Many issues arise due to the interconnectedness of family and farm which makes succession planning difficult. Typically, farms are asset rich and cash poor, limiting the options available for succession. The main issues are intrinsically connected with the instinct to provide for your family equally. However, succession planning should put an emphasis on taking care of the owners in their later years and their wish to keep the farm in the family.
The societal expectation has shifted from leaving all of the family’s assets to the eldest son to an equal distribution between all children. However, there is nothing in New Zealand law which requires a parent to equally provide for each child upon their death. When the societal expectation was to leave all the assets to the eldest son, there was no need for a succession plan as everything could be determined by a will. Succession planning has become significantly more difficult; therefore, it is no longer desirable to leave succession to be determined by a will.
Having the discussions:
While children enjoy their childhoods growing up on a farm it does not necessarily mean they want to dedicate their life to the farm. Alternatively, you could have more than one child that wishes to take over the farm. With this in mind it has become more important to have succession discussions as a family. Succession planning conversations are now happening from when children are in their twenties and looking to choose and establish themselves in a career. Succession discussions are beneficial for many reasons because the earlier you start to have the conversation, the more normal these discussions will become. Therefore, the more comfortable your family members will feel being honest about what they want to happen to the farm. If your family is not able to express their true feelings on the matter, you could end up with great rifts within the family.
There are different questions which will need to be addressed including:
- Is the farm economically viable for a child to take over?
- Will passing the farm down to a child leave them with unmanageable debt?
- What role do the parents want to play in the farm moving forward?
- Is there more than one child that wishes to take over the farm?
- Do any of the children want to take over the farm?
- Are they prepared for the responsibility of a farm?
- How can we make the transition of ownership happen?
- Can different farm businesses and income streams on the land be created to give opportunities for multiple children?
- Can the family leverage existing wealth to purchase additional farming opportunities for other children?
- Can the farm afford to pay a dividend to off-farm children? Or is the economic reality that difficult discussions will need to be had with non-farming children?
A farm is foremost a commercial entity and the longevity of the commercialisation of the farm is an important consideration when determining the next steps. All good businesses have contingency plans before they are needed. Contingency plans are important if there were any unexpected disability, illness or death within the family.
Farm succession can be complicated as many different factors play a role in the decision-making process. Some of these factors include the makeup of the family and family dynamics, the overall family wealth and that key split between farm and off-farm wealth, the income produced by the farm (the greater the income, the greater the options for succession we find) and the nature of the property itself. Preparing a proper succession plan will allow you to obtain a full perspective of your farm. If done correctly, a succession plan will enable you to understand all the options available to you. These could include subdivision opportunities, viability of the farm and if it is sustainable to keep in the family, how the child taking over the farm will fund their purchase of the farm and many more vital considerations.
The transition
Traditionally, farmers have adopted a trust structure for their succession plans. While trusts are very useful for shifting inter-generational wealth, trusts do not create a succession plan. Trusts can merely aid in the structure of a plan. Typically, parents or farm owners transfer the land into a trust which the children will be beneficiaries of. There are many beneficial aspects of a trust including being flexible and enabling the interests of the parents to be prioritised during their lifetimes, and after that those of the children. A Trust also enables a degree of protection from the risks of running the farm as a business as creditors of the farm business have no claim against trust assets, if properly and fully gifted.
Using a trust structure for your succession only enables your farming children to have a discretionary interest as a beneficiary. All beneficiaries need to be considered every time a beneficiary receives capital from the trust. Therefore, every time the child running the farm receives capital from the trust, the other siblings will need to be considered if they are beneficiaries of the trust. It is important to know that a trust relies heavily on its trustees, and it is the trustees which have the discretion to enable beneficiaries to benefit from the trust. The owners need to put careful consideration into who will be trustees upon their passing. The owners of the land will be the settlors and a settlor can also be a trustee. As trustees, the owners can oversee the farm while also allowing for the beneficiaries (children) to operate and capitalise from the farm.
There are downsides to the trust structures. Trustees are personally liable. Therefore, any liability which is attached to the land will also be attached to the trustees. This liability can be extended to statutory liability for health and safety and resource management obligations.
A trust also provides a layer of protection against relationship property claims in some instances. But a trust will not completely protect the farm from a relationship property claim. To completely protect the farm from a relationship property claim, the individuals involved need to enter into a contracting out agreement.
In recent times there has been a shift from using trusts to using companies as the structure to govern succession planning. That structure allows the advantages of a company to be part of the mix.
A company structure allows for transparency as there are certain expectations of directors and shareholders. Additionally, a company allows for parents and children to work together as shareholders. The company structure allows for transitional ownership from a parent to child over time through progressive transfers of shares to the farming child. Transitional ownership can be a beneficial arrangement to ease the handover process and enable the child to buy into ownership over time via leaving their share of farm profit in the company in good income years.
A company structure allows for each child to have a minority stake in the farm. However, this works best when the farm is producing a steady income stream that will allow dividends to the minority shareholders. There is also the ability to have a shareholder agreement that can enable the child who takes over the farm to be paid for their work. Additionally, it will enable more than one child to be part of the day to day running of the farm. A company structure also allows for the child(ren) taking care of the farm to have options. If the farm is required to obtain outside investment, a company structure allows for investment easier than a trust structure would.
Conclusion
Care and preparation in farm succession planning will enable a smooth and successful transition. The main goal at the end of the day is for the family to be on speaking terms. Succession discussions are crucial to get this outcome. The more prepared you are, the more options you will have available to you. If you would like to discuss asset planning or the restructure of farming assets, please contact a member of our Agribusiness team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
