Taking the next step with succession planning

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Published: August 5, 2010

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Successful farm owners must manage a host of variables, whether they are fluctuating grain and livestock prices, the volatile Canadian dollar or production issues.

The task of keeping a business in the black can often become so time consuming that we forget about the issues that do not seem as pressing.

However, these issues, if dealt with appropriately, can have large economic benefits.

Such is the case with succession planning, where people consistently underestimate the full benefits of sitting down and contemplating the future of their business operations.

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One of the first steps in developing an appropriate succession plan is determining the long-term objectives of the business.

To do this, farmers must answer major questions: is the farm going to stay in the family or will the assets be sold and the proceeds distributed among dependants through a will?

If the assets are to be sold, farmers will need to determine a timeline.

If the farm is to stay in the family, they will need to decide which family members will be involved in the business and which will not. The input of these family members will also be needed.

Farm families frequently have children who grow up to have no interest in running the family farm. This can make it challenging when trying to consider how to appropriately split business assets.

For example, a farmer might have a child who wants to be involved with the farm and another who does not. Considering that most family farm owners have most of their assets tied up in the farm, splitting the assets can become a daunting task.

In this situation, they could consider setting aside assets not involved in the farm for the non-farming child, or taking out a life insurance policy with the non-farming child as the sole beneficiary.

They could also arrange for the child who wants the farm to take out a loan to pay the other children an amount equal to their share of the farm assets.

There are many viable options. Selecting the right one depends on the family’s situation.

I sometimes encounter parents who are not comfortable passing the farm to their children because it may mean leaving the family homestead.

The family home is usually the base of operations for the farm, so the issue of where the parents and adult children live can be a major decision.

Parents want to be able to enjoy the family home through retirement, but not transferring the farming assets before death could have a negative impact on their succession plan.

In this situation, parents can maintain a life interest in the home through such options as a family farm rollover, where certain farm assets can be transferred to a child with little to no tax consequences.

However, certain steps need to be taken to qualify for this tax strategy, and the process can be complex.

Another option is a family trust, which may provide additional flexibility in the succession plan.

A trust allows farmers to start bringing in their successors while not necessarily giving them control over the business. It also allows them to control when successors will receive assets from the trust.

Trusts can be a useful way to protect the family farm if family disputes or spousal conflicts among children arise. They can also help fill in the gaps left by traditional succession planning.

Creating a will is another critical aspect of succession planning that many people underestimate. To many people die without a proper will.

A will ensures that the plans farmers put in place for the business will be followed. If they don’t have a will, it could leave their assets at risk and prevent the operation from going to the appropriate person.

Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.

About the author

Colin Miller

Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.

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