Farm succession planning offers a unique set of circumstances, not just for the retiring parents, but for all children, whether off farm or on farm.
Farm owners - a unique set of circumstances
One of the types of clients we enjoy working with are farm owners. Farm owners have a set of circumstances which makes their financial planning unique. They have significant generational assets that often only one child will inherit, run and operate. This creates issues around inequality of inheritance for the non-farming children, which can cause family disputes if not dealt with appropriately. Below we discuss these and how appropriate financial planning can help resolve, mitigate or reduce the risks involved.
Dealing with inequality
Farms are often generational assets among families, they get handed down the family line over time. Farms are often significant assets in value and usually make up the majority of the farm owners’ assets. However, the farms cashflow/profit can usually only support one family. So, when it comes time to pass the farm to the next generation it will often be passed to one child, sometimes at the detriment of others. This creates a few issues.
1. Inequality – This means that one child is receiving almost all of the estate. This can create issues for parents who want to be fair to their other children, but it is not practical to break the farm up into pieces.
2. Contested Estates & Legal Disputes - For the children who miss out on a slice of the pie, it can mean falling out with other siblings and parents. In the worst of situations, it can mean contested estates, which means the farm gets broken up anyway. Exactly, what the parents were trying to avoid. Not only is that the last thing any parent wants with a farm succession plan, but it also comes with its fair share of angst, legal costs and broken families.
What are the ways planning in advance can help?
Building up off farm assets: Building up off farm assets can help to fund the parents’ retirement. It also means that there are other assets outside of the farm, that can be left to the other children. Assets off farm can be investments or superannuation, which is a tax effective vehicle for future retirement as well as reducing your tax bill while you are operating the farm.
Getting a plan in place early: Getting a succession plan in place will involve 3 to 4 advisers. Your Accountant, Financial Planner, Solicitor and if finances are involved your bank or Commercial Finance Broker. By planning early, structures can be put in place to ensure all parties are on the same page, ensuring a smooth transition.
What if something happens to one of the parents earlier than expected: The passing of a loved one is emotional and stressful at any time. Even more so if your succession plan is not in order. This is where life insurance can come into the picture. Life insurance ensures that money becomes available to facilitate an early & unplanned succession event.
How are the parents going to retire
What are the retiring parents going to live off when they retire? In an ideal world they would live off the assets that they built up off farm to sustain themselves. However, this is not always the case. Sometimes it's mixture of lease agreements on property and income still being paid to the parents from the farm. This can be very inconvenient, as the next generation often don’t want to be paying wages to their retired parents, when the money could be spent on the farm. It could also mean the next generation having to use debt to buy the parents out, which can involve them having to take on the farm’s current debt, plus additional debt to buy in.
Conclusions
Farm succession planning is not just a set of financial decisions that need to be made. It is an emotional process that when done right should involve the entire family. These succession plans can take years to fulfill after they are first set in motion, so the earlier you start, the better.
This article is general in nature and not intended to be used as personal advice. We recommend you seek personal financial advice before implementing any strategies.
Contact Prosperity Wealth + Advice to discuss how we can help you with your farm succession planning
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