The Family Farm: Don’t leave it to the fairies

The issue of the succession of your family farm is a sensitive one. Succession of your family farm means that you are either dead or incapacitated. Not a pleasant thought for either yourself or your children. It is, however, an issue that you need to address. Proper planning avoids unnecessary stress, expense and acrimony to those involved in the succession process: your surviving spouse, children and grandchildren. When you create a business succession plan for your family farm, you take control. Control, at a time when the future could be left to the fairies.

Consider the following questions:

  1. Do you want one of your children to continue on the family farm?
  2. Do you want to treat all your children fairly?
  3. Do you want to ensure the financial viability of your farm through the next generation?
  4. Do you want to ensure financial security for yourself?
  5. Do you want to prevent erosion of the family farm through family breakdowns?

Did you answer yes? Read on!

Have you seen your Adviser and your Accountant about the future of your farm?

If you have, then you are smart. You are also well on your way to securing your family farm’s viability through the next generation.

Have you chosen a successor or a likely successor to take over your farming business? Does this person know that they are the successor?

An integral part of the transfer of the family farm process is telling your family what you intend. You want certainty for the next generation. Communicate with your family members. Uncertainty may lead to an irrevocable division in your family.

Farmers, such as yourself, may have answered no to the above questions because you perceive the transfer of the family farm as an event. But the reality is that it requires more than an event. Transferring the family farm -your family farm- requires a process. This process is best performed by you within a managed and evolving business structure. You manage the entry and exit of generations. Your connections with the past, present and future are slowly formed and slowly broken. It is essential that you timely plan the succession process to make your family farm and its managerial transference as natural as possible.

The transfer process of your farm can be broken into two components:

  1. Succession: when you transfer of managerial control; and
  2. Inheritance: when you transfer control of the assets and ownership.

You will already be aware of these facts if you are a second-generation farmer. You have already been through the process: the initial testing period, the increased responsibility that comes with partial succession of management control, to the total transfer of management and control and ultimate retirement of your father.

This brings us back to the question:

“Have you determined the successor to your family farm?”

Maybe you haven’t. Nowadays, there are many more options open to your children than were open to you. Similarly, there are also many more options available to you in your choice of successor than were available to your parents. Some children simply don’t want to stay back and work on the farm. Statistics show that only one quarter to one third of farms have a successor. There are many reasons for this. Nevertheless, the figures remain a significant barrier to the longevity of family farms. Will it be a barrier to the longevity of your family farm?

It is very important that you start to consider the future plans for your farming business. Research and hard gained experience has shown that farm transfer is either addressed too late or not at all. This results in a loss of motivation, competence and release of energy by the second generation, adversely effecting farm productivity and viability. You don’t want this to happen to you and your farm. That is why you have read this far.

Why do so many farmers (like yourself) leave the planning for the future of the family farm until it is too late to effectively deal with its transfer?

A few reasons may spring to your mind. You are still way too active to be considering the handing over of your farm. You really enjoy farming and being in control of your family business. You might not have the confidence in your child’s ability to adequately manage the farm. Besides you had to wait when you received the farm from your father.

A survey of farmers conducted by the Rural Industries Research and Development Corporation (RIRDC) showed the following reasons for the delay in the transfer of the family farm:

  1. Can’t work out how to treat ALL children fairly
  2. Can’t think of alternative
  3. We are still actively involved in farming
  4. Fear of family breakdown in succeeding generation
  5. The cost involved in transferring title
  6. We don’t have sufficient information about how to transfer our farm
  7. Our family farm will only just support one family
  8. The financial future of farm too uncertain
  9. Too many problems associated with the transfer

How do your concerns fit in with those outlined above? Don’t be alarmed, it is not too late to commence your planning. Remember the transfer of the family farm is a process, not an event. It requires time to implement. The decisions you make may be hard, but, leaving them until later, won’t make them any easier.

It is important that you make plans early. You can plan a composition of assets that treats both non-returning family members and succeeding family members fairly. You can also prepare for your retirement. Early decision-making takes the decision out of the hands of the fairies; unless you leave it to them.
Do you find this discussion stressful?

Most of us do! Therefore, nothing gets done and the stress- your stress- continues. There are a great many questions and emotions that you need to address. The stress can spill over from your business into your family; and from the family into the business. If you plan early and communicate these plans to your family members, stress levels will be considerably lower. Your retirement will also be that much more enjoyable.

Speaking of retirement: have you considered your retirement?

Statistics show that this most likely to occur when there has been a transfer of ownership of the farm. A RIRDC survey asked a number of farmers to rank the source of their retirement income. They gave the following results:

(1) The farm (4) Pension
(2) Superannuation (5) Investments (shares etc)
(3) Sale of farm assets (6) Sale of non-farm assets

Superannuation was ranked as the second most likely source of retirement income, but only 57% of those surveyed had Superannuation. This shows that some farmers have not considered the future sufficiently, nor the possible problems they may encounter in retirement.

Are you guilty of omitting to do some or all of the above?

If you think you may be susceptible to some of these problems, don’t stress. All is not lost. You can still make plans to deal with the future. You may find the following steps useful:

  1. Be prepared to talk about the transfer of your farm. Professional assistance is available if you do not know how to approach the subject with your family members.
  2. The farm transfer is a process. It has to be negotiated by you and your second (succeeding) generation.
  3. Attempt to understand the needs, concerns and perspective of the next generation. Appreciate the difficulties the next generation faces if they do not know your plans.
  4. Involve and pay for a network of professionals services to assist you to develop an on-going farm transfer plan.
  5. As soon as possible, commence a retirement plan. Its aim is to reduce your dependence on the farm as the retirement fund.
  6. Recognise that the transfer of your family farm is something that needs managing as much as any the part of your family farm business. Your will may be chosen as a final vehicle to transfer ownership, but it should not be seen as the whole farm transfer process. The transfer of your family farm needs to be considered as an on-going and managed process, rather than a single event. It is important for you to commence the transfer on your terms.
  7. View yourself as the initiator in most instances of any discussion about your farm transfer. It is extremely difficult for the second generation to initiate discussion.

“So,” you say, “this may be very well and good, but where do I start?”

This is a very good question!

The answer is going to be different in each different farmer’s situation. But generally speaking, every farmer already has an on-going relationship with an Accountant if not a Financial Planner also. They are a powerful combination. Your Accountant and your Adviser already know you and your farming business’ position. Therefore, they are in the best position to give you advice on your requirements.

You then need to communicate your intended plans with your selected Successor, and negotiate a plan with them that is suitable for you both. You then need to seek the assistance of a Succession Planning Lawyer to create a Will and a Business Succession Plan that ensures your position is looked after. This creates certainty and ensures that your wishes are carried out. The assistance considers your best interests. Your Successor needs to seek her own advice from a different lawyer.

Counselling may be required during this process; whether for the Bill associated with the professional services (!) or to manage the stress involved or to facilitate an agreement between you are your Successor on your combined future plans.

These services work very effectively together in a network to produce a plan that is the most efficient and effective for your business- the family farm. This network works with the farm family and identifies impediments to reaching agreement in the family. But what about costs?

Can I afford to transfer the family farm?

Farming Succession Planning does not necessarily mean any transfer of the farm. However, the cost involved with the transfer of the farming business often consists of:

  1. The stamp duty on the transfer of land
  2. The fees associated with the use of professional advice
  3. Capital Gains Tax

It may come as a surprise to you to learn that if your farm is a covered by Part III BAA of the Stamp Act 1921 (WA), then you can apply to the Commissioner to have the stamp duty exempted or partially exempted. The application of this Act is very broad. It eliminates the major cost barrier involved in the transfer of your family farm.

In the wider scheme of things, professional fees are an investment by your business to assure its future viability. Your use of the professional services will reduce unnecessary costs in the long run. You are provided with tax effective strategies. It reduces the possibility of your wishes not being carried out in the future, when you are not in a position to enforce them. It may be uncomfortable and difficult for you to approach these issues for the first time. Timely planning by you places the control of succession issues and your family farm, firmly in your hands. It also reduces the possibility of your family farm’s future being controlled by who knows who. Fairies, for example.

Start the process today

Civic Legal are happy to meet with you, your Accountant and Adviser and discuss these issues in greater depth.  As a private law firm, we only take instructions via your own Lawyer, Accountant and Adviser.