It’s little wonder that farm succession planning is in the “too-hard basket” for many farmers, with relatively high rural property prices making it very difficult for the next generation of farmers to buy out other family members at market value.
Because of this, planning for the continuation of a farm takes forward thinking, and no one model will suit all farms or all families.
The first step in creating a successful farm succession plan is determining what “success” will look like. This will be different for different families, but more problematically will vary between family members who have an interest in the same succession plan.
Will Dad ever want to hand over the reins? Will Mum want a nice house in town? Can Dad and Jr. work together? What does Jr’s wife (or husband) think?
However, there are many common themes. For example:
Continuity of the family business for the benefit of succeeding generations;
Good retirement income for the retiring generation;
Keeping debt in the next generation at a level that allows them to make a profit; and
Fairness between the children in the next generation.
In order to achieve all of these things it’s necessary to begin with a healthy farming business, with strong profits and/or a good growth strategy. Some farming businesses can’t, in their current form, provide the income necessary to sustain more than one family unit, or in the alternative service the debt necessary for one child to buy out the parents. In some cases, selling the farm will be the most sensible option.
However, an assessment of whether to end a family farming enterprise is rarely a simple business decision – and where there’s a will there’s often a way. Some tools that can be useful include:
Using equity in the family farm to enable children to work their way up in the farming industry, for example by providing the financial backing for a child to take on a share-milking role. This can help create independent wealth for the succeeding generation to invest in the family farm, as well as increasing their business experience.
- Releasing capital by selling farm assets that aren’t required. By way of example, the sale of Fonterra shares can provide cash to help even up asset distribution between children where a dairy farm is to be carried on as a dry stock unit. The recent opportunities to exchange shares for vouchers and cash has also helped some farming families to release funds for succession planning purposes. Alternatively, it may be possible to cash up land by subdividing a section or sections from the farm.
- Off-farm investment can supplement cash-flow to retiring farmers, as well as providing a pool of assets to help even up the distribution of assets to children who will not be taking over the farm. Life insurance can also play an important role in this second goal.
- Graduated takeover strategies, including share-milking or leasing arrangements can be a pathway to ownership of the family farm, while providing an income for the retiring generation. A company structure for cross-generational ownership of assets has the advantage of flexibility and makes it relatively simple for property to be transferred over time for valuable consideration. A company structure also provides a formal setting for decision-making and regular board meetings can be a great way for information and experience to be shared between generations.
- Expansion strategies, like the purchase of neighbouring land or a run-off, can broaden options by increasing the size of the income “pie” to be cut between the generations and adding another asset to the mix can increase options later, when it can be sold or used to equalise inheritances.
- Trusts also have an important role to play in farm succession planning and can be invaluable in keeping assets safe from potential future relationship property claims against your children. The benefits that attach to trusts can also be harnessed within the company structure by individual family members’ trusts holding shares.
Regardless of the direction the farm will be taking, transparency in the succession planning process is important to ensure perceived fairness and prevent acrimony within the family. Communication and independent valuations are key elements of this.
In the interests of family harmony, it’s also a good idea to avoid a situation where a child works for low wages in the expectation of an un-defined future benefit. Ideally each party will receive value each year for their input into the business. If cash is tight, there are options available to achieve this, like a gradual transfer of shares in a farming company, effectively in lieu of wages.
There are always important taxation issues to consider when you’re working on a succession plan. For example, the book value of livestock and machinery is often significantly lower than market value, which can result in a tax liability of many thousands of dollars on a transfer.
Farm succession planning requires a holistic assessment of the farming business and the strengths, weaknesses and wants of everyone involved. This type of close analysis can create opportunities that enhance your business now. A meeting with your accountant and your lawyer is usually a good place to start. But we won’t expect your call until you’ve finished calving.