It is extremely important to have an estate plan, including a will, particularly when you consider that almost half of Canadian farm owners are older than 55 and are in possession of approximately $100 billion of capital assets says Grant Diamond, a senior tax consultant with FBC, a tax advisory service with over 60 years of service to the farm community.
This article tackles the thorny question of farm succession and how best to structure the distribution of your assets when your children will be the beneficiaries. What happens in a family of four children when three of the children have left the farm and one stays on to help nurture and grow the asset? Do they all get a proportional value of the farm or does the child who has remained on the farm get more to reflect his or her labour, input and commitment? Either way, there will be some disagreement and perhaps ill feelings that will arise from the process.
Tom Dean, the author of the best-selling 2008 book Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth suggests that “you gift your wealth and wisdom but not your business”. He thinks that gifting the business to the kids can be “incredibly toxic and maybe the most dangerous idea a business owner can pursue.”
One approach might be to ask the children to return cash bequeathed them for shares in the business where they will have some risk as well as commitment to the future growth of that business. According to Mr. Dean’s observation, however, most children would rather take the money and do something they are passionate about.
Although it may feel noble to pass along the family farm, it might be more of a millstone to the beneficiaries if they have neither the interest in nor commitment to the operation. The trick is to start the succession planning early involving the children so their interests are known and considered and can influence the final structure of the plan.
Mr. Dean suggests that one simple question in the succession planning process can shortcut the work involved and set a clear path. Simply ask the children, “Who wants to risk their inheritance to purchase the business?” If the answer is no one, Mr. Dean advises, start early to plan the sale of the business at best value and give the cash to the kids through your will.
The problem is it sometimes takes a fairly long planning process to sell off the farm. In many cases, the owner thinks values will get better down the road or they simply over value the property at the outset. The trend in Canadian farming, however, is that farms are decreasing in numbers as they increase in size to take advantage of economies of scale.
Considering the 55+ aging farm owner population, Mr. Dean suggests asking these additional questions of family members:
- What will our farm business look like in 5 years?
- Is anyone interested in buying the stock and gaining control?
- Will someone sell his or her stock and if yes to whom?
- Does anyone agree that in the interest of maximizing shareholder value, this farm can be sold to a third party?
- To secure our future prosperity, should we either keep the farm business and invest more money in it, or proactively sell it?
It can be an uncomfortable topic, but discussing the farm succession around the kitchen table with everyone involved is better than the alternative of waiting. Being proactive allows for better timing of any actions that need to be taken.
Grant Diamond is a tax specialist with FBC, a firm dedicated to providing farmers and small business owners with expert tax services and advice for over 60 years. FBC has branches in BC, AB, SK, MB, ON and NS to serve its 50,000 Members. FBC also provides financial & estate planning. To learn more about FBC, visit www.fbc.ca. If you have any questions regarding this article, email fbc @ fbc.ca or call toll-free 1-800-265-1002.
Accurate as of April 08, 2015