Succession Planning process from the perspective of each of the major stakeholders: Part 1

 

Over the forthcoming issues of Farming Ahead we will be considering the challenges of farm succession from the perspectives of the current owners
(generally Mum and Dad), who are seeking to secure their future financial security; the on-farm children intending to take over the significant responsibilities of running farm; and the interests of the off- farm children who often feel they are unfairly treated in the process.

It is this potential conflict of interest that causes what is called “change stall”. This means that the family avoids the discussion because of the potential for family conflict. Intergenerational succession should be a time of celebration, a time to look back with satisfaction about what has been achieved and a time to look forward to the next generation reaping the rewards for the hard work and dedication of the current owners as well as continuing to develop the enterprise. Unfortunately, if the process of arriving at a satisfactory outcome for all stakeholders is not carried out effectively, or is left until it is too late, then this otherwise positive experience may cause significant damage to family relationships, sometimes with lasting effects.

By discussing the concerns of each of the parties hopefully, we can assist in developing empathy and understanding and establish a commitment to a positive outcome from all those involved in the succession planning process. We will also share some successful solutions that some families have arrived at after considering the interests of the current owners (Mum and Dad), and both the on and off- farm children.

This month we will look at the farm succession from the perspective of those not actively involved in the farm.

Firstly, let us share with you some of the comments we have had from off- farm children.

Carolyn- “I get along well with my brother and his wife but when Mum and Dad transfer the farm I don’t think Jeff and I will feel like we can still come here for holidays and long weekends”

Mike- “It’s ok for my brother and sister to get the farm but Mum and Dad are effectively giving away part of my inheritance”

Rod- “Bill reckons he deserves the farm because he has stayed around to help Mum and Dad. They all seem to forget the early years that I worked for a pittance before I moved out”

Anne- “I don’t understand why the farm isn’t just sold so that everyone gets an even share, which is as it should be. After all what if it is sold as soon as Mum and Dad transfer it? "

The above real life comments show the sorts of concerns held by off- farm children. In many cases the off- farm children consider that the process of succession represents a finality in itself. They often do not share, to the same extent, the satisfaction of continuing the family legacy by passing the farm down from one generation to the next.

The current owners face a real dilemma. They may have spent many tough years developing the farm into a sustainable and profitable enterprise. If the farm is broken up to cater for the interests of the off- farm children then it may no longer be viable or at the very least, less productive.

In order to overcome this dilemma there are a number options that may be considered. 

For instance:

  1. Are there off- farm assets that could be used to compensate the off- farm children. The value applied to these may be discounted to offset the future risks that will be faced by on- farm children.
  2. Can benefits for off -farm children be built into the estate and retirement planning of the current owners to protect against the loss of future inheritance. For instance the off-farm children may be made “binding” beneficiaries under the parent’s superannuation fund or treated separately under the will or testamentary trust.
  3. If the on-farm children are paying for the farm under a “vendor term” arrangement with Mum and Dad then perhaps part of this cash stream can be directed to creating a tax effective benefit for off- farm children.
  4. Could other future benefits be established and funded over time such as an education fund for the children of the off- farm beneficiaries?

The circumstances of every family are different. In the following actual example, the parents were fortunate enough to have accumulated significant off farm assets. They were able to transfer the farm to one of the children without requiring a payment. They were content to live off the earnings of their investments and super and planned to leave their future estate to their remaining off -farm child to equalise the benefits. Although you may not be in this position, off farm assets can be created over time by having the on- farm children purchase the farm out of future profits over an agreed transition period.

Example: 
The current asset and ownership structure is as follows:

Mum & DadOn-farm childOff-farm childTotal
Investments$450,000--$450,000
Superfund$700,000--$700,000
Property, Plant, Livestock$2,500,000--$2,500,000
Seperate acreage$200,000--$200,000
House on Separate title$650,000--$650,000
Total$4,500,000--$4,500,000
Less Bank debt on property plant and livestock$500,000--$500,000
Total$4,000,000--$4,000,000

The position following the transition could be described as follows:

Mum & DadOn-farm childOff-farm childTotal
Investments$450,000--$450,000
Super Fund$750,000--$750,000
Property-2,500,000-$2,500,000
House on seperate title$650,000--$650,000
Cash from sale of Separate acreage--$200,000$200,000
Total$1,800,000$2,500,000$200,000$4,500,000
Bank Debt-$500,000-$500,000
Net position after debt$1,800,000$2,000,000$200,000$4,000,000
Distribution of Estate--$1,800,000$1,800,000
Net position after estate distribution-$2,000,000$2,000,000$4,000,000

For the above transition to be effective a number of issues were taken onto account:

  • As the off-farm children had to wait potentially 30-40 years to equalise their benefit, restrictions were placed on the future the sale of the property. If the property was sold within 5 years following the transfer ,a percentage of the proceeds will be passed back to Mum and Dad and the off-farm child
  • Insurance policies were taken out on the on-farm child so that in the event of the child predeceasing the parents , the spouse received the proceeds and the farm reverted back to Mum and Dad
  • A life tenancy was created to provide security for Mum and Dad living in the separate house. If the farm is sold then the on farm child is required to purchase an equivalent house for the parents

Next Rural have put together a simple yet comprehensive guide to business transition and succession planning. To obtain a copy of this guide FREE, and with no obligation, simply email Next Rural on info@nextrural.com.au or call 1800 708 495.