Family gift may be more trouble than it’s worth

What happens in a family of four children when three of the children have left the farm and one stays to help nurture and grow the asset?

In the succession plan do they all get a proportional value of the farm or does the child who has remained on the farm receive more to reflect his or her labour, input and commitment?

Either way, disagreement and perhaps ill feelings will arise from the process.

Tom Dean, author of the best-selling 2008 book Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth, suggests that “you gift your wealth and wisdom but not your business.”

He thinks that giving the business to the kids can be “incredibly toxic and maybe the most dangerous idea a business owner can pursue.”

One approach might be to ask the children to return cash bequeathed them for shares in the business. This will give them risk as well as commitment to the future growth of the business.

However, Dean thinks most children would rather take the money and do something about which they are passionate.

It may feel noble to pass along the family farm, but it might be more of a millstone to the beneficiaries if they have neither the interest nor commitment to the operation.

The trick is to start the succession planning early, involving the children so that their interests are known and considered and so they can influence the final structure of the plan.

Dean suggests that one simple question in the planning process can reduce the work involved and set a clear path.

Ask the children, “who wants to risk their inheritance to purchase the business?”

If the answer is no one, Dean said the parents should start planning the sale of the business at best value and plan to give the cash to the children through the will.

A fairly long planning process is sometimes required to sell the farm. In many cases, the owners think values will get better down the road or they simply over-value the property at the outset.

Canadian farms are decreasing in numbers as they increase in size to take advantage of economies of scale.

Dean suggests asking these additional questions of family members:

  • What will our business look like in five years?
  • Is anyone interested in buying the stock and gaining control?
  • Will someone sell his or her stock, and if the answer is yes, to whom?
  • Does anyone believe that the business can be sold to a third party in the interest of maximizing shareholder value?
  • To secure our future prosperity, should we keep the business and invest more money in it or sell it?

Grant Diamond is a tax analyst in Kelowna, B.C. with FBC, a company that specializes in farm tax. Contact: [email protected] or 800-265-1002.