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By: Robert Moore, Thursday, June 23rd, 2022

Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law ProgramLegal Groundwork

A well-known statistic is that one-half of all marriages end in divorce.  While there is some debate as to the accuracy of this statistic, there is no doubt that many marriages do end in divorce.  According to Ohio law, all marital assets are to be divided equitably in the event of a divorce.  Equitable does not necessarily mean equal although an equal division of assets between the spouses is often the result.  It is important to note that only martial assets are subject to the equitable division between the spouses.  Non-marital assets, or separate assets, are retained by the spouse who owns the asset.

Separate assets include the following:

  • An inheritance received by a spouse during marriage
  • A gift received by a spouse during marriage
  • Property acquired by one spouse prior to the date of marriage
  • Passive income and appreciation from separate property by one spouse during marriage

The above list would seem to make it an easy exercise to determine what are marital assets and what are separate assets in a divorce.  However, like many legal issues, this is often not the case. Determining whether an asset is a marital assets or a separate asset can be complicated.  For example, Ohio law also provides that the following is a marital asset:

“… all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both of the spouses that occurred during the marriage.”

So, it is possible for an asset to be partially a marital asset and partially a separate asset.

Consider the following example:

Andy and Beth are farmers and in the process of divorcing.  Shortly after they were married, Beth inherited a 100-acre farm from her grandmother. When she inherited the farm, it was valued at $600,000.  A few years after inheriting the farm, $80,000 of drainage tile was installed on the farm paid for by Andy and Beth’s farming operation.  The current value of the farm is $1,000,000.

In this example, when Beth initially inherited the farm it was a separate asset.  However, the tile that improved the quality and value of the farm was paid for by Andy and Beth’s joint farming operation.  Therefore, Andy likely has a valid claim that at least part of the $400,000 increase in value is a marital asset due to the tile installation paid for by money earned during the marriage.

Perhaps Andy further argues that most of the increase in value was due to the fertilizer, tillage and other soil improvements made while Andy and Beth farmed the land.  Andy’s argument tries to make the entire $400,000 increase a marital asset.  Conversely, Beth argues that the land value increase was not actually earned during marriage but was merely a passive value increase due to market pressure and nothing that Andy did. Beth’s argument tries to make most of the $400,000 increase a separate asset.

As this example illustrates, an asset that is initially a separate asset can become, at least in part, a marital asset.  Both Andy and Beth have valid arguments as to their positions.  It is not hard to imagine how much time and legal fees could be spent resolving or litigating the issue in a contentious divorce.

People who own significant assets prior to marriage or may inherit assets during the marriage should consider a prenuptial agreement that will clearly identify which assets are to be marital and which assets are to be non-marital.  If the couple did not enter into a prenuptial agreement, the spouses should be careful not to taint any assets they wish to keep separate. For farm assets, this may be difficult due to the nature of improving the assets as part of the farming operation.  For some non-farm assets, such as financial accounts, it may be easier to maintain the separate status of the assets.

By: Robert Moore, Thursday, June 16th, 2022

By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program

Legal Groundwork

Second marriages can present a unique challenge for farm succession planning.  The challenge occurs when one or both spouses have children from a prior marriage.  The spouses often want a plan that will ensure the surviving spouse has adequate income for the remainder of their life but at the death of the surviving spouse they will usually want their assets to 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 succession scenario.  Mark and Mindy each have two children from previous marriages.  Mark farmed his whole 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.  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 ultimately go to his children and not Mindy’s children.

Let’s first look at what a bad plan 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.  Let’s assume they each have a will that says everything to each other then to the children.  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 succession plan.

The better plan is to use a trust.  The trust can hold the deceased spouse’s assets in trust 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.

Using the example above, Mark establishes a trust with the following terms: “Upon my death, my 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.”  This trust will provide income to Mindy but ultimately distribute the assets to Mark’s children.

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 these provisions: “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.”

As the examples show, trusts can be very effective at establishing plans for second marriages.  The surviving spouse can be provided with adequate income while protecting the assets for the deceased spouse’s children.  A simple plan or no plan can result in some or all of the deceased spouse’s assets being inherited by the other spouse’s children.  A trust can be designed with a great deal of flexibility and creativity. Farmer’s in second marriages should consult with legal counsel to determine if a trust may be best for their succession plan.

By: Robert Moore, Thursday, June 09th, 2022

Legal GroundworkBy Robert Moore

Attorney/Research Specialist

 

In the prior post, we explained partition and the risk it poses to family farmland.  Fortunately, there are a few strategies that can be implemented to avoid partition. 

One strategy that can prevent partition is the use of a Limited Liability Company (LLC).  The concept of using the LLC is to replace the multiple owners of the land with one LLC owning the land.  Then, those same owners own the LLC rather than the land.  Partition rights only apply to real estate, not to business entities.  So, instead of three people owning the land, three people own an LLC that owns the land.  Since there are no partition rights with an LLC, no one owner can force the sale of the land. 

Consider the following example.  Andy, Betty and Charlie are siblings and own a farm together.  Each is aware of partition rights and wants to prevent any of the owners, including future owners, from exercising their partition rights.  They establish an LLC and transfer the land into ABC Family Farms LLC.  The LLC operating agreement states that land can only be sold with the consent of all members. 

The three owners of the land have eliminated the threat of partition to the family farmland.  The legal owner of the farmland is now the LLC, not the three siblings.  Andy, Betty and Charlie are the owners of the LLC but Ohio law does not provide for partition rights of an LLC.  Additionally, as added protection, the siblings require unanimous consent before any of the land in the LLC can be sold.  By placing the land in the LLC, the three owners have ensured that the only way the farm will leave the family is by joint agreement of the family.  A well-designed LLC can make it nearly impossible for land to leave the family without the agreement of the family. 

The above example illustrates how an LLC prevents partition by the owners and family members, but LLCs also protect against creditors and lawsuits.  Let’s assume Andy has financial problems and creditors have filed and won lawsuits against him.  Without the LLC, the creditor could force the sale of the land through foreclosure on Andy’s share.  However, Ohio law only allows creditors to attach to an LLC owner’s interest.  This means that a creditor is entitled to an owner’s share of the LLC profits but cannot force the sale of the assets owned by the LLC.  In this example, Andy’s’s creditors are entitled to receive his share of the profits from the LLC but cannot force the sale of the land.  An LLC can prevent an owner’s financial problems or lawsuits from causing the sale of family farmland.  

LLCs are often used in estate and succession planning to protect the family farmland.  Instead of multiple family members inheriting land (and the risk of partition), mom and dad may establish an LLC for the farmland.  Then, the children inherit the LLC without the partition rights.  By transferring the land via an LLC, mom and dad do not need to worry that one child or their creditors will force the family farmland to be sold. 

Consider the following example.  Mom and Dad want their three children to inherit their farmland.  They would like their children to own the farmland together as it is too difficult to divide up the land equitably.  Mom and Dad are aware of partition rights and want to make sure that no co-owner can force the sale of land against the family’s wishes.  Mom and Dad transfer their land to an LLC.  Their three children will inherit the LLC with the land.  Because each child will own an interest in the LLC, and not an interest in the real estate directly, partition rights are not available.  Mom and Dad also established the LLC with the requirement that any transfers of land require unanimous consent of all the members. 

This example illustrates how LLCs can be incorporated into estate plans to minimize the risks of partition.  By having multiple heirs and beneficiaries inherit the LLC, and not the land itself, the land will not be transferred out of the family due to partition.  We often think of using LLCs for liability protection but LLCs may be even more valuable to protect against partition rights. 

Another way to protect against partition rights for heirs is to use a trust.  With this strategy, the land is owned by a trust rather than the beneficiaries. Since the beneficiaries do not legally own the land, they are not entitled to partition rights.  The disadvantage to this strategy is that the trust beneficiaries will not be able to use the assets as collateral nor to build their wealth. 

Consider the following example. Mom and Dad want their children to have the benefit of their land upon inheritance but want to be 100% sure that their children do not sell the land before their grandchildren can inherit it. Mom and Dad establish a trust that holds the land for their children’s lives. During the children’s lives, the children receive the rent but do not own the land. Thus, the children cannot take action to sell the land. Upon the death of the children, the grandchildren will receive the land. 

While the land is in trust, the children do not own the land. Thus, they do not have partition rights and cannot force the sale of the land. The grandchildren are nearly certain to inherit the land. On the other hand, the land is not available as collateral for a loan and the other benefits of ownership are not available to the children. 

As the example shows, trusts are an excellent method to avoid partition. However, trusts also severely restrict the rights of the beneficiaries while the land is held in trust. A careful analysis of the benefits and disadvantages of using a trust to avoid partition must be carefully considered. 

In conclusion, before allowing land to be owned jointly, the owners should consider the risks of a forced sale of the land through partition. Partition can be avoided by using LLCs or trusts to hold the land. Be sure to consult an attorney to determine the best course of action to address the perils of partition. 

Posted In: Property
Tags: Partition, Forced Sale, LLC, trusts
Comments: 0
Vintage cowgirl on a horse with a lasso
By: Peggy Kirk Hall, Monday, June 06th, 2022

It's time for another roundup of legal questions we've been receiving in the Agricultural & Resource Law Program.  Our sampling this month includes registering a business, starting a butchery, noxious weed liability in a farm lease situation, promoting local craft beer at a farmers market, herd share agreements, and agritourism's exemption from zoning.  Read on to hear the answers to these questions from across the state.

I want to name my farm business but am not an LLC or corporation.  Do I have to register the name I want to use for the business?

Yes, if your business name won’t be your personal name and even if the business is not a formally organized entity such as an LLC.  You must register the business with the Ohio Secretary of State.  First, make sure the name you want to use is not already registered by another business.  Check the name availability using the Secretary of State’s business name search tool at https://businesssearch.ohiosos.gov/.  If the name is available, register the name with the Secretary of State using the form at https://www.sos.state.oh.us/businesses/filing-forms--fee-schedule/#name.  If there is already a business registered with the name you want to use, you might be able to register a similar name if your proposed name is “distinguishable” from the registered name. The Secretary of State reviews names to make sure they are not already registered and are distinguishable from similar names.  See the Guide to Name Availability page for examples of when names are or are not distinguishable from one another.

I am interested in starting a small butchery.  What resources and information are helpful for beginning this endeavor?

There are legal issues associated with beginning a meat processing operation, and there are also feasibility issues to first consider.  A good resource for initial considerations to make for starting a meat processing business is this toolkit from OSU at https://meatsci.osu.edu/programs/meat-processing-business-toolkit.   A similar resource that targets niche meat marketers is at https://www.nichemeatprocessing.org/get-started/.  On the legal side, requirements vary depending on whether you will only process meat as a custom operator or fully inspected operator, and if you also want to sell the meat through your own meat market.  The Ohio Department of Agriculture’s Division of Meat Inspection has licensing information for different types of processors here:  https://agri.ohio.gov/divisions/meat-inspection/home.  If you also want to have a retail meat market, you’ll need a retail food establishment (RFE) license from your local health department.  To help you with that process, it’s likely that your health department will have a food facility plan review resource like this one from the Putnam County Health Department.

Is Ohio’s noxious weeds law enforceable against the tenant operator of my farm, or just against me as the landowner?

Ohio’s noxious weed law states that the township trustees, upon receiving written information that noxious weeds are on land in their township, must notify the “owner, lessee, agent, or tenant having charge of the land.”  This language means that the trustees are to notify a tenant operator if the operator is the one who is in charge of the land where the noxious weeds exist.  The law then requires the notified party –which should be the tenant operator—to cut or destroy the noxious weeds within five days or show why there is no need to do so.  The concern with a rental situation like yours is that if the tenant does not destroy the weeds in five days, the law requires the township to hire someone to do so and assess the costs of removal as a lien on the land.  This puts you as the landowner at risk of financial responsibility for the lien and would require you to seek recourse against the tenant operator if you want to recover those costs.  Another option is to take care of removing the noxious weeds yourself, but that could possibly expose you to a claim of crop damages from the tenant operator.  A written farm lease can address this situation by clearing shifting the responsibility for noxious weeds in the crop to the tenant operator and stating how to deal with crop damages if the landowner must step in and destroy the noxious weeds.

Can we promote local craft beers at our farmers market?

Ohio established a new “F-11” permit in H.B. 674 last year.  The F-11 is a temporary permit that allows a qualifying non-profit organization to organize and conduct an event that introduces, showcases, or promotes Ohio craft beers that are sold at the event. There are restrictions on how long the event can last, how much beer can be sold, who can participate in the event, and requirements that food must also be sold at the event. The permit is $60 per day for up to 3 days.  Learn more about the permit on the Department of Commerce website at  https://com.ohio.gov/divisions-and-programs/liquor-control/new-permit-info/guides-and-resources/permit-class-types.

Can a goat herdsman legally provide goat milk through a herd share agreement program? 

Herd share agreements raise the raw milk controversy and whether it’s legal or safe to sell or consume raw milk.  Ohio statutory law does clearly prohibit the sales of raw milk to an “ultimate consumer” in ORC 971.04, on the basis that raw milk poses a food safety risk to consumers.  But the law does not prohibit animal owners from consuming raw milk from their own animals.  A herd share agreement sells ownership in an animal, rather than selling the raw milk from the animal.  Under the agreement, a person who pays the producer for a share of ownership in the animal may take their share of milk from the animal.  The Ohio Department of Agriculture challenged the use of herd share agreements as illegal in the 2006 case of Schitmeyer v. ODA, but the court did not uphold the ODA’s attempt to revoke the license of the dairy that was using herd share agreements.  As a result, it appears that the herd share agreement approach for raw milk sales is currently legally acceptable.  But many still claim that raw milk consumption is risky because the lack of pasteurization can allow harmful bacteria to exist in the milk. 

Can the township prohibit me from having a farm animal petting zoo on my hay farm?

It depends whether you qualify for the “agritourism exemption” granted in Ohio law.  The agritourism exemption states that a county or township can’t use its zoning authority to prohibit “agritourism,” although it may have same zoning regulations that affect agritourism buildings, parking lots, and access to and from the property.  “Agritourism” is an agriculturally related entertainment, recreational, cultural, educational or historical activity that takes place on a working farm where a certain amount of commercial agricultural production is also taking place. If you have more than ten acres in commercial production, like growing and selling your alfalfa, or you have less than ten acres but averaged more than $2,500 in gross sales from your alfalfa, you qualify under the agritourism exemption and the township zoning authorities cannot prohibit you from having your petting zoo.  However, any zoning regulations the township has for ingress and egress on your property, buildings used primarily for your petting zoo, or necessary parking areas would apply to your petting zoo activity. If you don't qualify as "agritourism," the township zoning regulations could apply to the petting zoo activity, and you must determine whether a petting zoo is a permitted use according to your zoning district, which could depend upon whether or not you want to operate the petting zoo as a commercial business.