Farmland “Inherited” Through Family Settlement Agreement is Marital Property

February 21, 2013 | Erika Eckley

In Iowa, when a couple divorces, marital property must be equitably distributed during the dissolution process. In determining what is equitable, the court looks at several factors. These include the length of the marriage, the parties’ contributions to the improvement of property, whether the property was the family home and provided a source of livelihood for the family, and the parties’ ability to support themselves after the separation. Typically, though, property inherited by one party is not considered marital property. Unless specific circumstances exist, inherited property will not be included in the equitable distribution. In a recent Iowa Court of Appeals case, the court was asked to review the distribution of assets between a couple and to determine whether the property was marital property or part of the husband’s inheritance.

The parties had been married for thirteen years. Both had full-time jobs throughout the marriage. The husband’s parents owned farmland in Iowa. The farmland was placed in a trust following the father’s death with the mother receiving a life estate and the husband and his sister receiving the remainder interest. The husband also purchased 360 acres of farmland from his mother with her interest in the sales contract placed in a trust.  Following the death of his mother, the husband entered into a family settlement agreement with his sister and received all of the farmland. The husband and wife took out a loan to pay the sister pursuant to the settlement agreement.

During the marriage, the husband operated the farm, which was financed through the couple’s wages from their full-time jobs. The loans incurred for the farmland were also paid from the parties’ wages. The value of the farmland increased significantly during the course of the marriage. After a trial on the dissolution, the trial court set aside 50% of the current value of the real estate as inherited property belonging solely to the husband. The court then divided the other 50% between the husband and wife as marital property. The loan to pay the family settlement was determined to be marital debt to be distributed as well.

In the distribution, the husband received the farmland, farm equipment, and his interest in other company assets. The wife was awarded her 401K, vehicle and personal property. The court ordered an equalization payment of $448,107 to be paid by the husband to the wife to cover the difference in the value of the assets received by the parties. The husband argued that all of the farmland should have been treated as inherited property and appealed the distribution and equalization payment.

On review, the appellate court agreed with the trial court that the farmland received through the family settlement agreement was a mixture of inherited property and marital property, the purchase of which was financed through a marital loan. The court agreed that the entirety of the land was only “inherited” in the sense that the title to all the lands derived from the husband’s parents or their estates or trusts, but the husband was required to purchase some of the land from his sister.

The court also upheld the equalization payment to the wife. The husband had a net estate of $237,720 when the parties married. At the time of the trial, the husband had a net worth of at least $1.34 million. The farmland alone was appraised at $2.2 million. The court agreed that the husband had an appreciation in his net worth of more than $1 million during the course of the marriage. Because some of the farmland had been purchased with marital funds as part of a settlement agreement, the wife was entitled to a portion of this increase in value. The court reasoned that the equalization payment of $448,107 was less than one-half of the husband’s increase in net worth. Because of this, the court affirmed the property distribution as equitable. In re Marriage of Klingaman, No. 2-992/11-1839, 2013 Iowa App. LEXIS 191 (Iowa Ct. App. Feb. 13, 2013).