When it’s time for generational change, this family needs to consider age and their children’s special requirements
It is a farm in crisis. A couple we’ll call Max, 74, and Ruth, 71, are struggling to keep 640 acres of mixed hay and grain in central Alberta going. But it’s getting to be almost impossible. Max has trouble getting around and is suffering from Alzheimer’s disease. As a result, they have rented out the farm and now just watch others farm their property.
It’s a heritage farm with an original homestead built at the beginning of the twentieth century. Over time, Max and Ruth have coped with his illness by cutting back their operations. They sold off their herd of 200 beef cows a few years ago but want to keep the farm in the family.
Time is running against them; Max has to go to a long-term care facility.
His needs have become more than Ruth can provide. Keeping the farm in the family depends on what children we’ll call Stephen, 41, Arlene, 42, and Lucille, 45, can do.
Stephen and his wife — we’ll call her Diane — have a business in town. They have no time to manage or operate the farm. But their youngest child, a grandchild we’ll call Tom, is passionate about livestock and wants to restore herds to the farm. He is in the second year of an agriculture program at a nearby university.
Tom is likely to be the best hope for continuation of the farm. Max and Ruth’s daughter, Arlene, who lives in a small house on the farm, has neurological problems and cannot support herself financially, much less take on the family farm. And Lucille, married with three children, lives far from the farm and has no interest in running it.
Paradoxically, money is not the largest problem. Max and Ruth have a $67,926 combined annual income from land they rent out and mineral royalties, Canada Pension Plan benefits and Old Age Security. The farm has an assessed value of $1.21 million and is clear of debt. Add in the value of vehicles and equipment and a bit of cash in the bank and Max and Ruth have assets totaling $1,573,000.
For the family, the farm’s continuation depends on what Stephen and his wife, Diane, can do. A financial plan structured by Certified Financial Planners Richard Bradford and Edward Turgeon of LifeLegacy Wealth Management Inc. of Red Deer, Alberta will transfer the farm to them with the understanding that Arlene will continue to live in the house, even if the farm is sold out of the family at some time in the future.
Generational shifts are never easy, but this one is especially challenging. “We need to give equitable treatment to the couple’s daughters and to make a plan that ensures that Stephen’s sisters, though not a part of future farm operations, cannot interfere to the detriment of the farm. It is imperative that his siblings cannot exert influence that would compromise the ongoing viability of farm operations,” Mr. Bradford says.
Transfer of the farm and its operations to Stephen and, in time, to Tom will not be enough to assure its continuation. The farm’s real estate is the largest part of realizable assets, Mr. Bradford notes.
“There is not much cash or other equipment and, moreover, we have to provide money for Max’s long term care,” Mr. Bradford adds. “Money also has to be found for the needs of Arlene, who will be a dependent for the foreseeable future. Later, Ruth may need long term care. Finally, given the nature of Max’s illness, he is unable to change his will. Ruth manages her husband’s affairs and the farm with a power of attorney which enables her to arrange for the transfer of farm assets during Max’s lifetime.”
Arlene’s welfare can be assisted in part by the Alberta program called Assured Income for the Severely Handicapped. It provides $1,588 per month with an exemption of $800 per month for earned income.
A life insurance policy can provide money for the non-farming siblings. However, there are other health issues that have to be considered. Consideration has to be given to the possibility that for any reason — perhaps illness — Stephen and Tom might not be able to run the farm in the future, Mr. Turgeon says.
Under the plan for the generational change, the farm will be transferred to Stephen and his wife Diane at fair market value, $1,21 million via a loan from the parents and secured by a promissory note.
Max and Ruth should register a lien against the property to secure the repayment of the loan. That lien would register a life interest in the home quarter and thus ensure that Arlene has the use of her small home for as long as she chooses to remain. If Stephen and Diane or their estates sell the farm, the parents would have to be repaid or they could call the loan and seize the security.
Interest on the promissory note should be payable monthly to Max and Ruth. That income will be taxable for the purpose of recovering taxes, likely the alternative minimum tax, that will have to be paid upon the transfer. Interest will also help to replace land rent and allow them to pay care costs and general costs of living. Interest should float and be subject to annual revisions, Mr. Turgeon suggests.
Arlene will receive Alberta’s Assured Income for the Handicapped (AISH). Eventually, she can apply for Old Age Security and the Guaranteed Income Supplement. She can also apply for a Registered Disability Savings Plan. The RDSP can be funded out of the AISH benefit and any earnings she generates. The first $800 per month of her earnings will not be clawed back. For the RPSP, if she contributes $1,500 per year, she will get $3,500 per year in annual grants and $1,000 in annual bonds. By her age 60 at a 5.5 per cent nominal rate of return, the RDSP would grow to $99,645 and provide about $4,332 per year of income to her age 80, Mr. Turgeon estimates.
Arlene can also apply for a Disability Tax Credit. The current amount of the credit is $7,546 from the federal government and $13,331 from Alberta. The present combined tax value is $2,465, Mr. Bradford estimates.
As a last step, Ruth needs to change her will to affirm if her intent on her passing is to forgive any portion of the promissory note owed by Stephen and his wife.
Ruth also has to decide how the residue of the estate will be distributed among her adult children. Arlene’s needs should be given additional weight, perhaps by creation of a testamentary trust funded by insurance. The trust’s income or capital distributions can be at the discretion of the trustees based on Arlene’s needs.
These plans seem complex, but they establish a secure basis for the farm, keep it in the family, provide for the needs of Max and Ruth and address Arlene’s disability. It is a solution that keeps the farm in the family and looks after each of Max and Ruth’s children. The plan is complex and needs the combined assistance of their accountant, lawyer and the financial planners, Mr. Bradford says. “It’s the best way to help them maintain their lifestyle and achieve their legacy.” †