How to pass on the family farm
Handling succession issues
Gone are the days when the farm is simply transferred to the eldest son. Fairness to all children is now an important objective for most parents and necessary to avoid the possibility of legal disputes.
Parents need ongoing financial security; the succeeding children need certainty of a flexible and resilient succession plan.
The non-succeeding children need the assurance that their inheritance will be protected.
Initially discuss with your spouse and decide what you want out of life and then work closely with those involved.
Have clear open communication – start these discussions early and document meetings.
Every adult should have an up-to-date will but a will is very inflexible and not adequate on its own as a succession plan.
One way to manage your assets is through a family trust.
Trusts provide the foundation and mechanism for a good succession plan.
To add value to the trust a memorandum of wishes is recommended.
Consideration could also be given to a company structure as the legal entity to operate your farm.
The company could own all farming assets including land, this may or may not include livestock;
The trust could own shares in the company; and
Shares in the farm can be sold to the succeeding children over a greater period of time.
The above approaches do provide mechanisms to transfer ownership but the shift, if very gradual, will not give the succeeding child emotional ownership.
Provide limited accountability and control.
Therefore, in addition to the above, thought could be given to selling livestock, as an example, to the succeeding child, creating a 50/50 arrangement.
This strategy has two main benefits:
They actually obtain ownership and control of the livestock; and farming decisions.
This method generates income for the children, allowing them to buy more shares in the farm over time.
Other options to generate income for the succeeding children would include leasing land to them, or assisting them with a 50/50 arrangement on a different farm.
Many succession plans will have tax implications.
You should ensure that you use any tax losses, control exposure to marginal tax rates, ensure depreciation recovery issues are handled correctly and ensure all debt is tax deductible where possible.
To protect the family, and the farm, the parents should:
Form a company/trust structure – the structure could allow for an option for all income to be passed to the surviving spouse if there was a death of a spouse.
Retain ownership of more than 50 per cent of the farm until they pass the reins over to the next generation.
Pass on the succeeding child’s inheritance to a separate inheritance trust and retain control or if the succeeding child is in a relationship ensure relationship property is ring fenced.
No one adviser is likely to have a comprehensive solution; you need help from an accountant, a lawyer and a banker and maybe even a facilitator.
Keep all immediate family members involved.