Succession planning - keeping the farm in the family by Kevin Keith
June, 2010
One of the most critical and inevitable issues any family farm will need to deal with is the issue of succession planning. For many, the farm is usually the family's largest asset and is likely to be one of the primary factors in meeting your family's future financial needs. With this in mind it is particularly important that you consider your options and make a decision as to whom you will pass your farm operation to. By considering your options in advance, you may be able to minimize your tax liability significantly and avoid major business problems such as needing to sell farm assets to settle estates or causing friction between family members.
One of the first things you will need to consider is what you would like to happen with the farm once you pass away. You will need to think about whether you would like to make a plan to keep the farm in the family, sell it to a buyer outside the family or if it should be dissolved and the assets distributed to family members. Communication with family members is essential as there can be quite a bit of tension or family disharmony if succession planning is not discussed and considered in advance.
Some of the factors that could influence your decision include: how likely the farm is to have continued success in the future, the abilities of your family members to operate the farm, and whether or not your family members have the desire to continue operating the farm. This is not an exhaustive list, but are some of the initial questions you could ask yourself.
With these considerations in mind there are a number of ways you can choose to distribute your assets. If the family is not capable of running the business or has no desire to continue its operation, it may be in all the parties' best interests to sell or liquidate the farm assets on or before your retirement or passing. In many cases dividing the ownership of the farm may not seem fair. If you have family members that are quite actively involved in the farm and others that are not, you may wish to use other family assets that are not connected to the farm in your plan to ensure fairness for all family members.
For example, if you have two children, one child who would like to be involved in the farming operation and the other does not. You could leave the farm to the child that wants to continue operations and then have this child take out a loan to pay the second child their share (this share does not necessarily need to be equal) of the farm value. With this option, you must also consider the borrowing costs associated and determine whether the inheriting child can get a loan for the determined value.
You could also plan to take out an insurance policy or build up other assets or investments that are not farm-related to leave the non-farming child their share of what you think they should receive. This will allow both children to receive their value of your assets. Although this option takes proactive planning on your part to save funds or pay amounts for an insurance policy, it could help to reduce future disagreements.
After you have decided how you want to divide the assets, you should then consider the best tax plan to put this into action. If you decide to transfer your farming assets to your children there are some income tax rules that could act favorably for you. Normally when you transfer property to an individual other than your spouse, you are considered to have sold the property for its fair market value. This would require you to pay tax on the difference between your original cost and the current value of the property. However, if you transfer a farming business to a child or grandchild you can avoid this, as there is some flexibility for transferring farm assets to a child. With the use of these special tax exemptions, any increase in land value from the date you purchased it to the date transferred (up to a maximum of $750,000) can be transferred to your child tax free.
Another tax option to help distribute your farm assets is to use a trust. With a trust you can stipulate who manages the income within the trust and who can withdraw amounts from the trust. If you are leaving assets to young children, you can stipulate an age at which the children can withdraw funds from the trust. This option allows you to retain some control over the assets.
If your operation is in a company, different tax considerations will have to be made. One option could be to freeze the value of you farm company at your retirement date. Under this strategy, any value up to the date of retirement is yours and can be used for your retirement. The company can then repurchase your shares, allowing any new value the company creates to be given to the child.
This is only a quick overview of items to consider when planning for farm succession. It is important to remember that successful succession planning is not completed in a day and it is advisable that you seek advice from a professional in order to make the best decision for you.
KPMG Lethbridge
kkeith@kpmg.ca |
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