SUCCESSION PLANNING: GET EXPERT HELP AND UNDERSTAND YOUR OPTIONS
Updated: May 30, 2022
Even if succession seems straightforward, as when passing on operations to a single heir, several steps are needed to facilitate the transfer of the farm from one generation to the next, says Trevor Dickinson.
Succession planning may require changing business structures and deciding between a direct sale and placing assets in a trust. In more complex cases, it might make sense to divide farming operations, enter into a contract with an outside farmer or sell the farm. There is no one-size-fits-all approach.
Because of the complex nature of a succession plan, a team that includes a lawyer and accountant is indispensable in helping to evaluate the legal and tax implications of different business structures and vehicles (such as trusts) used to transfer assets and operations.
A succession plan that has to provide for a number of heirs could include options such as separating farming and non-farming assets, dividing the farm into several smaller operations, or selling the farm and splitting the proceeds.
A professional team will also be needed to complete the paperwork required to prepare a formal succession plan.
Once your family has established its goals for the future of the farm, including an estimated retirement date and a plan to shift operations and assets, your advisers will look at the current business structure and determine family businesses whether it can help you meet those goals, or if restructuring is needed.
Each business structure (a company, joint venture/partners, or trust) has its advantages and disadvantages, and each affects taxes, liabilities and the ease of transferring assets in and out of the business in a different way.
Which business structure is best for your farm will depend on a number of factors. Partnership agreements are generally suitable, as this structure enables the separation of land from farming operations and allows operations to be placed with the partner who is farming. Having all the assets tied up in one business entity can cause problems.
A partnership set-up gives your heirs control of the operations, including the freedom to maintain the farm, buy equipment and make decisions about operations without interference from their non-farming siblings, who may own the land (and receive rent from the siblings who farm it).
CRAFTING A PLAN
After the business structure is evaluated (and changed, if need be), you will need to plan how operations will be transferred and who will take over the farm. Transferring ownership should involve the following three steps:
Hand off aspects of farm management
Give farming heirs additional responsibilities; this will help prepare them to take over farm management when you retire. Consider separating livestock from cropping operations, for example, and letting each heir run a specific aspect of the farm.
Convert farming heirs from employees to partners
As their responsibilities increase, reward your farming heirs with additional compensation, including a salary and performance incentives.
Begin transferring assets
In preparation for succession, encourage your heirs to begin acquiring assets, or start transferring assets into their names or the business’s. Implementing a succession plan over time is far better for the future of the farm.
As your heirs prepare to take over the operation, they will need help from you. The phased transfer of ownership from a farmer to a single heir is relatively straightforward.
The process becomes more complex when there are several heirs, especially if they include a combination of farming and non-farming children, or no heirs at all. There is often the risk, of course,
that the farm could get chopped up into small pieces or be run by a group of partners, including some with no ties to farming, that cannot reach consensus on how to move forward.
Although things are obviously less straightforward in these situations, you do have options. Scenarios could include giving land, equipment and livestock to farming heirs and giving rental properties and mineral rights to non-farming heirs, or simply selling the farm and splitting the proceeds.
With no heirs, the land and equipment could be let to a neighbour or a beginner farmer. In this case, you would retain ownership of the farm as part of your retirement portfolio and the rental income would provide ongoing income.
It can be expensive to assemble a team to make recommendations about an optimal business structure and plans for passing on operations to the next generation, but investing in a succession plan is essential. You do not want to work for 30 years or longer, only to see the results of your hard work fall apart.
Published in the March 2021 Edition of Farmer's Weekly
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