The Importance of Farm Succession Planning

The only constant is change and nowhere is this truer than with farming. Once the foundation of our pioneering society, farming has continued to grow and evolve so we can put food on our table. However, like any business enterprise, the succession of the family farm is particularly
important, yet few plan for it.

As a financial planner, I am usually focused on the numbers and the analysis. In this article, however, I am going to set the numbers aside and speak to the heart of the matter based on my experience. The purpose is to highlight the challenges of farm succession planning and serve
as a call to action to encourage farm families to work toward a plan before it is too late.

As with all entrepreneurs, the focus of the farmer is to grow and build their farm into a viable and sustainable business enterprise. This requires a lot of sweat, sacrifice and hardship over many years. In my experience of working with farm families, on their succession planning, a few axioms are universal:

• Farmers are the salt of the earth. Hard working and dedicated 365 days a year.
• Farmers are hands-on workers; they are not fond of administration, paperwork, or succession planning. Their planning focus is rather on how to replace the tractor, the combine, or whether the grain truck is going to make it another year.
• They are emotionally connected to their farm and their home, and this influences their decision making.
• Financing the buyout of a farm, whether within the family or to a third party, while also trying to keep it going, is no easy task.

History and demographics play a role as well. A few generations back, the eldest son usually took over the farm from his parents; there was never really any discussion. In recent years, however, the value of farmland has increased significantly as has the implied capital gains on
such land (today, a farm family having land worth $10M+ is not uncommon). Farmers have therefore become known and are self-proclaimed to be asset rich and cash poor. Compound this land wealth with the many career options available to today’s farm youth and you have a
perfect storm of complexities surrounding succession planning for the family farm.

So, how does one pass on a farm operation? First, you need to decide whether you want to keep it in the family and if any adult child wants to continue the business.

• If you do not want to keep it in the family, then you can sell the farm and divide up the cash (even with LCGE of $1m, a $10M farm is going to incur serious capital gains taxes). This needs to be properly planned for.
• If, however, you wish to keep it in the family or one of the adult children wants to take over the farm, think about how you will pass the estate equally to all of your children:
  • Do you give the farm to the adult child that wants to take over and tough luck for the other children (a fast-track to estate litigation)
  • Does the adult child who wants to keep farming take out a loan to buy out their siblings? Thus, cash strapping a farm that is likely already cash strapped (seriously impacting the very survival of the farm itself).
  • Do you set up a farm corporation and give equal shares to each of the children (now you have four people running the farm)? And what if one child wants to sell their share?

There is another, often unspoken, issue in farm succession planning: the ongoing family dynamics and keeping harmony among the adult children after the parents are gone, which are often Gen 1’s main concern. Sadly, there is no shortage of cases where dividing up the
family farm has needed to be settled by the courts, often with a decision that none of the parties involved were truly content with.

As a result of these significant decisions to make, it is not hard to understand why Gen 1 would rather not think about this. And, unfortunately, this brings us to where we are today, with less than 20% of family farms having a succession plan. Planning ahead is the only way to go
and this is certainly true of farm succession planning. The sooner a succession plan is developed, the sooner these strategies can be implemented, as they require time to develop to perform optimally and achieve the desired results.

There are several financial and legal strategies that can be utilized to set up a successful farm transition. The more common ones include (i) maximizing the Lifetime Capital Gains Exemption; (ii) comprehensive tax planning, including optimizing tax-deferred rollovers; (iii) proper estate and incapacity planning, including setting up trusts where appropriate; (iv) life insurance planning; and (v) estate freezes. In preparing farm succession planning, you should consider the following elements:

• The goal for the farm, now and going forward
• Consider the location of the farm, as well as the individual family members.
• Put together a farm succession plan that includes everyone’s input.
• Develop a timeline with actionable steps for everyone along the way.
• Have family meetings to discuss concerns, issues or strategies.
• Seek advice from professional advisors (lawyers, accountants, tax experts, financial planners, family enterprise advisors, etc.)

If you know someone with a farm, please encourage them to begin the conversation and develop a succession plan that works for all involved. Failure to do so, results in a significantly higher tax bill than necessary, expensive litigation and families torn apart.

Kenneth M. Doll,
BA, B.Comm., MA, CFP, CLU, TEP, ICD.D

 
https://albertafinancialplanner.ca/


 
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