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Get it in writing: wills and agreements

Financial Planning: Make things easier for yourself and your loved ones by making the paperwork clear

Laura McDougald-Williams, a partner with Meighen Haddad LLP in Souris, Manitoba, spends a lot of time with farm families trying to help them plan for unexpected events such as death, disability, divorce or disagreement.

“So many times, I wish I’d had a 20-minute estate planning session with people before one of these events in their lives happens just to reduce stress and save costs,” she said in her presentation at the Manitoba Farm Women’s Conference (MFWC) in Brandon in November. “Planning ahead can just make it a little bit easier when you’re in a difficult time.”

The value of a will

According to information provided to McDougald-Williams by Branstone Financial Strategies Inc., around 70 per cent of Canadians do not have an up-to-date will, and yet an estimated $1.5 trillion worth of assets are due to be transferred to the next generation within the next 20 years.

Of those who have a will, 99 per cent appoint a family member as executor. Of executors surveyed, 47 per cent recorded administrative complications, 31 per cent, emotional issues and 26 per cent, legal issues. “That’s a scary picture of unprepared testators who will transfer a lot of money to do-it-yourself executors who are already having problems,” said McDougald-Williams.

A properly prepared will can help overcome these challenges. It can provide choices as to who will be the executor, who the beneficiaries are and how assets are divided up. Not having a will can create unexpected consequences. Family members or next of kin would have to choose among themselves who is going to administer the estate, which is a potential area of conflict if not everyone agrees upon who is the best person for the job. Without a will, the government has beneficiary designations that can also result in a few surprises.

“If you don’t have a will, your spouse, children or next of kin are your beneficiaries, but that can be problematic in the case of a blended family, which is common these days,” said McDougald-Williams.

If there is no will and there are children from a prior relationship, in Manitoba, the Intestate Succession Act sets out that the spouse would receive 50 per cent of the deceased person’s estate or $50,000, whichever is more. The children from the prior relationship share the remaining 50 per cent of the estate with the spouse. “That’s not always what one wants to have happen in an estate plan,” said McDougald-Williams. “Having a will gives you the power to provide direction and that’s very helpful to your family.”

It’s worth getting a professional to draw up a will because, although a holographic will — a will a person hand writes themselves and signs — is technically valid, the problem can come in interpreting it. McDougald-Williams gave an example of a case where two brothers were living together and had another brother living separately. When one of the two brothers living together died, his own hand-written will said, “I leave everything to my brother.” But which brother? “The problem with a holographic will is have you clearly given instructions so that an absolute stranger would understand what your estate plan is?” said McDougald-Williams.

Reduce costs and taxes

A will can also help reduce estate administration costs and probate tax. “The estate administration costs are probate taxed, so whatever goes into your estate at the time of your death would be any assets that you own in your name alone at the time of death,” said McDougald-Williams. “Unfortunately, I’ve had a few estates where all of the farmland was in the husband’s name. The husband passes away and the wife is then left having to probate the husband’s will because any land title registry requires a probate on the will to have it transferred over to the beneficiaries.”

In Manitoba, probate tax is 0.07 per cent, so on a million dollars of farmland, the probate tax would be $7,000. In addition, the provincial government has set out a legal tariff that lawyers must charge to prepare the request for probate, which on the value of this farmland would be $13,000. In the scenario McDougald-Williams gave, the widow would incur $20,000 of administrative costs just to transfer farmland that she’d been farming for 40 years into her name. Had the farmland been owned jointly, she could have filled out a land transfer form to add her name to the title for less than $500 and no land transfer tax would have been payable.

Dealing with divorce

With the divorce rate in Canada at around 41 per cent, divorce is another situation that can cause serious issues for family farms. With pre-owned assets, such as farmland, any increase in value since the time of marriage is shareable upon divorce. If a spouse or common-law partner (after three years of cohabiting under Manitoba law) is added to the title so the property is owned jointly, upon separation that is deemed to have been an irreversible gift at 50 per cent and the value has to be divided equally between the two owners.

Gifts and inherited assets are generally exempt from sharing upon separation, but the increase in value since time of marriage is sharable. “All of these things can be a great concern to farm families with valuable farm assets because if one partner is leaving the farm, the farm operation may have the cost of paying that person out potentially half of the value of the farm, or half of the value of any increase in the farm value since the time of their relationship,” said Mc McDougald-Williams.

Spousal and pre-nuptial agreements can be used to avoid such scenarios and protect family farm assets. “It’s a tool we use to clarify that any pre-acquired, gifted or inherited land is definitely kept separate from the family law,” says McDougald-Williams. “It keeps that value within the farm family.”

“We see so often that if people had a proper agreement in place it would have prevented a dispute or conflict,” said McDougald-Williams. “Having written agreements help people communicate better, clarify the intentions of the parties, and it’s helpful to use a lawyer. We see problems arising between parties all the time. Every year, we’re updating their contracts to try to cover new issues that have arisen. It’s a way of helping us think of every different angle and what types of things could happen.”


Get these four agreements in writing

Lawyer Laura McDougald-Williams of Meighen Haddad LLP has seen almost every type of farm family dispute at her rural law practice in Souris, in southwestern Manitoba. She recommends several types of written agreements that are essential to family farms and may help resolve conflicts in the event of death, divorce, disability or disagreement among family members.

  1. Employment contracts: Useful to set out wages, terms of employment, benefits, holiday entitlements and other employment basics, whether employees are family or not.
  2. Land rental agreements: Your landlord may be a reasonable person to work with, but what if he or she has a stroke or passes away and you’re dealing with the landlord’s power of attorney, executor, or another family member? An agreement in writing including the rent charges, how many years it’s locked in for, and the terms of the rental agreement is binding on a person’s estate.
  3. Unanimous Shareholders’ Agreement: If there are multiple families involved in a farm company, the Unanimous Shareholders’ Agreement can set out an exit strategy if someone wants out of the farm operation. It can detail how to manage that in the event of retirement, disability, divorce or death. These agreements give families an opportunity, while everyone’s healthy and things are stable, to map out what would be a fair exit strategy to give the farm operation maybe five or 10 years to pay out the value of retiring shareholder shares or that type of thing.
  4. Partnership and operating agreements: When sibling groups farm together and don’t have written contracts setting out how they are sharing the company expenses or use of machinery and equipment, it can get messy if there’s a death or a disability. These are important tools to help with that type of situation.

About the author

Contributor

Angela Lovell is a freelance writer based in Manitou, Manitoba. Visit her website at http://alovell.ca or follow her on Twitter @angelalovell10.

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