When passing on your farm operation to the next generation, key questions will often arise concerning control of the farm assets.
There are several ways to transfer farm assets, each with its advantages and disadvantages.
The following are simple examples of how qualified farmland can be transferred to the next generation, with a focus on control.
Although this article will focus on the transfer of farmland, similar principles can be applied to shares in a qualified farm corporation or an interest in a qualified farm partnership.
Simply forgoing any decision is an option. This may be the simplest option for you today, letting property be transferred as specified in your will. As you will keep control of the property until you pass, it should be protected from any events in your children’s life, such as a matrimonial dispute. Ultimately, you completely control the farm assets until they are passed in your estate.
This may be the easiest today, but it can likely lead to many issues later (for example, if a will was contested by non-farming children).
Direct transfer as a gift
Another option is to transfer the land to your children as a gift of qualified farm property. This option is simple and cost effective. It will have no immediate tax implications if certain criteria are met.
However, once you have transferred the assets, you will immediately lose control, as well as the financial security you held when you retained the land. You need to be sure you are protected financially for your retirement before going forward with a gift.
Direct transfer at fair market value
Alternatively, you can transfer the land at fair market value. This usually involves taking back a promissory note from the next generation and allows for security on the transfer. You can then receive a lump sum or periodic payments up to the fair market value of the land you transferred. This provides you with some financial security for your retirement. Additionally, you can use your lifetime capital gain exemption to reduce the tax implications of the sale. Also, you do not have to be fully repaid on the note if that is not your desire — the note can remain outstanding up to your death and you can forgive it in your will.
Whether the land is transferred as a gift or at fair market value, control of the farm’s future will pass with the title. Should your child decide to sell the land, you may not have any legal standing in the decision. You may consider adding certain conditions to the transfer, such as a right of first refusal, an option to purchase at a certain price, or even a penalty clause for selling to help protect from the next generation selling the land.
These all can be complex and have their own set of potential tax issues.
Placing the farm in a trust
You may consider placing the land within a corporation or partnership to be owned by a family trust. As a legal relationship, the trust allows you to provide use and growth of the farm property to your children, while the land and any increase in value remains protected under your direction as the trustee.
Each beneficiary can be provided full access to their lifetime capital gains exemption and know they have access to the assets being transferred to them in the future. The trust can also potentially provide protection from creditor actions and matrimonial claims against your children.
There are various other succession options and combinations of options available. It is best to sit with your advisers, who will help you find the best strategy for passing your greatest investment on to the next generation.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org. He would like to thank Marden Litchfield and Travis Dow of KPMG for their assistance with writing this article.