I often choose the topic of an article based on new tax rules or trends I see in practice. However, this time I decided to try something a little different and threw out a poll on social media to see what topics may be of interest.
Among the suggestions I received was a trend that emerged with questions around what estate planning is, when to do it and how to take advantage of tax rules for farmers. These are all great questions.
A variety of submissions from my firm over the years have targeted the specifics of a lot of these questions, but in this article I want to provide the 50,000 foot view.
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What is estate planning?
At its most basic level, there are three items I always discuss with clients as part of their estate planning: a will, a power of attorney and a health care directive.
Additional estate planning tools are available, but these are the base.
I think we all know what a will is — a written direction that stipulates how our property will be distributed on death. However, many people are less familiar with the power of attorney and health care directive.
A power of attorney is you granting legal authority to another person to step into your shoes to deal with your property and make personal decisions on your behalf, with the exception of health care decisions.
Many people associate this document with a loss of competency, but in my opinion, every competent individual over the age of majority should have this document in place. You never know when an accident could happen rendering you unconscious or causing competency issues, particularly in a higher risk occupation such as farming.
As well, without a power of attorney, someone would need to apply to the court to be appointed to make decisions on your behalf. Not only can this be costly, but you have no guarantee the person appointed by the court is the person you would want making decisions for you.
A health care directive can be used for two purposes:
- To set forth your wishes as to the type of health care you would like to receive if you are unable to give direction.
- To appoint an individual to act as your health care proxy, which is the individual who would have legal authority to direct health care professionals when you are incapable of doing so.
Unlike the power of attorney, in Saskatchewan there is legislation that provides for a default ordering of who can make these decisions in the absence of a written directive.
When should I start estate planning?
This is such an individual determination. As I noted above, I think any individual over the age of majority should have a power of attorney, and in Saskatchewan, a health care directive can be executed as young as age 16. However, if we throw a dose of reality into the mix, there are very few 16 to 18 year olds who are going to start estate planning.
So, if I had to provide a general “rule,” you should start estate planning when you start acquiring assets, such as a house, farmland and machinery, or when you have children. Your estate plan doesn’t have to be complicated to start, but you should start.
How do I take advantage of the tax rules for farmers?
Some pretty nice tax rules are in place when it comes to succession planning for farmers. However, did you know you have to meet certain tests to qualify for them? Here are a couple of high-level recommendations to prepare yourself to discuss these with your lawyer or accountant:
- Track your land use. Make a chart and write down every parcel of land you own, whether personally or through a corporation. Track the number of years it was farmed by your parents (or in-laws), track the number of years you, your spouse or children farmed the land and the number of years the land has been farmed by anyone else, such as if you are renting out the land.
- If you own a farming corporation, keep an eye on your inactive assets. If you are building up cash, investments or other assets that are not used in your farming business, you could quickly throw your company offside the beneficial tax rules. They are nuanced, but at a high level, if your inactive assets comprise 10 percent or more of the fair market value of your corporation’s assets, you have likely lost the ability to roll those shares or claim the capital gains exemption. As a quick side note, there are tax efficient ways to solve this problem, so don’t just start pulling assets out.
I highly recommend having a conversation about these rules with your advisers early. It is so unfortunate when I see people who have compromised their ability to access these tax rules simply because they didn’t know the rules when it mattered.
Stephanie Maszko is a lawyer with Stevenson Hood Thornton Beaubier LLP in Saskatoon. She can be contacted at smaszko@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.
