Any good farm succession plan starts with recognising there is a need to address how and when the business is passed on to the next generation. Other considerations which complicate this process are providing an income for several generations whilst wanting to provide an inheritance to off-farm children.
No two succession plans are the same but there is often a desire to be fair to everyone involved. Fair and equal are not necessarily the same things so it’s rarely assumed that this means an equal split of farm and personal assets to everyone. In an ideal world, the farm would be large and profitable enough that it can be carved up and gifted to all the different off-farm children, with the on-farm son or daughter still able to run a viable business and support the income needs of the older generation.
How many families can afford to do that? Even if this could be achieved, is it fair and would everyone be happy?
Control, not ownership
A common myth with farm succession planning is it’s all about deciding who owns the land or who will receive it via the parents’ will. While these decisions do need to be made, it doesn’t address the main concerns of the next generation or their off-farm siblings. For the farm successor, we have observed that they are more interested in control and security rather than who owns the land and machinery.
Control is about being the master of your own destiny and able to make your own decisions. At the end of the day, farmers want to know the business they have dedicated their life to will continue to support their family in the future. A parent’s desire is to see their children grow and live a better life than they could provide. This is why the generation taking over is also keen to give their young children the opportunity to farm, regardless of who owns the land.
What about the off-farm children?
While there is often an understanding that the on-farm sibling (usually a male) gets the farm, the off-farm children at some point begin to wonder where they fit in. This, in many ways, is where it gets awfully complex. Some had a desire to come on the farm but understood the tough economic realities. Some wanted to farm but were never afforded the opportunity. Some have moved on and don’t expect much. Others are bitter that their brother or sister will inherit the farm and they will be left with not much.
The point is there is no way to predict what people are thinking, feeling or assuming. This is the sleeping giant which could cause problems later so it’s important to ask them. It’s much better to get it out in the open and have these discussions while everyone is alive and able to explain themselves.
Finding out what each family member is thinking is difficult and it’s likely that they won’t be completely honest if you bring it up. This is why it must be outsourced to someone independent, with no vested interest in the eventual outcome.
This is what succession planning is about – facilitating these conversations that lead to making decisions that everyone owns and understands. Everyone is more likely to get on board if they feel they have been listened to.
Cognitive dissonance is the uncomfortable feeling we get when we hold two conflicting thoughts at the same time. An example is knowing you should do something but avoid it. One way to make this feeling go away is to apply mental gymnastics in order to justify a making the bad decision. We all do it, myself included. A classic example is when someone starts a diet. “I ate the donut because I’ve been really healthy this week”. The more uncomfortable we feel with the thought, the more we say and do to try and make peace with it.
We see this time and time again with farmers and their succession planning – or lack thereof. They know they should do something about it but avoid it. We hear things like, “It’s expensive”,“I’m really busy”, or even worse, “Dad said it’s all sorted”. These are all great ways to keep kicking the can down the road.
A succession plan is not transferring a block of land into someone’s name.
A succession plan is not setting up a new trading entity for your son and daughter in law.
A succession plan is not discussing it with your accountant.
A succession plan is not saying your off farm-daughters get your shack and super.
A succession plan is not hoping for a good season to pay down more debt.
A succession plan is not getting a will.
A succession plan is not having a great family that would never not take you to court.
A succession plan is not all agreeing that something needs to be done.
A succession plan is not assuming that everyone in the family knows what you are thinking.
A succession plan is not simply saying “Whatever mum and dad want”.
Addressing the elephant in the room
If you find this confronting, it’s meant to be. We’re all busy but believe me, the sheep and spraying can wait. This is about addressing the elephant in the room. The elephant that your off-farm children roll their eyes at. The elephant that your son and daughter-in-law can’t discuss honestly around you. No, these people aren’t greedy and wondering what’s in it for them. They can see the storm brewing while you convince yourself that you’re busy and everything is fine. I can speak with authority on this issue because we see it day in, day out.
Nothing will ever change if you’re not willing to give something up, including your time, money and commitment to the cause.
Succession Planning is much more than getting your wills done
People often confuse succession planning with getting wills done. One appointment with the lawyer, $2,000 later. Wrong! While this is an important exercise, it’s one of the last jobs once all the big questions have been discussed and answered with all family members. You cannot do this – father and son alone – without involving all immediate family members and finding out their honest opinion. Just because they have never said anything – and you have never asked – doesn’t mean they don’t have their own assumptions and expectations. Avoiding this step now is the easiest way to break up a family and wipe your estate clean in legal fees when you’re gone later.
Why Succession Planning should be outsourced
The process in developing a succession plan can be confronting and uncomfortable at times. Therefore, it must be outsourced to a professional who is impartial and not afraid to ask the tough questions. Once a plan has been agreed to, their role is to ensure it is followed through. This means engaging with all the relevant stakeholders and other professionals, such as accountants, lawyers, bank managers and conveyancers. We specialise in succession planning within the rural sector in South Australia.
Transitioning a family farming business to the next generation
We recently advised a couple in their late 50’s on how they could best transition their family farming business to the next generation. From our experience, the most important thing to address first in any family succession plan is the financial security of the parents. It’s virtually impossible to transition the farm without knowing how the people who are exiting the business will be able to support themselves. That financial support might include continuing to receive income from the farm or having sufficient investments to be financially secure or the Centrelink Aged Pension or a combination of these.
Of course, to be financially independent of the family farm means that there are sufficient investments and savings to generate the income and capital needed. This might be possible for some families but certainly not all.
A CentreLink Aged Pension?
Centrelink can be a solution for those who have little saved but the trick is to know the qualification rules and then arrange your affairs in the most effective way.
The current full rate of Centrelink Aged Pension for a couple is almost $34,000 per year and this is reviewed every 6 months. With today’s interest rates, you’d need almost $1.2m invested at 3% to earn $34,000.
The couple I referred to in the beginning of this article operate a farm with almost 3,000 acres and 2 adult sons eager to join the business. The parents have a modest amount saved and can’t see how they can plan their exit, let alone allow their sons to be involved in the farm. If things are tight with one family relying on the farm, there’d be no chance with 3 families. Their situation was causing frustration in the family because there seemed to be no solutions. Centrelink wasn’t something they’d considered or thought they might receive.
Qualifying for a CentreLink Aged Pension
We’re certainly not advocating that people aim for Centrelink benefits but for some it could be a part solution or their only option. To qualify, Centrelink will assess your assets and income. From Jan 1st 2017 the upper asset limit where no pension is payable reduces to $823,000 and, most farm properties, would be worth much more than this. However, by transferring the farm assets to the next generation, you can apply for the Aged Pension after 5 years. This is called the ‘deprivation of assets’ rule. In this case, timing the transfer is important. Currently, the age qualification is 65 but will rise to 67 in the next 7 years
There’s still the opportunity to have up to $375,000 in assets with no reduction in the Aged Pension for a couple. The amount of pension reduces for every dollar of assets over the lower limit and cuts out at $823,000. Therefore, you can have investments valued at say, $500,000 and still receive a part pension.
The other handy thing for farmers to know is if you have lived continuously in your home on the farm property for 20 years or longer. In this case, the title isn’t included in the assets test.
The best Solution comes from Communication
We feel that if a farming family is willing to communicate and work together, then there are solutions to make a successful succession of a farm business from one generation to the next. We’ve helped many of our farming clients to facilitate discussion between family members and help develop an overall succession plan. In fact, there are some quite amazing results with multiple benefits including resolving estate planning issues and tax efficiency. Ultimately, what every family wants is harmony and maintaining good family relationships.
Testamentary trusts can split income among beneficiaries to suit their tax situations, and offer asset protection in the event of children going bankrupt or suffering a marriage breakdown. It’s best done with the help of professional advice from a solicitor or trustee company. “It’s not something you do through a will kit — it’s written into the will and is really something you need to get advice around.”
A standard will may cost you about $200 and a testamentary trust another $200, Budreika says. He prefers people appointing a professional to manage the trust rather than a friend or family member.
“Most people who get left as an executor of an estate have no idea what to do.
“In the end you can’t stop people from doing what they’re going to do, but you can try and mitigate mistakes as much as possible.”
Review your nominated beneficiaries, check that dependants you nominate are allowed under current laws, and remember that your superannuation does not automatically form part of your will.
People wanting their super to be part of a will and testamentary trust need to make that nomination with their super fund.
No doubt you would’ve heard the saying ‘if you fail to plan then you plan to fail.’ From our experience this is a true statement and applies to so many areas of our life.
This topic on succession planning is really about one generation exiting a business and the next generation taking over. Each family farming business eventually has to deal with this matter, either by choice or being forced to act after an unfortunate incident.
We’ve identified four main reasons for creating a succession plan:
Desire to retain the family farm for the next generation
Minimise family conflict
Protect the business
Maintain family harmony and relationships
In formulating a succession agreement, there are four main steps:
Exit and retirement plan for the older generation leaving the business
Transition plan for the next generation
Decide / change ownership of assets
It’s important that the process follows this order.
We met a person recently who provides rural skills training who said there is a scarcity of specialists who work in this field. We know he is correct. The reason, we think, is because it requires experience, empathy and common sense as much as technical ability. The process of succession involves transitioning different generations who often have different objectives and motivations. This means there usually aren’t quick fixes or resolutions.
So what makes a good succession planner?
Someone who facilitates and communicates between family members
Acts impartially with no vested interests
Understands what each generation wants to achieve
Develops a strategy plan that the parties agree to
Follows the project through to completion
It’s advisable to use someone who is independent of the family, coordinates the process and calls on the services of the family accountant, lawyer, banker and even agronomist. If they know and understand farming then that’s even better.
So when it comes to seeking expert succession planning advice, I’m pleased to say, we are one of those scarce specialists. We’ve had over 25 years working with farming families in SA and have a particular focus on the Eyre Peninsula.
It’s quite common for people to spend a lot of time focused on building their wealth but give little thought to what happens to it all after they die. Many laugh it off, saying “I don’t have much” or “the kids can have my debts”. I can assure you it is no laughing matter for the family at the time of death, as only then do they gradually learn what arrangements are in place (or not) and what this means for them. Without the correct estate plans, this job is extremely costly and time consuming.
Estate plans include Wills, Powers of Attorney and Advanced Cared Directives (formerly Power of Guardianship).
A Will documents who inherits your assets and possessions once you have passed away and who is responsible for managing and distributing the estate on your behalf (the executor). This excludes money and assets in superannuation or any other type of trust, which have their own rules. In South Australia, marriage ordinarily revokes any previous will. Those who die without a will have their affairs dealt with according to intestacy laws, which are slow and unlikely to match what you may have intended.
Power of Attorney
A Power of Attorney appoints a person or trustee of your choice to manage your financial or legal affairs while you are still alive.
Advanced Care Directive
An Advanced Care Directive outlines your lifestyle wishes if you are too unwell to make a choice. For example, it nominates the person who decides to switch your life-support machine off.
A surprisingly high amount of people do not have any documented estate planning arrangements. Reasons why may include; cost, time, effort or simply not being aware of its importance.
Most general legal practises offer estate planning services, although our experience is that they are often not thorough. A surprisingly high number of clients who have seen a lawyer in the past to arrange their will, do not have a Power of Attorney or Advanced Care Directive. We find this odd given the insignificant additional cost involved. Typically, this is because lawyers act on instruction only. The trouble is – you don’t know what you don’t know. How can you instruct someone to provide you with specific estate planning solutions if you don’t know what they are? Experienced practitioners who operate in this space will know what questions to ask, which is why we usually recommend seeing someone who specialises in this area, rather than who is merely convenient in town.
While we cannot create these documents for our clients, we have a good enough understanding to alert and guide them through the process.
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This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. You should read the PDS and consider whether the product/s is right for you. Past performance is not a reliable indicator of future performance.
Strategic Advice Solutions Pty Ltd (ABN 86 619 221 662) t/as Planning for Prosperity is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523