In December 2011, I wrote a book called “Keeping Farming in the Family – a guide to farm succession”. My motivation for committing a lot of time and effort to this venture was a compelling desire to help farming families understand how farmland in this country can indeed stay with farming families. The book is written for farmers, but it has also appealed to advisers in the rural sector.
The issue of succession planning is ever-evolving. For example, as recently as three decades ago, it was assumed that the eldest son would succeed to the farm if he wished and this was rarely challenged. This is no longer the case.
In my experience, the common problems with farm succession are:
- Farming families are often too busy to plan long term – but this is common for most small to medium-sized businesses.
- The succeeding child often fails to put pressure on the parents and trusts that their contribution will be rewarded in due course.
- With the best will and intention, it is difficult for farming families to conceive of a solution to the many succession issues, especially fairness to the non-succeeding children. The best solution rarely comes from the family. Their skill and experience is farming.
- An inability to find an adviser with the skill and experience of planning successful succession.
I am convinced, by the hundreds of plans that I have now implemented, that the secret to a successful succession plan lies in establishing a proper legal structure. A good legal structure forms the solid foundation needed for the many different plans that farming families implement. More of this later.
I have been able to isolate issues common to every succession plan. I refer to these common denominators as the “Three Objectives”.
In order of priority, the Three Objectives are:
- Financial and emotional security for the parents To ensure that the parents’ financial position is absolutely secure and their emotional sense of doing what is right is satisfied.
- A flexible and resilient plan for the succeeding child To ensure that the land and buildings and the farming operation transfers smoothly and properly to the succeeding child and to create a business that has long-term viability. Such a plan also needs to survive each of the generations.
- Fairness to the Non-Succeeding Children To ensure that the non-succeeding children receive a fair share of their parents’ inheritance.
Whilst the succeeding child and the parents can often devise a plan that will work for both parties, the plan falters at the point where they endeavour to achieve fairness for the non-succeeding children. A range of factors makes this task difficult. However, it is possible to implement a successful plan so long as the legal structure is correct, the plan has been created and reduced to writing, and the plan is implemented early.
The legal structure that provides the vehicle for a successful plan is a company owning all farm assets including land, with a family trust as shareholder.
I know that a trust owning farmland has been favoured by advisers in the last two decades. Whilst there were good reasons in the past for farmers to own land in trusts, predominantly tax and asset protection, a landowning trust does not provide the transferability required to implement a long-term successful succession plan that meets the Three Objectives.
In devising a plan it is very important to the parents that fairness to the non-succeeding children is achieved. There are two vital ingredients to achieving this goal:
- Sell the shares in the company to the succeeding child at current market value; and
- Recognise the succeeding child’s contribution to retaining the farm and by providing incentives and concessions to the succeeding child commensurate with that contribution.
The plan is implemented by the parents’ trust selling shares to the succeeding child. Depending upon the profitability of the farm, the succeeding child may need to acquire these shares over two or three decades.
You will see from this second diagram that the succeeding child acquires shares either by purchasing them or by receiving the shares as a gift.
It is important to understand that the sale of shares by the parents’ trust to the succeeding child (who would do well to also form a trust) is a normal arm’s length transaction for value. That is to say, the succeeding child generates income through farming (salary, dividends and other sources) and pays cash to the parents to purchase shares. The value of the shares is determined at the date of the transaction.
It is also important for the parents to understand the level of commitment being made by the succeeding child to take over the farm. Recognition of this contribution is rewarded by the parents providing incentives and concessions to the succeeding child in recognition of this commitment.
In my view, the urban, non-farming moral view that farmers must distribute the land value equally to each of their children, which is the essence of a trust owning farmland, has no place in the rural community. Parents need to have the courage to reject this urban myth and recognise that the farm is owned by them and it is up to them to decide what is fair.
In my view, it is time that the moral and legal entitlement of the non-succeeding children to an equal share of the farm is dispelled.
I do not need to cover the many advantages of farm succession. Farming families best appreciate all of these factors. I think that it is time that the rural community stands up to be counted and to challenge the assumption that a succeeding child benefits the most from farm succession, or that the sale of the farm to satisfy a mathematically equal distribution of capital to the children is in the best interests of any member of the family.
Farm succession is an important, solemn obligation of farm owners in circumstances where the parents have a child or children wanting to continue with farming as a vocation. But it takes leadership and a determined resolve by the parents to convince the family to change its mindset from “what’s in it for me” to “let’s all work together as a family”. By achieving this paradigm shift the parents will ensure the farm is retained which will financially and emotionally benefit the whole of the family. Under this mindset, the successor is properly celebrated as the hero because he or she makes succession of the farm possible, rather than the person who is “getting something for nothing”.
If this sentiment resounds for you, then you would do well to further investigate these issues. Some of the answers are available in my book “Keeping Farming in the Family – a guide to farm succession
The information in our articles is general information only and does not constitute legal or other professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article - including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.