The diversity of a family farming enterprise combined with the dynamics of the family unit can raise challenging and complex issues.
The topic of succession planning is often a highly emotional one. The respective contributions from individuals to the farming enterprise are likely to have varied over the years and not all family members’ motivations are aligned. It is not difficult to see why succession planning is often pushed aside until it becomes urgent.
Succession planning should not however take a back seat to the day to day farming operations. The first step is to have a conversation with those involved – and the earlier the better. If family members do not communicate their goals and aspirations, then it is unlikely these can be incorporated into a succession plan. It is also likely that it will lead to disputes later.
What is farm succession planning?
A farm succession plan is a strategy setting out the processes that will be implemented to sustain the family farming enterprise, so it can be passed on to future generations at the right time. The focus is on the profitability and longevity of the farm, together with consideration of the needs and wishes of the various family members.
A balanced succession plan will support the viability of the farm, keep the business in the family (if desired), ensure a sustainable retirement plan with financial security for retiring family members, and deliver workable arrangements for remaining / incoming members.
No matter what the ultimate objectives, a farm succession plan will generally involve complex financial and legal considerations. Retaining professional advice is a wise investment to ensure a sound succession plan is in place to complement years of hard work and endure future generations.
Following are some typical issues that will be encountered during your planning.
Individual / family needs and goals
Understanding the goals and intentions of family members is essential in developing a succession plan. There is no point assuming an individual’s needs and wants – it will take a series of discussions / meetings to provide clarity.
Following are some common matters that may need to be addressed and reflected in the succession plan:
- the skill, experience and capacity of existing / incoming members to operate and manage the farming enterprise;
- whether the retiring members (parents) wish to remain on the farming property and / or have ongoing contribution to the farm’s management;
- addressing unequal contributions between family members, for example, providing fair arrangements in circumstances where one child has remained working on the farm for minimal wages while the other child has left and pursued a university degree;
- the emotional dynamics of the family unit including any conflicts or ‘history’ between family members.
In addition, personal estate plans should be considered to ensure maximum asset protection and that they are consistent with the overall farm succession plan.
An appropriate legal structure should be determined to support the long-term goals of the farming enterprise. There is no one-fit solution however various structures should consider wealth and personal asset protection, tax minimisation and profitability.
The right legal structure should facilitate stamp duty exemptions for intergenerational transfers and minimise taxation liabilities such as capital gains tax.
Obtaining an independent valuation of the farming enterprise and a statement of assets and liabilities is important to support the succession plan and any funding requirements.
The financial circumstances of remaining / incoming members and their ability to continue the farming enterprise must also be considered. The income from the farm must be sufficient to maintain its operations and support those who live there.
Obtaining accounting and financial advice will assist in evaluating the net worth of the farm and planning for its future operations.
Transfer / sale of assets
The succession plan may include:
- transferring real estate and assets to family members;
- selling off certain assets such as equipment, livestock or parcels of land;
- leasing / licensing land and equipment;
- transitioning control of family trusts;
- restructuring farming operations.
All of these transactions must be properly documented so that ownership and title to assets is clear and rights and responsibilities between family members understood. Transfer arrangements should facilitate, where appropriate, stamp duty exemptions and address taxation matters. They should also where possible seek to avoid unwanted taxation consequences.
Having discussions about succession planning with relevant family members is important. But it should be coupled with a documented plan. Words and promises made between family members without any formal succession plan being implemented can cause a raft of problems.
Succession planning helps to provide clarity and certainty with early planning and communication between all affected family members key to developing a successful plan. The process cannot be rushed and needs a considered and methodical approach.
All farming enterprises are unique, as are the families that run them. Working with your legal and financial advisor will help to ensure that all factors are considered to achieve a workable succession plan tailored to your circumstances.
If you or someone you know wants more information or needs help or advice, please contact us on (08) 8344 6422 or email [email protected].