by Stacey N. Warren

When families engage in active estate planning, parents (or grandparents) make gifts to children (or grandchildren) to transition a family farm or a business from one generation to the next. Usually, they do it with tax planning purposes in mind, so the farm or business will remain within their family. They want it to stay intact. Besides receiving gifts under a family estate plan, a party may receive an inheritance from immediate or extended family members who have passed away. But what happens to those gifts or inheritances when you go through a divorce?

In a divorce, the court makes a property division as part of the final decree, dividing all of the parties’ assets and liabilities. It considers several factors in determining how those assets and liabilities are to be divided between the spouses. The court is not required to divide each asset equally between the parties. Instead, it is obligated to divide all property equitably. 

However, Iowa is a state with a rich agricultural history. Its divorce laws were crafted to protect gifts and inherited property (which, for many, included land). Iowa Code Section 598.21(5) exempts specifically the inherited property or gifts received or expected by one party from being included in the property division. But gifts or inheritances may be divided if the court finds it is “inequitable” or unfair to the other party or children of the marriage to exclude that gift or inheritance. See Iowa Code §598.21(6) (2020). 

When is it inequitable or unfair to exclude the gifted or inherited property for the final division of property? When no premarital agreement exists, and there is no stipulation where parties reach an interim division of property, the court must analyze the gifts or inheritances if a party claims it is inequitable to exclude it from the property division. The court’s analysis will include an assessment of factors which include, but are not limited to:

  1. contributions made by each party to the property and its care or preservation;
  2. existences of independent close relationships between the gift-givers and the spouse who did not receive the gift;
  3. separate contributions by the parties to preserve the property for either of them;
  4. the special needs of either party; and
  5. any other factor that would make it “plainly unfair” to a spouse or a child to have the property set aside for the exclusive use of the one who received the gift.

When this happens, a party may call multiple family members, family estate planning attorneys, family CPAs, and even family bankers to testify so the court may weigh the factors. Each side may also retain experts to give opinions about the current value of gifted and inherited assets, including farmland values, equipment values, or even the value of a family business.

If you want to avoid contentious and time-consuming litigation and the circumstances described above where your gifted or inherited property could be divided, a premarital agreement can help. It is the best way to protect gifted or inherited assets and preserve generational peace of mind. Iowa does not recognize post-nuptial agreements. Even if the gifted or inherited property does not have significant value now, a premarital agreement can protect you from having to divide value later, and anything else you may receive by way of gift or inheritance in the future.