Who Gets the Family Farm?
Or more specifically, who gets the farm income when you retire?
The answer to this question is not a simple one – especially if you don't have a sound succession plan in place.
All over the country farming families struggle with the issue of competing interests when attempting to sort out mum and dad's retirement and who gets the farm when it's time to pass it on.
To help ease this struggle, there are a number of fundamental principles that should be considered when starting to plan for the handover of your farm:
- Identify the needs and aspirations of each family member and manage their expectations.
- Build, maintain, and if necessary repair relationships between family members.
- Work out what the parents want when they retire - where they'll live, what they'll do, what income they will need etc.
- Transfer management and control of the farm business over time, and set a goal for when this will be completed.
- Have agreements drawn up that cover ownership and income distribution amongst children who will work on the farm and those who won't.
Of course there's no one size fits all approach to farm succession planning – how can there be when there is so much diversity among the businesses and personalities involved!
At Moore Stephens our Accountants and Financial Advisors work together to help guide our farming clients to create a solution that suits their individual needs. One very common scenario we work with is transferring the farm from parents to one or more family members. Let's look at the critical areas of consideration for this event.
Reviewing the Critical Issues
This first step is an important one. You will need to review a number of personal and financial issues and decide on some broad objectives regarding the transfer of your farm.
The critical issues in most farm transfer arrangements are:
- On-Farm Living.
- Equal vs. Equitable Treatment of Children.
Under each issue, we have provided some points for your consideration. In families where there are non-farming children, the issue that often gives parents the most difficulty is deciding on an arrangement which is equitable for all of their children. An equitable arrangement is not necessarily an equal one. In many situations, the equitable arrangement will be one in which the farming child receives a greater portion of the parents' estate so that he or she is able to continue running the family business.
It is important to remember that your idea of equitable might be completely different to that of your neighbour's even though your situations might be fairly similar. Your Accountant or Financial Advisor will be able to advise on your options here.
Are you looking for an interim arrangement at this stage, or are you considering a full sale?
- Are you prepared for a complete change from farmer to creditor (or, if a company is involved, to a passive investor)?
- Are you sure which children want to be involved in the farm?
- Are there one or more children who may want to become involved later?
- How important is it that you retain ownership of some of the assets?
- If there is an interim arrangement, how concerned are you that the farming child might not have sufficient comfort as to how the overall plan will ultimately unfold?
- Could you work with your child on a partnership basis? (Do you communicate well together? Could you treat your child as a business partner?)
Are you concerned about the stability of your farming child's marriage?
This can be a sensitive issue, however it is a significant one because if there is a marriage breakdown, a son- or daughter-in-law could acquire a large share of your estate.
- Does your child's marriage seem strong?
- Would you prefer not to transfer significant assets at this time?
Is it important that you control the farm for a period of time?
- Is it important that you have some element of control while you still have a significant investment in the farm?
- Is it sufficient that you have some influence over major decisions such as the future purchase and sale of assets?
- Do you want to continue managing the farm?
- Can you and your children work together to jointly manage the farm?
What importance do you place on security?
- Are you prepared to act as banker on a sale to your child or will you expect him or her to cash you out in whole or in part? If you do act as banker, will you want interest in the first few years of the agreement?
- Are you prepared to guarantee any bank indebtedness that your farming child might incur to buy you out?
- Do you want to remain on title until the child pays what is owed to you?
What future income (or debt repayments) do you need to receive from the farm?
- Do you know what income you will need to meet your living costs after tax?
- What financial commitments do you have to your other children?
- Do you want to receive lump sum capital payments either at the time of sale, or in the future?
- Will you want a return on any funds owed to you by your child?
- What is the farm's ability to make payments to you and support your child?
- Should the farm be expanded?
- Can the farm be down-sized?
Will you want to stay on or move off the farm?
- Does your child need to move onto the farm?
- If an additional home is needed, will you or your child move into the new house?
- Can your home be sub-divided from the farm?
- What is the cost of housing in town?
Equal vs. Equitable Treatment of Children
What assets will ultimately pass to your non-farm children?
- Are there non-farm assets which they might inherit?
- Are there any insurance policies which they might inherit?
- Will you be able to build up non-farming assets from the payments that the farming child might make to you?
- Is it likely that the non-farming children will inherit a receivable from your farm child or hold an interest in the farm?
- If so, how important is it that your farm child's ability to run the farm not be put at risk?
- How affordable would such payments be for the farming child?
On the assumption that you want your overall plan to be equitable – how do you decide what is equitable?
- Should you be guided primarily by the resale value of your assets?
- Should you be guided primarily by the profit that your farming child will make from the farm in relation to the value of the labour that he or she contributes to it?
- How important is it that your farming child receives the farm intact?
How important are the following:
- The standard of living and prospects of the non-farming children.
- What you have given to them already (university tuition, loans, etc.).
- What your farm child has contributed to the farm.
- The opportunities your farm child has foregone.
Are you concerned that one or more of your children might challenge your overall estate plan after your death?
Even though this should be possible only where one or more of your children are not provided for adequately, there is the potential for trouble in many farm situations because children do not necessarily share in their parent's estate in an equal manner. If you are concerned, it is best that you speak with a lawyer.
- Do you have non-farming children?
- Are they likely to disagree with your plans for the farm?
- Have you discussed your plans with all your children?
Setting Your Goals
In this step, you should continue to focus on broad objectives or goals - the details will be worked out later after you consult with your Accountant and Financial Advisor. What you want to do here is arrive at some decisions based on your discussions of the five critical issues – Ownership, Control, Security, On-Farm Living and Equal vs. Equitable Treatment of Children.
There are several points to consider when you are setting your goals:
Avoid the "Cash Trap"
Keep in mind that profits must provide for a number of competing interests illustrated below:
The family farm can not usually be transferred to the next generation at fair market value without jeopardizing the ability of the farming child to meet the various needs depicted in the "Cash Trap" diagram above. Some form of subsidization is usually necessary, in the form of a deferred withdrawal of the parents' investment, reduced interest rates, or a reduction in the transfer price. You also need to consider both Federal and State taxes on any transfer of the farm that is being considered.
The real question to be answered by you is whether the amount of subsidization required to make the transfer feasible is consistent with your goals.
Your Complimentary Financial Advice Consultation
As a Farmz member, Moore Stephens would like to offer you a Complimentary Consultation with one of our qualified Financial Advisors* to discuss Succession Planning or creating a financial plan to maximise your earning capacity.
Your complimentary consultation includes a fact-find session to help determine your financial needs*. Our experts work closely with you to ensure you not only receive quality service, but also sound advice that is tailored to your individual needs. Our detailed knowledge of taxation laws and investment structures also means your finances are structured in the most tax effective way.
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.