09 Jan Keeping Farming in the Family – a retrospective by Ian Blackman (published in the Dairy Exporter)
It has been nearly eight years since I first published my book Keeping Farming in the Family – a guide to farm succession. I wrote the book for the farming community because there was a lack of information in the sector regarding this important topic. My primary goal has always been to help farming families.
Within five years I had sold out of the first edition and this was an opportunity to revise the book for the second edition. The fundamental message has not changed.
THE FUNDAMENTAL PRINCIPLES
The message is that farming families need to get their legal structures and ownership right. If you have the foundation of a sound, flexible legal structure then your succession plan has the opportunity of being successful. Without this solid foundation the plan is almost always destined to fail.
The legal structure I recommend is for all of the business assets of the farm, including land, to be owned by a limited liability company and for the shares in that company to be owned by the parents’ family trust. The plan is implemented by the trust as shareholder selling shares to the successor over a lengthy period of time, with the intention that the successor eventually owns most or all of the shares in the company.
In my experience of implementing hundreds of succession plans, this is a very effective way of transferring all the assets of the farming business to the successor over a long period of time. The parents’ family trust sells the shares to the successor at the then current market value. In this way the parents can be scrupulously fair to the non-succeeding children and it provides the parents with cash flow from the sale proceeds during their retirement.
Owning land personally or in a family trust is not effective for succession planning. If the land is owned by the parents personally, the assets will usually pass to the children equally. If the land is owned by a trust then likewise the children are entitled to an equal share of the assets as beneficiaries of the trust. Owning land in a trust in this way is a time bomb which will explode on the death of the parents. The succeeding child is forced to sell because he or she cannot fund the share which is distributed to the non farming children.
I have recommended to many farming families to put the land in a company with all other farming assets and to sell the shares in the company to the successor over time. In this way on the death of the parents the successor usually holds over 60% of the shares in the company. His or her share of the inheritance can then be used to purchase the balance of shares from the other children.
Every effective succession plan needs to meet the following three objectives, in order of priority:
• Emotional and financial security for the parents
• A flexible and resilient plan for the successor
• Fairness to all members of the family
Few farmers are able to devise, by themselves, a plan that can effectively achieve these three objectives. In the past, fairness to the non-farming children was often sacrificed in the interests of succession. My book explains how you can achieve those three objectives without compromising any one of them.
The revised edition of my book contains a new chapter on the subject of fairness. Since writing the first edition and meeting with many farmers, I realised the importance of this issue.
The parents’ view of fairness often differs greatly to the view of their non-succeeding children. The parents often think that passing custody of the land to the succeeding child is more important than an equal share of the estate to each of the children. The non-farming children, supported by their urban partners, most often feel that they have a legal and moral entitlement to an equal share of the land and other assets.
The following topics are addressed in the new chapter.
Current Attitudes – the rural versus urban attitude towards fairness. As a general rule farmers see succession of the land as an important emotional issue and do not necessarily attribute any great cash value to the land. Conversely, urban folk tend to see land simply as a commodity with a high cash value. This divergent view becomes highly relevant to a discussion on what is fair when implementing a succession plan.
Family succession to the farm and the emotional value of succession to the parents. It is important that the parents assert their legal and moral right to decide, but do so in a considerate and understanding way. The right to decide what should happen to the farm is clearly and squarely in the hands of the parents. This important process relies on understanding the distinction between the parents “asking for permission” (never do this!) and”asking for feedback” (always do this!).
Too many so-called experts in this field believe that having a family meeting is the best way to start the process of succession planning. My experience of this approach is that such a meeting simply (but inadvertently) leaves the non-succeeding children with the idea that the decision will not be made without their permission. It is important not to create this impression.
Fairness to the successor – it is vital to ensure that the successor, who has committed his or her family’s future to farming the property and maintaining or increasing the value of the property, is treated fairly. It is important to recognise the succeeding family’s contribution. Too many times such a commitment is made by the successor because of the love of farming and to help the parents. There can be a corresponding reluctance on the part of the successor to raise the difficult issue of whether there is a succession plan and how it works. Without a plan, the farming child loses the opportunity to own the farm and to continue the family ownership of the farm for future generations.
Solving the fairness issue. In the book I discuss the best way of solving this difficult issue. The process involves the whole family but it is important to follow the correct order. This is a brief summary of that process.
1. The parents decide what they want and what they think is fair. It is their decision.
2. The succeeding child commits to the joint venture business plan.
3. The parents arrange a first meeting with the whole family.
4. The parents present both the business plan and the family plan. The advantages of a proper succession plan are explained.
5. All family members are encouraged to respect their parents’ right to make the decision.
The mindset in approaching this delicate issue is “let’s work together as a family” and not “what’s in it for me.
PLANNING, MEETINGS AND DECISIONS
This chapter has been revised to include meetings and making decisions.
The proper implementation of a succession plan depends on the parents first deciding what they want through a planning process. They should probably undertake this task with their professional advisers.
Once the plan has been formulated and documented, the draft plan should be discussed with the successor. The parties should enter into arm’s length negotiations concluding with a joint venture agreement. This written agreement records a commitment by the successor to the business plan and a commitment by the parents to sell shares in the operating company over a period of time. The parties need to understand the commitment that each of them is making to the other.
When the commercial negotiations on the joint venture are concluded it is time to share the draft plan with the whole family. It is not uncommon at this juncture for the succession planning adviser to be involved and chairing the meeting with the family. In this way all aspects of the plan can be explained to the whole family.
The new part of the chapter dealing with decisions identifies the types of decision, how to make the right decision and what is involved.
There are two categories of decision – the business decision and the family decision.
The business decisions are those made by the company. The family decisions are those made by the parents’ trust. It is often difficult for a family to understand this important distinction but it is vital. Families will find that understanding this distinction and acting on it will render the making of each decision much easier.
When a business decision is to be made, then the criterion to be applied in making that decision is “what is in the best interests of the company”. It is important to ensure that the decisions that involve legal relationships should always be at arm’s length. For example, if the successor is employed by the company, there needs to be an employment agreement and the terms and conditions of that employment need to be set at commercial rates and on commercial terms.
Conversely if it is a family decision, then the trustees simply need to act in accordance with their obligations. They are required to consider the needs of the beneficiaries and make a decision without regard to commercial efficacy. This decision will normally be unanimous and will be recorded in writing. The great thing about a trust is its flexibility. You will learn more about the need to have a family trust by reading my book.
The task of succession planning is a difficult and solemn one. The fact that it occurs at all is a testament to the resilience and “can do” attitude so prevalent in the rural sector.
However, a salutary warning, the court cases involving farmers with estate planning failures abound in New Zealand and each case is but a fraction of those plans that have failed. Given the amount of capital wealth involved and the emotional importance of these plans, every farmer should understand the issues and have an expert involved. There is a chapter in my book about finding the best advisers.
Succession planning is too important to simply assume that your professional advisers know enough to get it right: The faith that many farming families have in their professional advisers is not always well placed. This point is well illustrated in the first chapter of my book and the court case of Scott v. Scott.
The starting point is to learn as much as you can about the issues and processes involved. Work together and read and learn as much as you can before you embark on this enlightening journey.