second marriages
Second marriages present unique challenges for farm transition planning. This is especially true when the second marriage occurs later in life and the spouses have accrued significant assets and/or have children from prior marriages. The spouses in a second marriage obviously want to help provide for each other but may have a competing interest of providing for their children but not necessarily stepchildren. Without good planning, it is possible that farm assets will end up with a spouse or stepchildren who were not involved in the farming operation.
One of the challenges with second marriages occurs when one or both spouses have children from a prior marriage. The spouses usually intend to provide adequate income to the surviving spouse upon the death of the first spouse to pass away. Also, the spouses will usually want some or all of their assets to ultimately go to their children, not their spouse’s children. So, the issue becomes, how to establish a plan to take care of the surviving spouse while ensuring the deceased spouse’s assets go to their own children?
Consider the following example, a typical second-marriage, farm transition scenario:
Mark and Mindy each have two children from previous marriages. Mark has farmed his entire adult life and built a large farming operation prior to marrying Mindy. Mindy has two children and is not involved in the farming operation. Mark’s two children plan to take over the farming operation. If Mark dies before Mindy, he wants to make sure Mindy has adequate income for the rest of her life. However, he wants his assets to be inherited by his children and not Mindy’s children.
Let’s first look at what poor planning might look like. If Mark and Mindy do not have an estate plan or a simple estate plan where everything goes to the surviving spouse then to the children, Mindy’s children could end up with some or all of Mark’s assets. In this scenario, if Mark dies first, all of his assets will go to Mindy. At that point, Mindy will have total control of the assets and could sell them all or leave them all to her children. For second marriages, no plan or a simple plan is usually not adequate to meet the goals of a farm transition plan.
The better plan is to use a trust. A trust can hold the deceased spouse’s assets for the surviving spouse’s life, thus providing income. Then, at the surviving spouse’s death, the assets are distributed to the deceased spouse’s children. The surviving spouse never has ownership of the deceased spouse’s trust assets, so the assets are never in danger of ending up with the surviving spouse’s children.
Continuing the previous example, Mark establishes a trust with the following terms:
“Upon my death, my farm assets shall be held in trust for the life of Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. Upon the death of Mindy, my Trustee shall distribute the assets to my children.”
These trust provisions will meet Mark’s goals of providing for Mindy while having his children eventually inherit his assets.
Sometimes we may want some assets to go directly to the deceased spouse’s children at death and some held in trust. This is very common for farm plans. When children will be taking over the farming operation, we may not want to tie up the operating assets in trust but instead have those go directly to the farming children. To implement this plan, the trust may have provisions similar to the following:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions allow the farming operation to be inherited directly by Mark’s children, allowing a seamless transfer of the farming operation. The farmland is held in trust and leased by the children. The rental income from the farmland is provided to Mindy for the remainder of her life.
A third variation provides some assets outright to the children, some assets outright to the surviving spouse and some assets held in trust. This type of plan might be used when the spouses wish for some assets to go directly to the surviving spouse, without being held in trust. This is often done with cash or other financial accounts to provide immediate and freely available money to the surviving spouse. Trust provisions reflecting this type of plan may be as follows:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. My Trustee shall distribute my First National Bank account and Acme Financial Account to Mindy, outright and free of trust. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions provide cash to Mindy for which she has immediate access and control. The farm assets continue to go directly to the children so that they can continue the farming operation and the farmland is held in trust to provide income for Mindy.
In conclusion, a trust can be designed with a great deal of flexibility and creativity. The surviving spouse can be provided with adequate income while protecting the assets for the deceased spouse’s children. A simple transition plan or no plan at all can result in some or all the deceased spouse’s assets being inherited by the surviving spouse’s children. Trusts are often an important component of a farm transition plan for second marriage scenarios.
In Part 2, we will discuss prenuptial and postnuptial agreements.
Tags: second marriages, farm transition planning
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Second marriages present unique challenges for farm transition planning. This is especially true when the second marriage occurs later in life and the spouses have accrued significant assets and/or have children from prior marriages. The spouses in a second marriage obviously want to help provide for each other but may have a competing interest of providing for their children but not necessarily stepchildren. Without good planning, it is possible that farm assets will end up with a spouse or stepchildren who were not involved in the farming operation.
Farm Transition Planning Strategies for Second Marriages, a new bulletin available at farmoffice.osu.edu, addresses the two most common sources of risk to farming operations when a second marriage is involved – death and divorce. While these risks cannot be eliminated, there are strategies to help minimize the risks to ensure, as best we can, that farm assets stay with the farm family. The bulletin discusses the strategies and how they can be integrated into a farm transition plan.
Strategies to protect farms from the death of a second spouse mostly involves incorporating a trust in the farm transition plan. A trust can hold assets for the surviving spouse without giving legal ownership to the spouse. The trust serves the dual purpose of providing income and other resources for the surviving spouse while also protecting those assets to ultimately be inherited by the deceased spouse’s heirs. Trusts are an excellent tool to both provide for spouses and protect assets for future generations.
Prenuptial and postnuptial agreements can be used to reduce the risks of divorce. These agreements between spouses specifically identify which assets are considered joint, marital assets and which assets are to be considered outside of the marriage. These designations can help safeguard farm assets by keeping them immune from a division of assets in a divorce. A recent change in the law allows spouses to enter into such an agreement even after the marriage has occurred.
Any farmers who are in a second marriage should consider including a trust and/or pre/postnuptial agreement into their farm transition plan. An attorney experienced in farm transition planning can assist with deciding if a trust or marriage agreement is needed and how best to integrate into a farm transition plan. The Farm Transition Planning Strategies for Second Marriages bulletin provides a detailed discussion of trusts and marriage agreements and their potential impact on farm transition planning.
Tags: second marriages, farm transition planning
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Under Ohio law, a spouse cannot be disinherited by a will. Through a concept known as elective share, the surviving spouse may elect to receive what is provided for in the deceased spouse’s will or receive what is provided by law. How much the surviving spouse receives from the elective share depends on the family status of the deceased spouse. The following is the elective share for spouses as provided by the Ohio Revised Code:
- If the decedent (deceased spouse) died with a spouse but no descendants, the surviving spouse inherits the entire probate estate.
- If the decedent died with a spouse, and their only descendants were also descendants of the surviving spouse, the surviving spouse inherits the entire probate estate.
- If the decedent died with a spouse and one child who is not the child of the surviving spouse, the surviving spouse inherits the first $20,000 of the probate estate, plus half of the remaining estate. The child takes the rest.
- If the decedent died with a spouse and multiple children who were not children of the surviving spouse, and at least one child together with the surviving spouse, the surviving spouse inherits the first $60,000 of the estate and one-third of the balance, with the descendants who were unrelated to the surviving spouse taking the rest.
- If the decedent died with a spouse and multiple children who were not children of the surviving spouse, and no children together with the surviving spouse, the surviving spouse inherits the first $20,000 of the probate estate and one-third of the balance, with the descendants who were unrelated to the surviving spouse taking the rest.
Consider the following example as to how the elective share is applied:
Mark and Mindy each have two children from previous marriages. Mark has farmed his entire life and built a large farming operation prior to marrying Mindy. Mindy is not involved in the farming operation. Mark’s two children plan to take over the farming operation. Mark executes a Will that leaves all his assets to his children. Mark believes the Will causes all his assets to go to his children at death. After Mark’s death, Mindy decides to take her elective share. Because there are multiple children from a previous marriage, Mindy will receive $20,000 plus one-third of Mark’s assets.
As the above example illustrates, Mark could not disinherit Mindy using his will. Under Ohio law, Mindy had the right to receive assets from Mark’s estate even though he had left nothing in his will for Mindy. The same would apply if Mark had no will at all which is called intestacy. In intestate estates, the elective share also applies.
It should be noted that the elective share only applies to probate assets. Assets that are disposed of through a trust[1] or a transfer/payable on death beneficiary are not subject to the elective share. If Mark had all his assets in a trust and left nothing for Mindy, Mindy could not elect against the trust assets because they were not subject to probate jurisdiction. Also, if Mark had his children as payable on death beneficiaries of all his financial accounts, Mindy could not make an elective share against those financial accounts either.
Due to the ability to avoid the elective share, trusts can be valuable tools in farm succession planning involving second marriages. In the next installment, we will continue our discussion of planning with second marriages by explaining how trusts can be used to provide for the surviving spouse while ensuring the assets end up with the deceased spouse’s children.
[1] To avoid probate, assets must be titled to the trust or be titled payable/transfer on death to the trust. Assets that must go through a “pour over” will before being transferred to the trust are subject to probate.
Tags: second marriages, farm succession planning
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