In this final instalment, Andrew DeRuyck and Mark Sloane offer 10 options for transferring your farm to the next generation
The moral of this series is that often the biggest obstacle in developing a succession plan is getting started.
We’ve been involved in many successful transitions. The common thread is often that one generation takes the bull by the horns and develops options they feel they can offer the other generation.
The following list outlines a few of the common agreements and tools that can be used in a successful transition.
Often the retiring generation is faced with the decision to deal with assets such as land, equipment, buildings, and livestock. They need to decide whether they are selling that asset now, at some point in the future, or if the farm business will simply rent the asset with the ownership of the asset determined in the estate plan. Here are some options to consider.
10 transfer options
1. Immediate outright sale: An outright sale also gives control and security of the asset to the generation operating the business and therefore plan with more certainty.
One of the benefits to making an immediate outright sale is capital gains crystallization, which could avoid tax should the capital gains tax exemption be eliminated in the future. Depending on age, this may also avoid future claw back of Old Age Security Benefits.
Potential drawbacks to this option include loss of equity from divorce, loss of control for parents, immediate tax implications, uncertainty around future income stream, exposure to inflation risk for parents and loss of gifted equity if farm is sold in the future.
Assuming the asset is to be sold to the next generation right now, the options for helping structure that sale may include the following:
2. Vendor financing: the retiring generation may choose to carry the financing for the asset purchase. This can be as simple as a note payable or more structured with a mortgage payable. Either can be partially or entirely forgiven in the estate plan.
3. Occupancy agreement: The retiring generation has the option to sell assets but maintain an occupancy agreement securing rights and access to certain parcels or assets.
4. Life interest: Similarly, access to assets can be secured by the retiring generation through the registration of a life interest on any particular land title ensuring that they can continue to reside on property until their passing.
5. Joint Ownership: The retiring generation can sell an undivided interest in assets, thus not giving up complete control but giving the successive generation some certainty and comfort around the future plan for the assets, providing more clarity for their business planning.
6. Future sale: The retiring generation can draw up an agreement to sell the assets in the future. Some of the benefits of this are: keeping the assets in the hands of the retiring generation until next generation is stable in business; securing a future income stream; protecting against inflation; and protecting equity that may otherwise be lost should any marital issues arise. This option also provides clarity to the next generation for their planning purposes.
7. Agreement for sale: This tool allows for the payment for the asset over time with the eventual transfer of ownership upon the final payment.
8. Option agreement: This tool allows for a predetermined sale date and potentially a predetermined amount at some point in the future. Typically some consideration is paid up front in exchange for the certainty this provides in the future. Similarly to buying options within a stock exchange, the option does not necessarily need to be acted upon.
9. Rental agreements: Some farm families choose to keep business operations separated from ownership. These scenarios typically involve many family members, some of whom are farming and some that are not. For example, the children may collectively own all of the land together and the land is rented to the farming children within that group.
10. Land rental: This could be done on cash or crop share terms, or a combination of the two.
There is no one set of agreements or arrangements that will work for every farm. The key to finishing a succession plan is starting it. Your plan may not be perfect but your only guarantee of failure comes from not starting. The more you can clearly understand each other’s priorities and motives, the more constructive discussion that can take place ultimately satisfying everyone’s wants and needs.
This series of articles will not allow you to complete your succession plan, but hopefully it will help you and your family start the discussion and keep the ball rolling until agreements can be reached. As asset values continue to rise on the farm, the value from a well-planned succession will only increase. †