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Next Zoom Seminar: Farm Transitioning

Thursday February 10, 7pm.


The Guide

The Guidence &

The Good life


Barry Stollery CAFA

Lead Farm Management Consultant

                                          

 


"Every farm and estate will transfer someday, whether by choice or by accident, within the family or to a stranger."


 Most farmers and farm families have ideas about how they can pass their farm business into the hands of successors, but many find it difficult to move from ideas into a plan that will work best for everyone. As such, the necessary time that a transition requires is often put off or overlooked. In fact, a large percentage of families don’t start thinking about how to do this, until an event or crisis forces them to react. Not being properly prepared for any eventuality, at any time, can be very costly. The Gov’t requires a farm business to be appropriately defined 2 to 5 years before major tax breaks on the sale of a farm can be used.

 


We provide unlimited, no-cost access for farm talk solutions and guide clients through the process of selling farms in whole or in part. Hundreds of thousands of dollars of tax breaks are often overlooked or not available to the unprepared. Our role is not only that of advisor but also as a mediator, to help all concerned, understand the process as we go. We will work with existing lawyers and accountants or bring in others as necessary. Our clients (farmers or non) will receive a full financial plan and evaluation from which net worth can help determine future guaranteed income for life, lifestyle options and legacy solutions. We’ll plan your Estate, document your Executor, Power of Attorney, Personal Directive, and we’ll have a Lawyer make your final wishes uncontestable. A farm sale changes everything, and everything post sale must be made anew.


For more about us, connect with Barry Dean Stollery on Linkedin or Norm Powell at www.ppwmi.com.

 

Thank you for your interest, and we hope you find the following information useful.

1. FROM HERE TO THERE


Transition

Transition planning is the process of planning to transfer the ownership, management, and operations of an agribusiness to a child(ren), relative or another successor. Transition planning brings together a willingness and readiness to work this out with a path forward to achieve the desired result. This is not a single event, rather, it is an ongoing process. In some cases, there may be immediate needs, such as insurance or switching to a proper business designation, but comprehensive planning involves many vital legal details, and it often takes longer than one might think. Transitional process notes need to be taken and updated, revised, and referred to on an ongoing basis.


Preparation 

The transition starts with the question of readiness. This leads to the development stage where legal, financial, and accounting documents get analyzed. A financial plan is needed to evaluate assets vs liabilities and to determine the net worth. After a farm sale, securing investments, establishing an income for life and estate issues are addressed.


Post

Estate planning can take into account fair compensation for those not directly involved in the farm transfer. Specifically, estate planning includes organizing wills and legal documents, tax management strategies, estate distribution, contingencies, and other financial matters including investments, and life insurance. If you do not intend to pass your farm business on to a family member or already have passed it on, you likely still need financial and estate plans to know how to maximize your retirement and ensure an orderly passing.


2. ARE YOU READY?

2. ARE YOU READY?

  • GOALS:                                                                                                                                                                                           Having a clear understanding of your future goals, as well as those held by everyone else involved in your process, is a very important part of transition planning. Goal setting is a two-part process: first you first need to decide what you want to accomplish, and then you need to decide when you will accomplish it. Many people find that the ‘when’ part of goal setting is problematic: they know what they want to do but they have trouble committing to a timeline to get there. A goal without an accompanying action plan is merely wishful thinking.              
  • VALUES: individual, family/group                                                                                                                                                           A family and a business strive for quite different goals. A family ideally prioritizes belonging and relationship, businesses most often prioritize resources into profit. Blending family and business blurs the lines that distinguish one system from the other. Unless carefully managed, this blurring can cause conflict between relationship and business goals.
  • FAMILY FIRST/BUSINESS FIRST:                                                                                                                                               
     A family and a business strive for quite different goals. A family ideally prioritizes belonging and relationship, businesses most often prioritize resources into profit. Blending family and business blurs the lines that distinguish one system from the other. Unless carefully managed, this blurring can cause conflict between relationship and business goals.                                                                                                                                              

 RETIRING GENERATION

Early in the transition process, it is important that the individuals expecting to transition out of actively operating the farm write down their initial thoughts on retirement, the transfer of ownership and management, and their estate distribution. Key to the retiring generation is how much money they will need and what lifestyle they expect to live. Typically, farmers transitioning out of a farm business will use the capital from the sale of their farm to finance their retirement.

 

Being open and straightforward with family members about initial thoughts on retirement will reveal areas where additional research, thought or discussion is required, but until a net worth is established, talk is just speculative. Taking the time to clarify expectations at the front end of the transition process will make the rest of the planning process move smoother.


Retirement - What does it look like to you. (make notes)

  • SUCCEEDING GENERATION:                                                                                                                                                        Before committing to the transition process, individuals transitioning into a farm’s ownership and/or management should take time to write down and talk about their initial thoughts on the transition planning process, including their priorities, expectations, concerns, and timelines. It is a good time to have a get-together or Zoom meeting after both parties have had a chance to think about this, then some preliminary understandings can get things going. We can help direct the agenda. It’s often better to have a non-family mediator chair meetings.
  • FINANCIAL PERFORMANCE:                                                                                                                                                         One of the most important tasks in transition planning is accurately analyzing the financial performance of the farm operation. Unfortunately, many people working in a transition jump into making decisions about farm buyouts, estate/inheritance plans and living arrangements with inadequate and/or inaccurate financial information. Assuming that a farm business will be able to financially support personal and business goals without adequate analysis is risky to a family/group’s harmony and to the long-term operational success of the farm. A comprehensive financial plan is needed to bring all the finances out in the open. We will work with your accountant who can provide financial statements and tax returns from the past three to five years. Assets and liabilities will be added up to reveal a financial snapshot of your present situation and net worth. This is critical to showing what is financially possible for both buyer and seller, moving forward.                                       
    I will order NOAs and financial statements from my Accountant (Date)____________________________
    I will order property rights and all legal papers from my Lawyer__________________________________
  • MANAGMENT:                                                                                                                                                                                           A management assessment boils down to a single key question: Will the management decisions the farm manager make today, pave a path so retiring and succeeding generations can achieve their goals in the future? Ideally, the existing manager will be sensitive to the desires of the succeeding parties and hopefully the succeeding party won’t attempt to push changes for their benefit onto the existing manager.

PERSONALITIES/BEHAVIOURS AUDIT:

Many of the biggest stumbling blocks in transition occur when one or more people assume other participants should think or behave just like themselves. But different personalities can and do successfully work together all the time to develop and implement transition plans. After all, it’s in everyone’s best interest to do this fairly and correctly. Patience, understanding and a willingness to work through issues are necessary factors during transition. 

  • HISTORICAL BUSINESS DEVELOPMENT:                                                                                                                                   In the life of every farm business, certain events occur that could be considered monumental or business altering. Such events could include acquiring more land, changing a major operating strategy, taking on more debt, altering management or hiring new personnel Understanding the factors that shape a farm business over time is fundamental to keeping it on a healthy path looking forward. Those who don’t know a farms history may have trouble understanding how to resolve present issues. Knowing how and why farm decisions were made in the past can provide guidance to the succeeding generation.
  • DECISION TIME:                                                                                                                                                                             Now is the time to finalize a decision on whether your farm and group should proceed or not. Now you should have an accurate picture of your farm’s current status, potential stumbling blocks, and your farm’s likely future. As such, the decision of whether or not to proceed with transition should be much clearer now than it was prior to the start of the Readiness Stage. Still, it can be challenging to determine whether it is ready to proceed. It doesn’t have to be all or nothing for everyone, but a best way forward should be evident.
  • STATEMENT OF INTENT TO PROCEED/DEFER:                                                                                                                       A Statement of Intent to Proceed or Defer is designed to formalize and record a group’s intent to complete or not complete a transition plan following their readiness assessment. Ideally, everyone who is or may potentially be involved in the transition will take part in creating the formal Statement of Intent. A Statement of Intent to proceed, outlines a group’s intention to move forward with transition, creates accountability, and defines a timeline for completion. Often, families/groups that start the transition planning process give up, get stuck or encounter difficulties they cannot overcome. In the event that difficulties are encountered, and planning momentum is lost, this Statement of Intent can remind participants that they are committed to this process and can help renew confidence in completing the process. A Statement of Intent to Defer should be completed if a family/group identifies that they are not ready to participate in a transition plan at this time. It’s useful to document why now is not the best time. Not making a decision, is making a decision. Health can change, accidents can happen, circumstances can change for the worse, but make no mistake the farm will move on to somebody, at some time. Proceed or defer. Desired date for completion. Statement of intent. (make notes)

3. SOUNDS LIKE A PLAN


Now that you’ve taken stock of your situation, filled in the blanks and committed to doing this, we can begin the step-by-step practical process of moving the farm. We will go through some the following development areas to finalize issues and make the move happen in the most tax advantaged way so you can keep more of your hard earned money.

 

Challenges in Transition Planning

Countless emotional issues can still crop up or be brought back to life. Though they are often called ‘soft issues’, make no mistake: they can be decidedly ‘hard’ to solve in many cases. In fact, they can be more difficult to deal with than more concrete operational and financial issues. We can moderate meetings and help keep the plan on track, every step of the way.

 

Ownership Options

There are many options available to transfer partial or complete farm ownership from the retiring to the succeeding generation. If the retiring generation intends to rollover ownership in whole or part, tax options and business structures must be discussed early as some designations have a minimum 2 year enrollment before associated tax advantages can be taken advantage of.

 

Business Structures

Sole Proprietor

Most commonly used, but lest tax effective. A sole proprietorship occurs when the business and all its assets are personally owned by one person (the sole proprietor). Income produced by the business is taxed to the sole proprietor personally. A sole proprietorship is the easiest and least expensive form of business structure to set-up and organize.

 

Partnership

Should be considered when selling, as a husband and wife can both claim a CGE deduction, doubling a huge tax break. A partnership is a relationship between two or more people who agree to together operate a joint, for-profit business. It also applies to any arrangement where, in the absence of a written agreement, the conduct of the people indicates they are carrying on a business together.

Corporation

A corporation or company is a separate legal entity that exists independent of the shareholders or members who compose it. Their financial interest in the company is represented by ownership of shares. Once a farmer transfers property to a company, the company takes title to such property. In turn, the farmer has title to the allotted shares, which are held as personal property. The farmer may continue to control the farming business carried on by the company by virtue of shares held in the company, but the company is the legal owner of the farm.

 

Advisor Information Report

We will provide a completed comprehensive financial plan and initiate solutions discussion about ways to move forward. Much information will be provided so informed financial choices can be based on real data and current market conditions.

 

Estate

Writing and updating a Will with a power of attorney, personal directive and named executor are vital planning priorities for everyone, regardless of their stage of life. As such, it is highly recommended that all participants in the planning process ensure these documents and nominations are complete and up to date.

 

When considering distribution of assets, keep in mind that equal and fair do not mean the same thing. Whereas fair translates to equitable, equal means ‘the same’, an almost impossible ideal during farm transition. Being fair, in terms of value, is key.

 

The reality for most families working on moving a farm is that one or some of the retiring generation’s family will not want to be directly involved in the farm business. The conversation of on-farm and non-farm successors then needs to be about fair, not necessarily equal.

 

Feelings of entitlement are common in transition planning. Successors who have been working on the farm prior to transition planning will often believe they deserve a greater share of the farm and the retiring generation’s estate than successors who lived and worked elsewhere. Yet, successors who have not worked on the farm may feel entitled to an equal share through birthright. Meanwhile, the retiring generation may feel entitled to spend the equity that they have earned as they please. All thoughts and feelings must be understood, and incorporated into the estate plan, but it’s the retiring farmer or estate owner that has the last word.

 

Insurance

Insurance plays an important role in most estate plans and farm transitions. A reason people use insurance is because it provides the money to pay for the market value of the farm without selling the farm. For family farms, life insurance is often used to equalize inheritance distribution. Participants in farm succession must have sound financial information to draw from. Our financial evaluation and net worth calculations will be critical components in understanding how to use life insurance and how to distribute fair value.

 

At death, tax free life insurance payouts are generally used to cover debt, tax liability, and family support. Life insurance can also offer liquidity, tax free access to corporate capital and tax-savings strategies for large estates. 

 

Risk

Risk is a reality in agriculture. Certainly, you know this better than I. But risk can take many forms, and transition planning participants often have different risk tolerances. Usually, as people age, their tolerance for risk decreases. This means that it is common for there to be differences of opinion between the retiring and succeeding generations when it comes to decisions that include elements of risk and how to mitigate them. A huge financial risk is taken by not having a farm set-up properly years before a move, so it can qualify for massive tax breaks when the right time comes.

 

Tax Planning 

Tax implications are complex, but farmers have some distinct advantages. That said, there are some standards to meet. Land acquired post-June 17, 1987 must meet a “two-year gross revenue test” to get the capital gains exemption. This test requires that gross revenue from the farming business must have exceeded income from all other sources in at least two years, not including rent. However, in the case of a family rollover, this includes any two years the previous relative farmed the land. The adjusted cost base can also be set to line up better with the one-million-dollar capital gains exemption (CGE) to create a virtual tax-free sale. Partnerships can double CGEs and corporate designations have low tax advantages.

 

Management Structure

While the transfer of a farm’s management is one of the most important parts of transition planning, many farms do not create a formal transfer structure or strategy. This planning gap can lead to significant conflict and confusion. The retiring and succeeding generations should work together to create a formal transition structure that suits all participants’ transfer priorities.

 

Transfer Methods

Business structure and ownership transfer are complicated topics and determining the best method to transfer farm ownership depends upon many factors. Most farm transfers occur gradually over a period of time based on a combination of sale, gifts and bequest. The appropriate combination of methods is unique to each farm.

 

When determining how best to transfer farm property to the succeeding generation, a primary consideration is how much money the retiring generation will require to live for the rest of their lives. Many farmers spend their farming lives building equity in the farm business, which often results in their being asset rich but cash poor. If the assets are gifted or mostly gifted to the succeeding generation, consideration must be given to the retiring generation’s income needs.  

 

Farm transfers typically occurs at a time in the succeeding generation’s life where living costs are increasing due to marriage and a growing family. These costs must not be underestimated. The succeeding generation will require the farm business to cover operating expenses, income taxes, loan repayments and investment, as well as sufficient income for family living expenses. 

 

Selling Price

In some cases, it makes sense to sell a potion of land for a million dollars, a price equal to the capital gains exemption, this then can give the retiring husband and wife about $5oo thousand dollars tax free. In a succession situation, a farm business’s selling price is largely determined by the retiring generation’s willingness and ability to financially assist the succeeding generation. Cash flow and debt-servicing capacity of the farm business impact the decision.

Typically, some assets are transferred at or near fair market value; others will be sold to the succeeding generation for much less or given as gifts. The total sale price is usually determined by the retirement and estate objectives of the retiring generation and the financial capacity of the succeeding generation.

 

Job Descriptions

Many farms operate according to a ‘if the job needs doing, do it’ philosophy. As such, few farms formalize on-farm job descriptions. However, job descriptions not only help create structure during an upheaval that transition brings, but they also identify the full scope of each participant’s role within the farm business.

 

Roles, Responsibilities and Authority

One of the most difficult parts of transition is the transition of management, which requires the retiring generation to ‘let go’ of the farm business, passing operational control and management authority to the succeeding generation. This process does not happen overnight; rather, it is best undertaken as a gradual process in which management functions transition over time by way of a structured plan.

 

Many planning groups expect the transition of management to occur naturally and seamlessly when the succeeding generation simply steps in and begins working alongside the retiring generation. While this method may succeed, its lack of both structure and clear timelines makes it problematic and potentially frustrating for either or both generations. On the one hand, transition attempted via this method may mean transition to the succeeding generation never fully occurs. On the other hand, transition can occur very suddenly it the retiring generation decides to retire, becomes ill or, in a worst-case scenario, dies.

Training and Skill Set Development

Before the succeeding generation begins to take over management responsibilities for the farm, they should determine what additional personal, operational or management help they require in order to position the farm for success. 

 

Business Agreements

Most farm businesses operate according to a handful or more formal and informal business agreements including supplier and customer contracts, lease arrangements, lending agreements, etc. All of these agreements will need to be reviewed and changed/updated. In addition, outside individuals involved in any agreements will need to be informed that transition is occurring.

Unanimous Shareholder / Partnership Agreement

Much business in agriculture gets done on the basis of a handshake. However, the reality is that farming today is big business. Formalizing and documenting shareholder/partnership agreement minimizes disagreement and conflict, reduces stress and uncertainty, can save both dollars and relationships.

 

Accountant Review

Once participants feel comfortable and in agreement about their transition plan, an accountant will review the plan to identify any financial concerns participants might have overlooked. If all is well, the accountant will sign off.

 

Lawyer Review

Once participants feel comfortable and in agreement about their transition plan, a lawyer will review the plan to identify any legal concerns participants might have overlooked. If all is well the Lawyer will sign off.

 

Final Plan Adjustments

It is highly likely that your lawyer and accountant will suggest changes or provided feedback on some or many elements of your draft plan. This is an appropriate time to conduct a thorough review of documented work to date and a hold a final discussion with all concerned.

4.REST ASSURED

Life does not always work out exactly how it is planned, compromises made may leave hard feelings, but going through this process, you can at least be sure this was the best way forward.

Another stage of life begins and with it comes other priorities. Everything changes once the Farm is gone and new estate plans need to be implemented. Now life is about your financial security. You must never run out of income, so establishing a base of income that will never change or ever run out, will secure a financial foundation to build on.

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