How to keep the farm together, a complex generational transfer

Farm Financial Planner: Parents devise a plan for middle-aged children to keep the farm whole

Generational transfer and the task of being fair to the other children is complex.

A couple we’ll call Max, 75, and his wife, Betty, 70, farm 1,000 acres in western Manitoba. They have three children who are 40, 48 and 45 years old. The eldest and youngest have city jobs and no wish to farm. The middle son, who we’ll call Brian, will take over the farm.

The issue in this case is the common one of generational transfer. Good motives come up against a thicket of rules. It is essential to do it right. To that end, owners must balance law and good sense and a clear view of their objectives. To cope with the transfer, Max and Betty asked Colin Sabourin, senior investment advisor and certified financial planner with Harbourfront Wealth in Winnipeg, Man., for professional assistance.

The problem for Max and Betty is a common one — keeping the farm and the children together. That implies not selling the farm and, as well, creating an incentive for all three children to take over the farm one day. Financial resources, moreover, are limited, so the farming son would have a hard time borrowing sufficient money to pay off his two siblings.

The generational transfer and the task of being fair to the other children is complex. The farm, inventory and equipment have an estimated value of $4,780,000. There will be some taxes payable at death on some assets. The estimated value of assets, including land, to be transferred works out to $4,345,000.

A tally of total farm assets breaks down to $2.8 million farmland, $300,000 inventory and $230,000 for farm buildings and equipment. On top of farm assets, there is a $300,000 farm home, $350,000 in a registered retirement income fund, $220,000 in a tax-free savings account, $350,000 in non-registered securities and $80,000 cash. That adds up to $1.3 million. All assets total $4.78 million. At death of the parents, there would be $435,000 of taxes on non-registered securities as well as selling farm inventory and the recapture of depreciation on farm buildings and equipment.

Fairness and division of assets

Division of assets and fairness to all the children is the issue, Sabourin explains.

Farmland, farm buildings and farm equipment can go to the farming son, with the remaining assets split between the two other children. The farming son would inherit $3,180,000 and the other two children would split the remaining $1,165,000. Each would receive $582,500. This plan works but it seems inequitable. The farming son would have 73 per cent of estate value while the other children would split the remaining 27 per cent fifty-fifty.

The seeming inequity has a justification, Sabourin explains. There would be chores and the risks that go with running a business. The non-farming kids with their inheritance would not be taking on any extra work to generate an income with their inheritance. A $500,000 inheritance, for example, growing at six per cent per year in stocks with growing dividends is an easy way to generate $30,000 per year compared with farming.

An alternative is to transfer farmland, farm buildings and farm equipment to the farming son while splitting the remainder so that the non-farming children might each inherit 20 per cent of total assets after tax, net $4,780,000. That works out to $869,000 for each non-farming child.

After the transfer of assets to the farming son, as above, there would be $1,165,000 left in the estate and each non-farming child would get half or $582,500. The transfer would require cash. The farming son could obtain bank financing for a loan to provide the non-farming siblings with their share.

A final alternative could allow Max and Betty to divvy up farm assets so that the farming son could get most of the land and his siblings getting a quarter section. The farming son could manage all of the land and equipment, but this plan allows Max and Betty to pass farmland to their non-farming children as well, Sabourin explains.

Depending on which option the parents choose, the farming son may need to come up with extra cash to compensate his siblings. To that end, he bought life insurance on his parents’ lives to provide liquidity for the transfer.

Instead of taking a loan from the bank, purchasing life insurance is a tax-efficient alternative. He could purchase the life insurance on his parents’ lives inside his own farm corporation and use corporate dollars to pay for it. Upon his parents’ passing, the insurance proceeds would be able to flow tax-free to him personally by exiting his corporation via his capital dividend account, Sabourin explains.

If Max and Betty decide to leave 25 per cent of their estate to each of their non-farming children because they believe it works well in terms of perceived fairness and tax management, their farming child would need to come up with $1,307,500. Instead of taking out a bank loan, insurance would be a more efficient option. However, a secured loan at today’s low interest rates would be workable provided the farm is productive.

The problem of fairness has a tax component. The farmland can be transferred to the farming son tax-free. He would be able to inherit the farmland with a bumped-up cost base by using his parents’ capital gains exemption of $1,000,000 for each parent. This will allow for tax savings in future if he ever sells the land. That’s because the adjusted cost base will be increased at the transfer.

The plan minimizes taxes for land transferred costs and will generate no capital gains taxes. Life insurance provides liquidity for the farming son to pay his siblings. The transfer is easy to understand and is equitable for all three children. It allows each to be successful on his own terms in the future, Sabourin notes.

There are other advantages to the plan. Not only is it simple in concept and transparently fair, it avoids the complexities and costs of layers of outside advisors. The overall concept is sharing of assets rather than selling them. It keeps the family farm together in concept and as a family enterprise. Indeed, given the middle ages of the children, the broad concept of this plan could be used for their own transfer to their children in decades to come. It is a kind of plan for family farm generational shift — fair, understandable, cost-effective and flexible given appropriate advice.

As a postscript, it is important to note the family farm in Canada is an endangered species. Just in the period from 1986 to 2016, Canada lost one-third of its farm families. In actual numbers that’s 300,000 farms down to 200,000, according to Statistics Canada. The next decennial census of Canada is set for May, 2021. The figures are not likely to improve.

About the author


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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