This article contains a cautionary tale about the Kash family, a fictional farming family that didn’t want to put any effort into planning for their retirement.
Instead, they were aware of favourable tax rules that allow for transferring farm property to children on a tax-deferred rollover basis, and therefore their “plan” was to just give everything related to the farm to their kids, Johnny and June, once they had enough other assets with which to retire.
Johnny wasn’t involved in farming and June was active on the farm.
Read Also
Crop insurance’s ability to help producers has its limitations
Farmers enrolled in crop insurance can do just as well financially when they have a horrible crop or no crop at all, compared to when they have a below average crop
The Kashes didn’t see any reason to walk the line around complex estate planning and thought simple and straightforward was best.
When Mr. and Mrs. Kash were ready to retire, they transferred some of their farmland as an early inheritance to Johnny. They then transferred all farming corporation shares and their home quarter to June and relocated to a condo in the city.
What June received had far greater value than what Johnny received, but this fit with the “fair is not always equal” mantra that the parents had heard about.
A few years go by and Johnny has a breakdown in his marriage. His spouse is now claiming ownership over half of the land he received, which the parents thought would remain “family land.”
They could have taken various steps to avoid this outcome:
Johnny could have entered into an interspousal agreement preventing claims against the land from the parents.
Johnny could have given the parents a promissory note, which his parents would plan to forgive in their will. By creating a debt, the parents could choose to enforce this debt against Johnny’s ex-spouse, or better yet, convince her that she didn’t want that land and the debt associated with it.
To make matters worse, Johnny had to sell the rest of the farmland to fund his separation battle. He sold the land to the highest cash bidder without June even being aware.
June was farming the land but did not have a written agreement with Johnny to secure these rights.
The parents could have done the following:
A long-term lease giving June rights to farm could have been created before the transfer.
A right of first refusal could have been given to June so she would have had the right to buy.
Now that June has lost access to her key parcels of farmland, the farming operation is no longer viable, so she has no choice but to stop farming and instead decides to pursue a career in country music.
Recalling that June received much more value than Johnny because she was going to be the farm successor, she thinks that if she sells the farm she will be able to fund her music career, so she sells to the highest bidder before the parents can do anything about it.
They are devastated. They thought they might move back to the home quarter because they miss the hustle and bustle of never ending projects.
How could have the parents avoided this?
Instead of transferring the farming operation outright to June, a succession plan could have been put in place to transfer management and future growth of the farming operation to June but allow the parents to maintain the accrued value of the farm, often known as an estate freeze.
If this had happened, the parents would still have equity in their farming corporation and could choose to transfer some of that to Johnny to come up with a more equal division of their property among their children.
With respect to the home quarter, the parents could have leased it to June for a period of time until they knew she is settled, or could have transferred it but registered security such as a mortgage against it to protect their interest and make sure June didn’t sell it without their knowledge or input.
The result of the “simple and straightforward” plan is that the parents are left living in a condo, their ex-daughter in-law has taken some of their land, Johnny received much less inheritance than June, even though neither are farming, and June has sold off what was supposed to be the family farm to pursue her country music aspirations.
While the story of the Kashes is an extreme example of a farm transition gone bad, it is a reminder of the importance of coming up with a detailed succession plan for your farm and transition of wealth and building in contingencies where appropriate.
Consulting regularly with your advisers about your succession plans is the best way to make sure that once it is time to implement, there are detailed thoughtful plans in place to achieve your objectives.
Greg Kirzinger is a tax lawyer and a partner with Stevenson Hood Thornton Beaubier LLP in Saskatoon and practises in the areas of tax, succession planning, farm and business planning and real estate. He can be contacted at gkirzinger@shtb-law.com. This article is provided for general informational purposes only, and does not constitute legal or other professional advice and does not replace independent legal or tax advice.
