depreciation).

4. However, deductions for depreciation are not always allowed. The

decision on whether to allow a deduction for depreciation is in the

discretion of the court based on all of the circumstances, including the

amount of depreciation claimed and the property depreciated. In re

Marriage of Worthington, 504 N.W.2d 147 (Iowa Ct. App. 1993) (initially

allowing deduction for straight-line depreciation, but then increasing the

resulting amount of child support under the guidelines on the basis that the

adjustment was necessary to avoid substantial injustice; with straight-line

depreciation, income would only be $71 per year, but the Court adjusted

child support to $440 per month).

a. In re Marriage of Starcevic, 522 N.W.2d 855 (Iowa Ct. App. 1994)

(court denied any deduction for farm equipment where husband

had non-farm full time job and operated farm as a hobby or tax

shelter).

b. In re Marriage of Ruth, 2006 WL 468773 (Iowa Ct. App. 2006)

(court refused deduction for straight-line depreciation because

allowing the deduction would result in an injustice to the children

and be inappropriate under the circumstances).

iv. Farm Expenses

1. The value of personal benefits provided to an employee, such as real estate

taxes, insurance, gasoline, and other vehicle expenses) may be considered

in determining gross income for child support purposes. In re Marriage of

Beecher, 582 N.W.2d 510 (Iowa 1998). Only the after-tax value of these

benefits should be considered, and it may be appropriate to normalize a

farmer’s income by adding back in expenses that are for personal use or

have a dual business-personal purpose. In re Marriage of Titterington, 488

N.W.2d 176 (Iowa Ct. App. 1992) (income of farmer for child support

purposes increased for benefits provided by the family farm corporation,

6

including real estate loan payments, real estate taxes and insurance,

heating fuel, and personal gasoline and other vehicle expenses). See also

In re Marriage of McKarney, 522 N.W.2d 95 (Iowa Ct. App. 1994)

(deductions not allowed for purposes of calculating child support because

they were for personal, rather than business, use).

2. Only expenses reasonably related and necessary for the farming operation

should be deducted in determining income for child support. See In re

Gurst, 2008 WL 508488 (Iowa Ct. App. 2008) (court disallowed reduction

of income for fuel, gas, oil, fertilizer, and depreciation for purchase of

farm equipment because all of the farm ground was rented out and they

were not needed for farming business).

3. Prepaid items such as seed, fertilizer, chemicals and fuel are often paid for

in the year prior to the crop year for which they will be used. The pattern

and amount of pre-paid expenses should be examined to determine

whether some or all of those costs should be added back into the farmer’s

income for child support purposes.

v. Income Averaging

1. Income of farmers should usually be averaged over a reasonable period of

time.

a. The length of time to average is whatever period most accurately

reflects the fluctuations in income. For farmers, commodities

fluctuate in value, production varies because of weather conditions,

and farm programs may have substantial impact on a farmer’s net

income. In re Marriage of Cossel, 487 N.W.2d 679 (Iowa Ct. App.

1992).

b. It is unrealistic and unfair to fix child support based solely on the

most recent income received. In re Marriage of Knickerbocker,

601 N.W.2d 48 (Iowa 1999).

c. Child support should not be readjusted each year based on each

year’s income. State ex rel. Pfister v. Larson, 569 N.W.2d 512

(Iowa Ct. App. 1997). Rather, support should be set in a single

amount, based on a reasonable average of income, subject to future

modification. In re Marriage of Blume, 473 N.W.2d 629 (Iowa Ct.

App. 1991).

2. There is no fixed period for the length of time over which to average.

Instead, use the period that best captures the fluctuation for the specific

farmer.

a. 3 years. In re Marriage of Cossel, 487 N.W.2d 679 (Iowa Ct. App.

1992); In re Marriage of Schnur, 2008 WL 2038808 (Iowa Ct.

App. 2008).

7

b. 4 years. In re Marriage of Knickerbocker, 601 N.W.2d 48 (Iowa

1999).

c. 5 years. In re Marriage of Hoag, 380 N.W.2d 8 (Iowa Ct. App.

1985).

vi. Earning Capacity/Imputing Income

1. The use of earning capacity, rather than actual income, to calculate child

support is a deviation from the child support guidelines. Before using

earning capacity the court must make a determination that if actual

earnings were used, substantial injustice would occur or adjustments

would be necessary to provide for the needs of the child and to do justice

between the parties. In re Marriage of Nelson, 570 N.W.2d 103 (Iowa

1997).

2. Under Rule 9.11(4), the Court may calculate child support based on

earning capacity rather than actual income if the Court makes a finding of

fact that a parent is voluntarily unemployed or underemployed without just

cause. In determining earning capacity, the Court considers employment

potential and probable earnings level based on work history, occupational

qualifications, prevailing job opportunities, earning levels in the

community, and other relevant factors. The Court shall not use earning

capacity rather than actual earnings unless a written documentation is

made that, if actual earnings are used, substantial injustice would occur or

adjustments would be necessary to do justice between the parties.

3. While the guidelines are based on the parties’ income, the Court has the

discretion to consider the parties’ net worth as a permissible factor in

setting or modifying child support. Such consideration is appropriate in

determining whether a deviation from the guidelines is inappropriate to

provide for the needs of the child and to do justice between the parties

under the special circumstances of the case. When a party owns substantial

assets, such as tillable land, which could or should be income producing,

the Court may impute income to the party for purposes of calculating child

support. State ex rel. Pfister v. Larson, 569 N.W.2d 512 (Iowa Ct. App.

1997).

4. The Court may impute additional income to the farmer for ability to work

outside the farm with a finding that such an adjustment is necessary to

provide for the needs of the child and to do justice between the parties.

This type of income imputation is more likely when the farmer has in fact

supplemented income with other work previously and when the labor on

the farm is less than full-time. See In re Marriage of Raue, 522 N.W.2d

904 (Iowa Ct. App. 1996) (attributed additional income of $500 per month

8

on the basis that the husband was a skilled plumber and had time available

to supplement his farm income).

B. Spousal support

i. Spousal support can be a way to compensate a spouse who exited the traditional

work force to contribute to the farm and/or family (reimbursement), or to help that

spouse get back on his or her feet (rehabilitative), or to provide support for a

spouse who is not economically able to support his or her self (traditional).

ii. The same income considerations as those in calculating child support can apply

(see above).

iii. When a court makes a determination on spousal support, it must also look to the

property division to determine the sufficiency of that division and if spousal

support is appropriate. See In re Marriage of Lattig, 318 N.W.2d 811 (Iowa Ct.

App. 1982).

IV. Property Division

A. Discovery of Property

i. The information gathered through formal discovery should include identification

of traditional farm assets and farm assistance programs. The parties have a duty

to disclose all property owned and debts owed. In re Marriage of Driscoll, 563

N.W.2d 640 (Iowa Ct. App. 1997).

ii. Parties must show ownership to the Court. See In re Marriage of McDermott, 827

N.W.2d 671 (Iowa 2013) (fact that farm was transferred by husband’s family to

husband and wife jointly with full rights of survivorship sufficient to find that

gifted portion was gifted to husband and wife jointly rather than to husband

alone); In re Marriage of Elsbernd, 2008 WL 2038811 (Iowa Ct. App. 2008) (the

former husband claimed that the trial court erred in determining the value of the

grain, livestock, and farm equipment; the court of appeals affirmed the trial

court’s valuation of the farm assets because husband had not shown credible

evidence that certain property was actually owned by other members of his

family); but see In re Marriage of Freund, 814 N.W.2d 622 (Iowa Ct. App. 2012)

(title not controlling in determining donative intent; real estate transferred to

husband and wife jointly but was determined to be a gift to husband only).

iii. As in any divorce case, parties may attempt to hide assets in order to prevent the

other spouse from receiving an equitable distribution of property, so thorough

discovery is a necessity.

B. Assets

i. Farm assets

1. Traditional farm assets include livestock, growing crops, stored crops,

machinery, land, the homestead, buildings, improvements and other farm

implements.

9

2. Federal, state and local farm assistance programs should likewise be

identified because they can add value to the farm and to the income of the

individual famer or farm business.

3. Remember the possibility of hidden assets.

a. A close inspection of grain production and expense records may be

required to uncover hidden grain, especially since it can easily be

hidden through related parties. Look at USDA records and crop

insurance records, commodity credit loan records, loan records,

hedge contracts, warehouse receipts, etc.

b. Owned equipment may not always be on the depreciation schedule

and equipment which is on the depreciation schedule may be

undervalued.

i. A farm equipment valuation expert who visits the farm and

personally inspects the equipment may be required.

ii. Closely look at tax elections where equipment may be

expensed and written off in the year of purchase.

iii. Beware of sham transactions where equipment is either

sold to or hidden by relatives or friends, especially when

the individual farms with or shares equipment with others.

c. Pay close attention to prepaid input costs which are often incurred

to reduce income for tax purposes in a given year but can also

appear to dissipate assets or increase debts.

d. Growing crops can present an issue when it comes to valuation.

ii. Non-farm assets

1. Personal real estate, personal vehicles, furniture and appliances, life

insurance, personal bank accounts, pensions, stocks, bonds, IRAs, mutual

funds, certificates of deposit, personal property and collectibles, etc.

2. Other business entities owned by either or both parties or in which either

party has an ownership interest.

iii. Valuation

1. Appellate courts refuse to disturb the trial court’s valuation of farm assets

when it is the range of permissible evidence. In re Marriage of

McDermott, 827 N.W.2d 671 (Iowa 2013); In re Marriage of Richardson,

2007 WL 2710953 (Iowa Ct. App. 2007). See also In re Marriage of

Freund, 814 N.W.2d 622 (Iowa Ct. App. 2012) (because of intricacies of

property valuation appellate courts give substantial leeway to the trial

court; the court defers to the trial court’s valuations when they are

accompanied by corroborating evidence or support credibility findings); In

re Marriage of Reinking, 821 N.W.2d 286 (Iowa Ct. App. 2012); In re

Marriage of Lovett, 2006 WL 2615062 (Iowa Ct. App. 2006).

10

2. Valuation is accomplished at the time of trial. Iowa Code § 598.21(5).

3. Valuation requires careful examination. In re Marriage of Schnur, 2008

WL 2038808 (Iowa Ct. App. 2008) (the appellate court upheld the trial

court’s refusal to accept a farm corporation appraisal which only evaluated

the corporation’s income tax returns and deducted losses; this method of

valuation neglected important factors that increased the value of the farm;

farm corporations have the ability to manipulate income by storing crops

instead of selling in that tax year or choosing which year to deduct loans).

4. Valuation requires competent evidence. In re Marriage of Thompson, 826

N.W.2d 515 (Iowa Ct. App. 2012) (no error in relying on real estate

appraisal to determine the value of the farm and in refusing to allow the

party’s banker from offering an opinion of value; the Court was entitled to

accept the professional well-researched appraisal over the banker’s

speculation or the self-researched valuation offered by the wife).

5. A reduction in valuation for deferred tax consequences is only appropriate

when a sale is contemplated. If seeking reduction for tax consequences,

the party must put on evidence of what tax consequences are claimed.

a. In re Marriage of McDermott, 827 N.W.2d 671 (Iowa 2013) (if the

Court orders the sale of the farm, then the Court must consider the

tax consequences of the sale in making its property distribution; in

addition, when the Court enters a lump sum payment of cash that

will in all probability require the liquidation of capital assets,

consideration of the tax consequences is appropriate in making an

award; here, the district court did not order a sale and even though

a lump sum payment of over $1 million was ordered, the Court did

not consider tax consequences on the assumption that the husband

could obtain a mortgage to pay the lump sum).

b. In re Marriage of Black, 2001 WL 57999 (Iowa Ct. App. 2001) (it

is inappropriate to decrease the appraised value of a farm

corporation upon consideration of tax consequences when the

parties do not intend to sell the asset and incur tax liability).

c. In re Marriage of Reinking, 821 N.W.2d 286 (Iowa Ct. App. 2012)

(record did not support finding that husband would have to sell the

property to pay the $125,000 cash settlement to wife; moreover,

husband offered no evidence at trial as to the specific tax

consequences claimed or the amount thereof, and husband’s bald

assertions of tax consequences on appeal were insufficient to

support his claim).

d. In re Marriage of Adams, 805 N.W.2d 397 (Iowa Ct. App. 2011)

(dissolution record does not show that a sale of the farm was

11

ordered, necessary, or otherwise relatively certain, and the parties

appeared to agree that sale should be avoided to preserve the

property for their children; reduction in value for $122,000 in

deferred tax consequences was not appropriate).

6. Discounts for minority interest and lack of marketability may be

appropriate when valuing a farm corporation. The Court may discount the

value of stock for minority ownership and lack of marketability in

distributing assets in a dissolution of marriage proceeding, but there is no

requirement that a discount be applied. In re Marriage of Steele, 502

N.W.2d 18 (Iowa Ct. App. 1993); see In re Marriage of Kitzman, 817

N.W.2d 31 (Iowa Ct. App. 2012) (approving a 40% discount for minority

interest and lack of marketability in valuing husband’s interest in closely-

held family farm corporation).

7. Growing Crops

a. The Courts may value growing crops separately.

i. In re Marriage of Godes, 2001 WL 1267708 (Iowa Ct. App.

2001) (assigned a value to growing crops by estimating the

probable yield of the crop at harvest, calculating the value

of that yield, and deducting the value and amount of labor

and expense required to mature, care for, and market the

crop).

ii. In re Marriage of Johnson, 2003 WL 21543550 (Iowa Ct.

App. 2003) (growing corps may be considered as property

separate from the value of the real estate, and “the

reasonable cost of harvest” may be considered in

determining the value of growing crops).

iii. In re Marriage of Brun, 2003 WL 22806203 (Iowa Ct. App.

2003) (trial held in late September and October, when the

crops were not yet harvested, forced the parties to estimate

their value; Court heard evidence from both parties and

found a value based on expert testimony based on the

expected yield, the expected price, and the expected cost of

the harvest).

iv. In re Marriage of Martin, 436 N.W.2d 374 (Iowa Ct. App.

1988) (appellate court first addressed the issue of how to

value growing crops for equitable distribution between the

parties to a divorce, concluding that in attempting to value

marital property in a dissolution action, the value of crops

growing upon real estate owned by both parties may be

considered as property separate from the value of the real

12

estate; “although the growing crop may be considered and

expectancy only, it is an accrued and accruing asset and has

a value to the parties.”).

v. Borchardt v. Iowa Dist. Court ex rel. Kossuth County, 838

N.W.2d 870 (Iowa Ct. App. 2013) (case remanded to the

trial court to determine the value of growing crop that

existed at the time of the dissolution trial; trial court

empowered to consider not only the existing record but to

also consider additional evidence necessary to determine

value and whether any income tax consequences need to be

considered; on remand the trial court determined the value

by subtracting the cost of the crop from the sales proceeds

based on sale occurring after trial; appellate court noted

that the fact that a growing crop results in income does not

mean that it is not also an asset for equitable distribution).

b. The Court may also not value growing crops separately.

i. In re Marriage of Conley, 284 N.W.2d 220 (Iowa 1979)

(“[t]he 1978 corn crop. Aurelia contends the trial court

failed to decide what should be done with the 1978 corn

crop. However, the decree was entered in June 1978 while

the crop was still growing. It was part of the land, so when

John was given the land he was also given the crop.”).

ii. Brown v. Geer-Brown, 2008 WL 3367560 (Iowa Ct. App.

2008) (the district court did not abuse its discretion in not

valuing growing crops because there was no evidence

presented that any crops existed).

iii. In re Marriage of Drake, 2005 WL 1225952 (Iowa Ct. App.

2005) (husband was awarded crops that had not yet been

harvested; court did not assign a value to the crops or

consider them in property division).

iv. In re Marriage of Bishop, 2003 WL 1524449 (Iowa Ct.

App. 2003) (wife argued that she was entitled to half the

value of the farm equipment, livestock, and growing crops

because they were “marital property” but without valuing

the assets, the court agreed with the husband’s contention

that the commodities were part of a continuing farm

operation and as such, the wife benefitted from the property

without having to contribute to it and it was equitable for

the district court to award the assets to the husband).

13

v. In re Marriage of Johnson, 778 N.W.2d 218 (Iowa Ct. App.

2009) (because husband depended on income from the farm

to pay his operating expenses, he was permitted to keep the

growing crop without valuing it as a separate asset).

C. Debts

i. Farm debts

1. Real estate debt

a. Mortgage of homestead or other such debt

b. Mortgage of farm land or other such debt

2. Non-real estate debt

a. Loans for purchase of farm machinery and equipment, livestock

b. Operating loans are generally used to finance the current crop

production and to care for and feed livestock

c. Tax debt

ii. Non-farm debts

1. Non-farm real estate debt

2. Personal loans for purchase of tangible items or financing of travel

3. Personal credit cards

4. Medical bills, utility bills, student loans

5. Loans against retirement accounts or life insurance

6. Judgments

7. Tax debt

8. Look for things that appear to be farm debt but may not be, like utilizing

funds from an agricultural loan to remodel a home.

D. Distribution of Property

i. Less than an equal share of property may be awarded to the non-farmer spouse.

1. Equitable distribution of marital property, based on the statutory factors,

does not require an equal division of assets. Iowa Code §598.21(5); In re

Marriage of McDermott, 827 N.W.2d 671 (Iowa 2013).

2. There is a public policy which favors preserving family farm operations.

Even though farmland is often a couple’s principal asset, Iowa courts are

reluctant to order the farm property to be sold with the proceeds divided

between the parties. See e.g. In re Marriage of Callenius, 309 N.W.2d

510, 515 (Iowa 1981) (citing In re Marriage of Andersen, 243 N.W.2d

562, 564 (Iowa 1976)); In re Marriage of Briggs, 225 N.W.2d 211 (Iowa

1975); cf. In re Marriage of Conley, 284 N.W.2d 220 (Iowa 1979). But

see In re Marriage of McDermott, 827 N.W.2d 671 (Iowa 2013) (since

husband expressed a strong desire in preserving the family farm, trial court

should do everything possible to respect that desire, but husband’s interest

14

in preserving the farm should not work to the detriment of wife in

determining an equitable settlement).

3. The court may award the farm-operating spouse a larger percentage of the

farm assets to encourage the undivided ownership and operation of family

farms. In re Marriage of Callenius, 309 N.W.2d 510 (Iowa 1981). In

order to offset this inequitable distribution of assets, courts have recently

awarded non-operating spouses a larger percentage of the assets not

attributed to farming. In re Marriage of Lacaeyse, 461 N.W.2d 475 (Iowa

Ct. App. 1990). But see In re Marriage of McDermott, 827 N.W.2d 671

(Iowa 2013).

4. Courts try to avoid forcing the parties into a continued business

relationship, so joint ownership is discouraged. In re Marriage of

Lundtvedt, 484 N.W.2d 613 (Iowa Ct. App. 1992). Therefore, distribution

of assets during a divorce is even more complex and requires additional

consideration when a farm is part of the parties’ assets. Where the

husband purchased the farm land but the wife operated a milking

operation for thirty years, the court refused to award joint ownership of the

land to the husband given his past history and relationship with the

children and his ex-wife. In re Marriage of Simon, 2014 WL 7339335

(Iowa Ct. App. 2014).

5. Sometimes courts cite the severe tax consequences of a liquidation to

justify awarding the farm property to one party or the other. In re

Marriage of Bishop, 2003 WL 1524449 (Iowa Ct. App. 2003).

ii. There are limits to the public policy of preference to the farming spouse. In re

Marriage of McDermott, 827 N.W.2d 671 (Iowa 2013). In McDermott, the trial

court valued the farm, crops and farm equipment, awarded them to the husband

who stated a desire to keep farming, and ordered the husband to pay a cash

equalization payment in excess of $1 million. The Court of Appeals reversed and

reduced the lump sum payment to $250,000 on the basis that the trial court failed

to consider the tax consequences of the property distribution and thus overvalued

the assets awarded to the husband and on the basis that inequity would result from

including the full value of the farm property which was acquired from the

husband’s family. The Iowa Supreme Court vacated the Court of Appeals’

judgment and affirmed the trial court ruling on the farm value and distribution

issues. In so holding, the Supreme Court found:

1. There is a public policy in favor of preserving family farming operations,

which stated that a less than equal property distribution may be

appropriate so that the farmer-spouse might retain ownership of the farm.

Thus, when the farmer-spouse wants to preserve the farm, the Court

“should do everything possible to respect that desire.”

15

2. However, the farmer-spouse’s “interest in preserving the farm should not

work to the detriment of the other spouse in determining an equitable

settlement.” The Court went on to find that an equal division was what

was equitable in this case.

3. A forced sale is not a preferable method to divide marital assets because

such a sale tends to bring lower prices.

4. When a sale is ordered, and the proceeds divided, then each party is

generally responsible for one-half of the tax consequences arising from the

sale. It is only appropriate to reduce the value of the property for tax

consequences if the property is either sold or if an ordered lump sum

payment of cash will in all probability require the liquidation of capital

assets. In this case, the Court found that the husband would be able to

take a mortgage against the property to fund the lump sum payment and

that the property would generate sufficient cash flow to make the

mortgage payments and fund the equalization payment. Therefore, the

Court refused to consider income tax consequences. The dissent disputed

the finding, especially considering the husband historically generated only

$55,000 per year in farm income.

iii. Property inherited by either party or gifts received by either party prior to or

during the marriage is the property of that party and is not subject to a property

division except upon a finding that refusal to divide that property is inequitable to

the other party or the children of the marriage. Iowa Code Ann. § 598.21(6). The

factors a court reviews to decide whether gifted or inherited property should be

divided include:

1. Contributions of the parties toward the property, its care, preservation or

improvement;

2. The existence of any independent close relationship between the donor or

testator and the spouse of the one to whom the property was given or

devised;

3. Separate contributions by the parties to their economic welfare to

whatever extent those contributions preserve the property for either of

them;

4. Any special needs of either party; and

5. Any other matter which would render it plainly unfair to a spouse or child

to have the property set aside for the exclusive enjoyment of the done or

devisee.

In re Marriage of McDermott, 827 N.W.2d 671 (Iowa 2013); In re Marriage of

Thomas, 319 N.W.2d 209 (1982); In re Marriage of Larson, 808 N.W.2d 449

(Iowa Ct. App. 2011) (inherited farmland not treated as marital property

following long-term marriage in which parties moved to the farm and in which

16

wife gave up teaching to assist on the farm and raise children, when record did not

support an intent by husband’s parents for wife to share in the farm nor evidence

of a close independent relationship between husband’s parents and wife); In re

Marriage of Hattery, 743 N.W.2d 870 (Iowa Ct. App. 2007); In re Marriage of

Stanley, 2007 WL 2963751 (Iowa Ct. App. 2007).

iv. Below-market sales may be considered gifts. See In re Marriage of Wosepka,

2008 WL 5235375 (Iowa Ct. App. 2008) (holding that mother made a gift of

approximately $160,000 to her son by selling him a farm at a below-market price.

The Court determined that the difference in the value between the sale price and

the fair market value should be considered a gift).

v. Placing property in joint ownership does not, in and of itself, destroy the separate

character of gifted or inherited property. In re Marriage of Larson, 808 N.W.2d

449 (Iowa Ct. App. 2011); In re Marriage of Liebach, 547 N.W.2d 844 (Iowa Ct.

App. 1996).

vi. Property acquired before marriage may be divided as part of the marital estate,

however the court may consider property owned by one party before the marriage

as one of several factors in determining equitable distribution. Iowa Code Ann. §

598.21(5)(b).

vii. When gifted, inherited, or premarital property appreciates during the marriage, the

Court may separately consider the nature of the asset appreciation and

contributions to the increased value in determining if and to what extent the

appreciation should be shared.

1. Appreciation of inherited or gifted property may be included in the

divisible estate. See In re Marriage of White, 537 N.W.2d 744 (Iowa

1995); In re Marriage of Friedman, 466 N.W.2d 689 (Iowa 1991) (the

appreciated value of assets may be divided where the increase is due to the

talent, time, and effort of the marital partners).

2. Even when a premarital asset is not divided as marital property, the spouse

not receiving the property may nonetheless receive a portion of the

increase in value of the premarital asset. In re Marriage of Kragel, 840

N.W.2d 727 (Iowa Ct. App. 2013); In re Marriage of Grady-Woods, 577

N.W.2d 851 (Iowa 1998).

3. Courts consider the tangible contributions of each party, the reason for

property value appreciation, the length of the marriage, and statutory

factors to determine the equitable distribution of assets that appreciate in

value. In re Marriage of Grady-Woods, 577 N.W.2d 851 (Iowa 1998).

Tangible contributions of each party during a marriage, including

homemaking, assure that one party does not receive part of the appreciated

value of property brought into the marriage merely for being present in a

relationship. In re Marriage of Grady-Woods, 577 N.W.2d 851 (Iowa

17

1998). See e.g. In re Marriage of Calhoun, 2014 WL 250240 (Iowa Ct.

App. 2014) (husband awarded 25% of appreciation of farm value after two

year marriage because husband expended effort and money to improve the

farm property; husband not entitled to one-half of the appreciation because

the marriage was short and much of the increase in value was rising land

value independent of his contributions); see also In re Marriage of Boyd,

829 N.W.2d 190 (Iowa Ct. App. 2013) (awarding the wife approximately

11% of the appreciation on the husband’s inherited farm in recognition

that the wife contributed toward the improvement of the farm, had some

health issues, and had a long-term marriage).

4. Appreciation of property value may occur due to the efforts of the parties

or to fortuitous circumstances. Some of the case law holds that greater

contributions of time and effort toward the marriage warrant a larger

distribution of the appreciated property value. See e.g. In re Marriage of

Eastman, 2003 WL 22700556 (Iowa Ct. App. 2003); In re Marriage of

Richards, 439 N.W.2d 876 (Iowa Ct. App. 1989) (an equitable distribution

of the appreciated value of inherited property “should be a function of

tangible contributions and not the mere existence of the marital

relationship”). However, the Iowa Supreme Court has refused to

differentiate fortuitous gains from gains made by the efforts of the parties,

so it is not clear how much weight this distinction carries. In re Marriage

of Fennelly, 737 N.W.2d 97 (Iowa 2007) (dividing the appreciation of the

former wife’s investments equally with the former husband even though

the increase in value was solely due to fortuitous market circumstances

and not the efforts of the husband).

V. Planning Before Marriage & Succession Planning

A. One way to remove issues about farm assets in property division is to prepare for the

possibility of a marital relationship ending by entering into a prenuptial agreement.

i. The stigma or negative association with a prenuptial agreement may be a barrier

to overcome, but the topic should be discussed with farm clients.

ii. In any situation where substantial assets, including gifted and inherited assets, it is

important to plan for the future. Farming is no different.

iii. A prenuptial agreement can always be modified if both spouses agree.

iv. The goal is to provide for a financial settlement as opposed to stock or ownership

in a family farm business. Building non-farm assets can be a way to provide a

level of security for a non-farm spouse in the event of a future dissolution.

B. Another way to remove issues, or at least lessen the issues, in the event of a farm divorce

is succession planning.

18

i. Succession planning refers to the process of transferring ownership and

management of a farming operation to a succeeding operator. This most often

applies in situations where parents wish to pass the farm on to a child or children.

ii. When giving a gift, devising property, and selling property, the transferee must

make the intention clear.

1. If property is gifted, clear written documentation must be made of the gift,

the deed should only be in the recipient’s name (not that of both spouses if

that is not the intention), and all gift tax laws must be followed.

2. A will or trust document which transfers land ownership should only be in

the recipient’s name (not that of both spouses if that is not the intention).

3. Purchase agreements for family farm land should not be accomplished by

using both spouses’ names unless that is the intention.

iii. If the intention is to have the farming spouse be the successor in the farming

operation, but not the non-farming spouse, the “joint tenants with rights of

survivorship” language must be avoided.

iv. Recall that the deed language alone may not be enough if the other spouse

contributes to the appreciation of the gifted or inherited property, has special

needs that necessitate division of such property, or has a close relationship with

the person who devised property or made a gift.