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Three Common Pitfalls Of Succession Planning

Succession experts and provincial and federal governments alike have stressed about a looming crisis where billions of farm assets are about to change hands. The need for the older and, in most cases, the current generation to seek and obtain assistance in transferring their assets to the next generation is still there. From 30,000 feet that is what appears to be happening.

But down at field level concerns and issues that affect both the new entrants and the existing generation remain. The highly capitalized industry handcuffs some new entrants on the issue of asset ownership. Land is rented and equipment leased. The exiting generation needs retirement income and often retains land for cash flow.

NOT LETTING GO

In a family farm setting, we often see the father holding onto control of the assets and decision-making, while the farming son or daughter ages well into their forties with no sense of direction. Some of the common lies told around the farm kitchen table/ shop are: “Some day this farm will all be yours!” or “Don’t worry, your brother or sister has a good paying job, they are not interested in the farm.” When it comes down to the brass tacks the father or parents never let go and the off-farm siblings do have a strong interest in the farm assets.

DEFERRED TAX TRAPS

A common trap we see is the result of years, even decades of tax deferral measures (deferring income, purchasing livestock, farm inputs and equipment, etc.) by the current farm owner just so they don’t pay income taxes. The farm business becomes a ticking time bomb or an endless treadmill. The only way to get off or stop the treadmill is to pay tax or pass the tax burden to the family. These measures can create large debt loads or ballooning deferred income into the following year that has to be dealt with by the next year end. Business decisions get masked over by the fear of paying tax. The generation next in line often gets frustrated by this way of thinking.

UNKEPT PROMISES

The crisis that remains in succession planning today is simply not starting; families do not communicate enough with each other regarding the future of the family farm. Where does the farming son or daughter fit? Or the non-farming sibling(s)? The farming son or daughter needs assurance that they will have the opportunity to continue to farm and be successful without any distractions and not to operate on a hope and a promise. Non-farming children need to be treated fairly but not equal and given an explanation why.

Many times these promises to the farming children do not come to realization as the aging parents keep their finances and estate plans to themselves until their passing. In some cases all the children receive an equal share of the land, watering down the foundation of a viable farm for the farming son or daughter. While in other cases all the farm assets go to the farming son or daughter with non-farm assets going to the non-farming siblings.

Questions that need to be asked by both generations are:

When will I/we be able to make some and eventually all the farm decisions?

Can they make the right decisions? If not can I/we live with the results? Can I/we provide guidance or advice in making these decisions?

Will I/we have an opportunity to keep the farm base together and grow?

How do I/we treat all our children fairly when transferring the farm?

How can I/we transfer the farm while managing the tax position?

These are only a few of the questions to be asked. The key is to start now and work towards common ground between the exiting generation and the entrants. The farm took decades or in many more cases a century to build. Expecting to transfer the farm in days, weeks or months is not realistic. Most plans take six to 18 months to move from planning to implementation.

DaveBeckie,P.Ag.CAFA,isdirectorof agricultureclientservicesforEndeavor CharteredAccountants.Hewasbornand raisedonafamilygrainfarmintheDavidson, Sask.,area

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