Business & Policy
By Milt Carr and Associates
How Is the Next Generation Getting Your Farm? – Part 1
By Milt Carr and Associates
From my experience dealing with farm families and helping them with
their estate planning, the major concerns that most seem to have are
concerning family harmony and succession planning.
From my experience dealing with farm families and helping them with their estate planning, the major concerns that most seem to have are concerning family harmony and succession planning. When it comes to estate planning, many lawyers and accountants are focused on the technical aspects of the planning process like how to reduce taxes, the distribution of assets, etc. There does not seem to be much time spent on preserving family harmony when it comes to designing an estate plan or a succession plan that is equitable.
Making matters a bit more concerning is that, according to the Canadian government, approximately 85 per cent of farming families have not prepared a proper succession plan or farm business plan. Basically, the issue of how their assets will be distributed to the next farming generation virtually goes unaddressed and unresolved.
When it comes to the distribution of assets, from the parent’s perspective, they would like to see each child given a reasonable portion of their assets. However, the major stumbling block is that their assets are not liquid. Another point of concern is that fair distribution of assets is not always equal.
It is such an obscure situation that many get frustrated with the planning process, throw their hands in the air and close the file. This is one reason why so many agricultural families do not have a completed plan. So what can be done?
There are several options. Some farms have incorporated and have created shares in the corporation that can be owned by non-farming children. In theory, this works from a practical sense.
Here’s a scenario; dad takes the family agricultural business and divides the shares equally among five children. One child is now a share holder and full time farming member of that family, his brothers and sisters have no interest in working the farm. However, the distribution of shares may create an issue where the sibling who owns the farm and operates it daily continues to watch his asset grow but continues to also watch his obligation to his siblings and their families grow. The problem; he doesn’t have a way to purchase those shares back.
From the siblings perspective, they hold shares in a private corporation that are usually only saleable back to that corporation so they are left holding a piece of paper that has no real liquidity or spendable value. They may, get a dividend or an interest return on this type of structure but that is only if the farm has made enough profit to declare the dividend or pay out a portion of interest on redeemed shares.
The other issue involved is that usually the sibling that is now farming wants to either grow or maintain his farm asset. He may need to repair barns or change cages or even purchase more quotas. All of this costs money that either comes from retained earnings or has to be borrowed from the bank.
One of the concerns that the farming sibling has when he has non-farming siblings as partners or shareholders, is that there is a sense of responsibility or beholding to his non-farming siblings. This can create an anxious environment where the sibling who is farming starts to question his expansion or maintenance projects because he feels that he should give money to his non-farming siblings. The non-farming sibling can become anxious through questioning how the sibling on the farm is spending money when they would like to have money to pay down their own mortgage or put in a new kitchen.
Now, this scenario moves ahead 25 years. All those shares have been willed to the children of the children of this farming generation. The sibling who remained on the farm had a desire to hand this farm operation down to his own children. Now all the nieces’ and nephews’ and brothers and sisters and their children are all shareholders and are all expecting a piece from the farm. So how does the family of the sibling who worked the farm satisfy everyone’s requests fairly and still manage to operate the farm as their own?
Make no mistake, a share structure is important and can have good legal and tax planning built into it, however, you need to consider what might occur in the future. The family dynamic going forward will change over time and there may be different concerns and issues down the road, but being able to planning now how to maintain and protect family harmony in the future, is well worth doing.
In the months ahead, I will continue to address what should be considered when it comes to this often complicated issue of family harmony and succession planning. If you have any questions please send your concerns to Milt Carr at Canadian Poultry, e-mail email@example.com