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Farm Financial Planner: Estate planning with an out-of-date will

Passing the farm to the next generation when Dad’s will doesn’t mention the kids

A woman named Ruth, 65, and her late husband Max, who recently passed away at 66, farmed 1,600 acres in Manitoba’s Interlake region for the last four decades. Ruth continues their mixed farming operation with 800 acres of grain and the remainder in pasture and hay for what was, before they sold them, a small herd of beef cows. The farm did not thrive but neither did it suffer. With Max’s declining health in his last years, he and Ruth kept the property together and the family intact. But he did not update his will. His passing has opened old wounds.

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One son we’ll call Blake, 44, works in Alberta but wants to take over the farm. Two daughters ages 46 and 42 are married to local farmers.

Max used to assure Blake that one day, the farm would be his. But Max and Ruth did nothing to prepare for that transition of ownership. Max’s will was three decades old and made no mention of children. The farmland was still registered in Max’s name. Max never made any off-farm investments or even bought RRSPs. He devoted the farm income to maintaining the farm, rather than off-farm investments. You could say that he had a sort of financial tunnel vision.

At his dad’s funeral, Blake announced that he would be taking over the farm. Ruth, he said, could move into government-subsidized housing in town. The daughters would get nothing. These provisions caused anxiety and much family disharmony.

Making a plan

Ruth approached Don Forbes and Erik Forbes of Forbes Wealth Management in Carberry, Manitoba to help make the transition of the farm work. At present, Ruth owns farmland worth $1.2 million. Blake owns none of the farm. Ruth needs retirement income either from land rental or investments if the farm is sold and the cash invested.

At present, Ruth has Old Age Security which currently pays $7,360 per year and a small Canada Pension Plan benefit of $350 per month. She needs more money. The intentions Max expressed in his will have to be respected, but as a practical matter, Ruth needs innovation.

The accounting valuation for the farm will produce a seven-figure capital gain. It can be offset by the $1 million Personally Owned Farmland Capital Gains Exemption and the allowable exemption of the farmhouse and an acre around it. Allow $100,000 for the farm home and land and the total tax exemption should be $1.1 million, Don Forbes says.

Ruth wants to stay on the farm for another 10 to 15 years and then move to town. She could tell Blake to wait, but as a mom and as a practical person, she would like to help Blake take over the farm.

There are several ways out of this, Erik Forbes explains. First, Ruth could gift 160 acres of farmland to each of her three children this year. She would use part of her $1 million tax exemption to shield the transfer, which would be at close to market value. That way, the children would be starting with a relatively high cost base if they sell the land or when they, themselves, pass away.

With this plan, Blake would get a quarter section of better-quality land with a notional value of $250,000. His two sisters would each get a quarter with a value of $150,000. Blake could rent another quarter section from his mother. Blake can also purchase farm equipment for $50,000, paying Ruth $5,000 per year for the next 10 years. He would have use of farm buildings as part of that payment.

Ruth’s remaining 960 acres (500 cultivated) would be rented for cash to a neighbour for $18,000 per year. That would be Ruth’s retirement income. Blake would get an option to purchase this land at a favourable price when Ruth retires fully in 10 to 15 years.

The outcome

Blake may not like this arrangement, but it is good from Ruth’s point of view. Assuming she can make the deal acceptable to her children, she would have the market value of her 480-acre parcel valued at $550,000 against an original purchase price of $60,000. The $490,000 capital gain would be shielded by the $1.1 million deduction.

There would some tax payable due to the Alternative Minimum Tax. Ruth’s Old Age Security benefits would be fully clawed back in the transfer year.

Any surplus cash should go to Ruth’s Tax-Free Savings Account. She has $69,500 of room in 2020 and will have $6,000 more per year under present rules.

In this scenario, Ruth will have $614 from Old Age Security, $350 from the Canada Pension Plan, and farm rent of $1,500 per month. That’s a total of $2,464 per month. She can add $416/month from Blake’s machinery payment of $5,000 per year. Ruth will pay an estimated $260 monthly income tax and have $2,620 for living expenses in a paid-up house with an acre of land. Her estimated cost of living is $2,400 per month, so the plan would work on paper.

Assuming Ruth makes a one-time TFSA contribution of $69,500, and that sum grows at a rate of three per cent per year after inflation, Ruth could have $3,442 per year for the following 30 years. She could lengthen the life of the TFSA by contributing to it or cutting annual withdrawals. She could use the balance to finance a new car in a few years, or make gifts to her children.

This plan for the disposition of the farm conforms to Max’s will, creates retirement income for Ruth, allows Blake to take over the farm and provides for the interests of his two sisters. One might say that it is making the best of a situation that might have been better, had Max made a newer will. However, it is the sort of disposition Max might have made had he done so in the years preceding his death.

“We are making the best of a challenging and even heartbreaking situation,” Don Forbes concludes. Everyone is taken care of. The farm continues. Ruth has income and a place to live. Blake and sisters can continue as a family unit with a common interest in the farm. No one gets everything, but everyone gets something.”

About the author

Columnist

Andrew Allentuck’s book, “Cherished Fortune: Build Your Portfolio Like Your Own Business,” written with co-author Benoit Poliquin, was recently published by Dundurn Press.

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