Farm succession planning can represent a challenge for most producers. Advice from accountants and business consultants will provide a process, but ultimately the hard work of filling in the blanks will come from the prospective retirees themselves.
In a user friendly format, The family farm business succession checklist … approaching the porcupine from British Columbia’s agriculture department presents a farm succession to-do list under five headings, and professionals consulted for this story agreed with these.
1.Data collection is important, which means getting all the information together. This will include the estimated value of your farm, equipment, livestock, farm buildings, farm residences, quotas and inventory.
Estimate the value of assets, machinery and livestock on separate sheets. Help in this task can be obtained from other farmers, business contacts and your local machinery dealer. Keep in mind that there is likely to be a future tax liability that will have to be factored into the sale price for your children.
2. Take some time to review the most critical issues: ownership, control, management and security.
What will that look like? Is your farm a corporation or a company now? Will it be in the future? Who will be in charge? Who will live on the farm? What about non-farming children? How will they be treated fairly if not equally?
Could you work with your child? Could you treat your child as a business partner? Does your child have management experience?
Are you concerned about the stability of your farming child’s marriage? If there is a marriage breakdown, an in-law could end up with a larger share of your estate than your own non-farm children.
Who’s in charge here? Do you want to retain some control while you still have a significant investment in the farm, or will you be OK with having a say only over the big decisions such as the purchase and sale of assets? Will you hand over management completely, or not?
Are you prepared to act as banker on a sale to your child or will you expect her to cash you out in whole or in part? As banker, will you want interest in the first few years of the agreement?
Do you want your name to remain on the land titles until the child pays what is owed to you?
What future income (or debt repayments) do you need to receive from the farm? Estimate the income you will need to meet your living costs.
What financial commitments do you have to your other children?
What is the farm’s ability to make payments to you and support your child?
An Alberta farm family converted their farmhouse into a duplex for one farming child and her family and moved another house into the same yard for another farming child. For some people, that might be a little too much togetherness. Then again, setting up a new farmyard is expensive. Bringing in utilities and setting up a water supply can get very pricey.
When it comes to inheritances, an equitable arrangement is not necessarily an equal one. This is not your neighbour’s succession plan. What do your people want? What works for you?
What assets will ultimately pass to your non-farming children?
Are you concerned that one or more of your children might challenge your overall succession plan after your death?
3. Goal setting means getting everyone to say or preferably write down their goals. The answers might surprise you and they might confuse or discourage you, but before you can go forward, you first need to know where you are now and where you want to go.
Can you align your goals with your financial situation? All family members must establish their priorities by discussing what each one needs and wants.
“The family farm cannot usually be transferred to the next generation at fair market value without jeopardizing the ability of the farming child to meet the various needs. Some form of subsidization is usually necessary, in the form of a deferred withdrawal of the parents’ investment, reduced interest rates or a reduction in the transfer price. The real question to be answered by you is whether the amount of subsidization required to make the transfer feasible is consistent with your goals.”
4. Use succession planning tools such as tax tools, business arrangements, methods of owning property, will planning and life insurance.
After completing the first three steps, you probably have some idea of the general direction in which you should be headed. Let’s look at some tools you will find helpful in this succession plan.
Certain types of farm property can be “rolled over” or transferred from one generation to the next without tax.
Farm property eligible for “rollover” includes land, buildings, machinery, quota, shares of certain farm companies and interests in certain farm partnerships. Livestock are not eligible but can be transferred to a child without immediate tax consequences, provided the purchase price is not paid at the time of sale.
Property can also be “rolled over” to a partnership or company. The property eligible for this sort of “rollover” includes all the assets that can be “rolled” to a child, plus livestock.
However, there are conditions that must be met. These will be reviewed with you when you begin to develop your plan in detail.
Farmers can realize up to $750,000 of capital gains on qualifying farm property without being subject to tax by offsetting their gains with the capital gains deduction (CGD). Only one half of your capital gains is subject to tax, which means only half of the CGD or $375,000 can be applied to offset your capital gains. If both parents own the farm property jointly, each of them may be entitled to this tax-free gain.
The CGD applies only to the gains on certain assets. Generally speaking these assets are land, buildings, quota, interests in certain farm partnerships and shares of certain farm companies.
This is a complicated area that will have to be explored in depth with your adviser at the time your options are examined.
Income from sale of livestock, recaptured depreciation on buildings and machinery, recaptured write-offs on quota and some other types of income will not be eligible for the CGD.
A farmer who sells his land or buildings, an interest in a farm partnership or shares of a farm company and receives the sales proceeds over several years is usually able to spread his capital gain over a period of up to 10 years by claiming a reserve in respect of the unpaid sales price.
Clearly this tax commentary is very general and highlights only a few of the tax rules that might affect your final plan. However, it should give you a better idea of how you might achieve the general objectives you established in Step 3.
There are several business arrangements you can use to transfer the farm to your child. The best arrangement for you will depend on factors such as:
- Whether you want to continue to exercise some control over the farm. This control could be limited to major decisions and purchases or could include the day-today management of the farm as well.
- Whether you are looking for a temporary arrangement or an outright sale, the value of your farm, the number of children interested in farming and the current business arrangement. If you now carry on business as a sole proprietor or a partnership, you have more flexibility in structuring an arrangement with your child than if your farm is held in a company.
If you own your land directly and want to sell your property to a child but want to preserve your interest in your home, consider a life interest. This would entitle you to use of the property throughout the remainder of your life. Your interest would be registered so that it cannot be taken away or disposed of without your consent. Your child would receive what is called “a remainder interest,” which guarantees ownership subject to the rights contained in your life interest.
You can secure amounts owing to you as a result of a sale of land and buildings by:
- Carrying out the transaction through an agreement for sale and retaining legal title until the debt is paid off.
- Taking mortgage security.
In British Columbia there is also a Personal Property Security Act that is intended to provide a uniform system for secured transactions other than real estate.
Where property (such as land) is owned jointly with another person, it can either be held by them as tenants in common or as joint tenants. There are important distinctions between these methods of ownership:
- If property is held in a tenancy in common, each co-owner is able to bequeath or otherwise dispose of their interest in the property independently of the other co-owners.
- If property is held in a joint tenancy arrangement, it means that on the death of one of the co-owners, the deceased owner’s interest passes automatically to the surviving joint tenant(s) outside of the deceased’s estate. Because the deceased person’s interest transfers in this manner, there are no probate fees, the transfer cannot be defeated by other members of the deceased’s family and the interest in the property is not available to creditors of the estate.
Your will is a legally enforceable document that takes effect on your death. It describes your wishes regarding the property in your estate and deals with a number of other matters. It is important that both spouses have up-to-date wills. Your will should match your ages and farm status. Provisions in your will that might enable you to complete your farm transfer include:
- Purchase option: If you have concluded that one or more of your children should have the ability to acquire your farm, but you have not yet completed the transaction, you could consider putting an “emergency plan” in your will so that your child will have an option to complete the purchase from your estate if you were to die suddenly. Your will would state how the price and the interest rate, if any, is to be determined and the basis upon which it would be paid.
- Trusts: You could request that a trust be created through your will if any portion of your estate passes to a beneficiary who is a minor. The trustees you name will look after the assets in the trust until the beneficiary becomes an adult. You can also arrange for property that would be inherited by your spouse to be transferred to a trust for that person. This removes the possibility of your children being disinherited if your spouse survives you and remarries.
- Forgiveness of debt: You might decide to sell certain farm assets to a child during your lifetime at an amount that is higher than the amount you want to receive. You might do this if you were concerned about the child’s marriage and didn’t want to give your child a significant equity in the farm assets that could be claimed by his or her spouse. In this situation, you could bequeath the excess purchase price back to the child in your will and there would be no adverse tax consequences.
You might use life insurance to create a pool of non-farm assets for your non-farm children. Insurance might also be purchased by the family on the life of the farm child (with the parents as the beneficiaries) as a way to secure the amount that is owed to the parents by the farm child as a result of his purchase of the farm.
Naming beneficiaries or alternates in the life insurance policy itself (rather than having the proceeds paid to the owner’s estate and dealt with by the will) can reduce probate costs.
5. Discuss all details with your lawyer, accountant and others. Put together a team, people with skills that you need to facilitate a successful succession.