What should farming families consider when one child works in the business and other children do not?
Parents need to decide how they will recognise the contribution of a child working in the farm business, while being clear about what this means for the rest of the family. The answer will differ from family to family. Clear discussions, properly recorded arrangements and current estate1 planning can reduce the risk of a future disagreement becoming a dispute2.
Our Succession Planning Team discuss this important topic.
A question that deserves time
In many farming families, one child returns to the property while their siblings build their lives elsewhere. The returning child may work long hours in the farming business, accept a lower income while the operation grows, take responsibility during illness or difficult seasons, or make choices about their own family and career because the farm needs them.
Parents often want to acknowledge that contribution. At the same time, they may want all of their children to feel respected and secure. Those aims are not necessarily in conflict, but they do require careful thought. A plan that has only ever been discussed at the kitchen table can be understood very differently years later, particularly after a death, relationship breakdown or a difficult financial period.
Not every family will come to the same arrangement. Spending time discussing and documenting these matters where relevant will help your family make decisions with a clear view of their consequences, while there is still time to explain them and adjust them.
Fair does not always mean equal
An equal division of assets can appear straightforward. It may also be impractical where the main asset is a farm that needs to remain viable as one operation. Dividing land, machinery, livestock, water entitlements3 or business interests may not produce a workable result for anyone.
A fair approach may be that the child who has worked in the business for a lower income receives a greater interest in the farm, while other children receive other assets, superannuation4 benefits, life insurance proceeds or a different form of support. In another family, the farming child may be paid properly during their working life and had opportunities to grow their own businesses, and the estate5 may then be divided more evenly.
Neither approach is automatically right. What matters is that the arrangement reflects what the family intends, the contribution each person has made, the financial position of the business and the needs of the people involved. It should also be revisited as circumstances change.
Separate work from ownership and inheritance
One of the hardest issues is separating three connected but different questions: what someone is paid for their work, whether they have an ownership interest in the business, and what they may inherit in the future.
A family member can be a valued employee without owning part of the farm. They can take on management responsibility without having a guaranteed entitlement to inherit it. They can also receive an ownership interest during their parents’ lifetime, with arrangements made for the remaining estate6 separately.
Vague assurances can create real difficulty. A parent who says, ‘This will be yours one day’, may be expressing a hope for the future. The child who has built their life around the farm may hear a commitment. Their siblings may have heard something else entirely. Good records do not remove the need for trust, but they mean a family is not relying on memory alone when the stakes are high.
Include the right people in the conversation
The farming child’s own family and partner may be affected by the arrangement through housing, income, childcare, work opportunities and decision making for their household. Siblings who are not involved in the business may also need an opportunity to understand the broad direction of the plan, even if they are not involved in operational decisions.
That does not mean every financial detail must be shared with every family member. It does mean parents should consider what information is needed to avoid surprise, resentment and assumptions. A carefully facilitated family meeting can be valuable where the issues are sensitive or views are already beginning to diverge.
Plan for life changing events
Succession planning should not assume that everything will proceed as expected. Illness, incapacity, death, relationship separation, a poor season, debt pressures or a change in a child’s plans can all affect an arrangement that once seemed settled.
For example, if a child or their partner has contributed substantial labour or money to the farm, the family should understand how that contribution is being recognised. If parents intend to transfer an interest in the business, they should consider how that interest is held, managed and protected. If a relationship later ends, early legal advice can help the family understand the implications before documents are signed or assets are transferred.
Estate7 planning should sit alongside the business plan. Wills, enduring powers of attorney8, superannuation9 arrangements, company or trust documents and any agreements between family members need to work together. An outdated Will can undermine an otherwise sensible succession plan.
Put important decisions into practice
Families do not need every answer before they begin. A useful first step is to identify what has been decided, what decisions still need to be made and who should be involved in the next conversation. That may include the family’s accountant, financial adviser and lawyer10, all working from the same understanding of the family’s objectives.
Good lawyers know the law. Excellent lawyers apply good judgement to the way legal, financial and family considerations meet in real life. For farming families, that means helping you consider the practical effect of a decision on the business you have built and the people you hope it will support.
A considered plan gives the next generation a clearer basis on which to contribute. It also gives every member of the family a better chance of understanding the path ahead, before a difficult event requires decisions to be made quickly.
Footnotes
1. All the assets and liabilities of a person wherever they may be located.
2. A conflict.
3. Any emolument, fee, or profit, attached to an office or position in addition to salary or wages.
4. Financial provision for retirement paid by your employer.
5. All the assets and liabilities of a person wherever they may be located.
6. All the assets and liabilities of a person wherever they may be located.
7. All the assets and liabilities of a person wherever they may be located.
8. An instrument, generally a deed, that enables an agent (the attorney) to execute documents and do all manners of acts in the name of another person (the principal), as set out in the document granting the power. Legislation in each state jurisdiction governs the regime.
9. Financial provision for retirement paid by your employer.
10. As defined in the legal profession acts and the legal profession uniform law, an Australian lawyer is a person who has been admitted to the legal profession and is entitled to practice as a lawyer. This necessarily includes all judges, barristers and solicitors, but it does not include a person who merely holds a law degree.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]