I have been practicing with the same firm in Kearney, Buffalo County, Nebraska for just under 17 years. When I joined my firm, I expected that I would spend the vast majority of my practice involved in the transactional setting as my college and legal education focused on business principles including economics, finance and accounting. Lo and behold, I discovered that given the opportunity, I really enjoyed being in the courtroom. As such, my practice included more and more litigation, including litigation in what is often coined “Farm Divorces”.
What is a Farm Divorce? A Farm Divorce is exactly what it sounds like, a divorce between two people in which at least one (and often times both) spouse(s) are involved in farming, ranching, or both. Although procedurally, a Farm Divorce really is no different than a divorce involving W-2 wage earners, substantively, it is considerably different. That is not to say that the following issues do not exist in an off farm divorce setting, however, I have noticed a few common threads, which I am almost invariably asked about at my first meeting (regardless if I am representing the spouse that is or is not the actual producer). So, to those of you who might find yourself in the unenviable position of being a participant in a Farm Divorce, I will discuss a few of those commonalities in this blog and upcoming supplements. In this first installment, I will discuss what is known as Van Newkirk exception which is best explained by the following question and example:
Q: My spouse was farming and/or ranching before we were married, and already owned the real estate, machinery, equipment and/or livestock. Does that matter?
A: Yes and no. Although premarital property is set aside to the spouse who owned the asset prior to the marriage, two exceptions have developed in which a court may consider the premarital property in dividing the marital estate {I will discuss the second exception in PART TWO FARM DIVORCE 101}. The first exception is the Van Newkirk exception. The Van Newkirk exception states that although a spouse may have a premarital asset, if during the marriage the value of the asset increases either due to significant efforts of the spouse or by the infusion of marital assets to improve the nature and extent of the asset, the increase due to those significant efforts or the infusion of martial assets will be included in the marital estate. There are a few nuggets here that are easily seen through an example:
Ex. #1: Spouse has quarter section of dry land ground prior to marriage which abuts the home place in which outbuildings and the home sit. Non-farming spouse does not work on the farm and instead is a W-2 wage earner. During marriage, a well is installed and a power unit with a pivot is placed on the quarter section. All of the costs associated with the well, power unit and pivot are paid for with proceeds from the sale of premarital grain which was harvested and stored in the bins with the resulting sale proceeds being reported on the joint state and federal tax return of the parties. What is the effect of the installation of the well, power unit and pivot?
Answer: The power unit and pivot are most likely non-marital assets traced to the premarital grain. However, an argument can be made that the placement of the well, power unit and pivot have increased the value of the quarter section as it was previously dry ground and is obviously now irrigated ground. The question here is whether or not the reporting, and therefore payment of taxes, of the grain sales is a significant effort or the infusion of marital assets. It is most likely not a significant effort as that is generally tied to manual efforts, but certainly can come with the infusion of marital assets since the sale of grain was taxed on the couple as a unit. If the spouse can get an opinion as to the increase of the value of the land attributable to the placement of the well, power unit and pivot, the increased value may very well be a marital asset.
Ex #2: Same as Example #1, but this time, non-farming spouse works on the farm and along with farming spouse, provides 100% of the labor associated with the installation of the well, power unit and pivot. Additionally, in order to render the quarter section capable of running a pivot, both spouse are involved in dirt work to remove trees, fencing and remove hilly terrain from the parcel.
Answer: In this example, the cost savings of the labor and expense associated with the placement of the well, power unit and pivot, as well as the dirt work, removal of trees and fencing, along with the fact that the grain sales are taxed jointly to the parties, may give rise to the significant efforts needed to warrant the increase of the value of the quarter section in the martial estate.
Ex #3: Same as Example #1, except the cost associated with the placement of the well, power unit and pivot are paid from loan proceeds in which marital earnings are used to pay down the principal and interest.
Answer: In this scenario, Van Newkirk need not apply to the well, power unit and pivot as they are clearly marital assets. However, you now have a better case that the increased value in the quarter section from dry land to irrigated ground is marital because of the infusion of marital funds needed to pay off the loan.
These examples are not meant to be exhaustive, but only to give you an idea that the Van Newkirk exception has varied application. Sometimes you may need to look at the exception, sometimes not. The point is that in addressing any one situation, you need to look at all of the facts before just tossing up your hands merely because your spouse may have owned an asset prior to the marriage.
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