Your Money: Transferring the family farm: Family dynamics
By Medicine Hat News on November 24, 2018.
(Part 2) In 2017 Statistics Canada published “A portrait of a 21st century agricultural operation” based on the 2016 Census of Agriculture. It sets out how farming in Canada has evolved over the years from both a human and operational perspective. The study finds that from 2011 to 2016, the number of farm operations in Canada fell almost six per cent and the average age of Canadian farmers increased slightly to 55 years of age. On a positive note, the number of farmers under age 35 increased between 2011 and 2016, representing the first time there has been an increase in younger farmers in this age group since 1991. In addition, the number of female farmers continues to increase, with women making up almost 30 per cent of all farm operators. A key finding calls attention to using a written succession plan to transfer the ownership of an agricultural operation. It points out that in 2016, about eight per cent of all farm operators had a written succession plan, and about 16 per cent of family and non-family corporations had a written succession plan, as compared with only six per cent of sole proprietorships and partnerships. A succession plan involves the transition of a farming business by the principal farm operator to the next generation. Alternatively, it may involve selling the business, or renting out farmland to a third party, while allowing the farm owner and his or her family members to enjoy the financial benefits arising from the sale or rental. A typical succession plan involves the following steps: Start the conversation, then gather and review financial information, next discuss options and make initial decisions, followed by developing the plan and finally then execute the plan and monitor its progress. When starting the conversation, please understand that the bulk of a farming family’s assets are frequently tied to buildings, land and equipment. The farm owner needs to have the assets properly valuated to ensure that the succession plan works from a financial perspective so that everyone in the family may be adequately provided for. To deal with this issue, two key questions need to be addressed. First, is there one or more family members interested in (and competent to be) taking over the business? Second, how will the children who are not involved in the farming business be able to receive an equitable inheritance, if this is the desired goal? Next step is to gather, collect, analyze and review financial information of the farm operation. It will be useful to compile tax returns, financial statements, banking information, financing arrangements, investment statements, as well as legal documents such as contracts, shareholder agreements and estate planning documents such as the farmer’s will and any powers of attorney. This is followed by the stage to discuss options and make some initial decisions. During this stage, the farm owner and family members will identify issues, assess alternatives and make preliminary decisions. Some of the issues to be reviewed for purposes of the succession plan include: Identifying the successor and the method for the ownership transfer. If the successor is a family member, are there any training needs, and should there be a period of overlap from one generation to the next? If there is no successor from the family and the farm is to be sold, how will the value of the farm be maximized for sale and allocated for estate distribution? There are some family farm living requirements to consider. If the family farm is to be passed from one generation to the next, will the founding and successor generations occupy the farmhouse together? What will happen to non-farming family members? What are the monthly costs? Also you need to factor in the retirement planning needs of the farmer (and spouse). Next is to develop the actual plan. Once the family has settled upon family and individual preferences and goals, the next step is to establish a written succession plan and to set a timeframe for the succession to take place. The plan may include: an overall summary; a business overview and financial plan; a strategic plan to achieve family and individual goals; a farm management plan; a sale plan; and, if applicable, a contingency plan (i.e. in the event of disability or premature death of the principal farm operator). Finally, the last step is to execute the plan and monitor its progress. Once the succession plan is formulated and established, put it into action. Family members, professional advisors and relevant parties involved in the planning may require a copy of the plan. A timetable may be used to set out actions to be undertaken, and who is responsible for overseeing their implementation. Regular meetings can be held to monitor the progress and to address roadblocks which may arise and which may require alternate solutions. Family farm succession involves a complex matrix of issues and takes time to execute. It is important to start as early as possible. When embarking on the planning process, consider engaging a team of professional advisors to assist in developing and implementing various aspects of the plan. This may include a certified financial planner (CFP), business valuator, tax advisor, banker, insurance specialist and legal counsel. For a further discussion around your investment and estate planning issues, contact Neil Mardian, M.Sc. (Mgmt) CFP at 403-504-3026 or neil.mardian@td.com 14-13
