3 ways to balance retirement with farm ownership change

Farms are expensive. For families in transition, ensuring the next generation has enough capital to buy the farm while leaving the previous generation with enough to retire can be challenging.

However, actions taken now can help prevent greater burdens for both parties later.

Ideas to help make the family farm more affordable to the next generation while ensuring the exiting generation can retire comfortably. Tweet this

Establish an estate freeze

Renée Senko and Darcie Sabados, chartered professional accountants with Wilde Advisory Group in Vegreville, Alta., say enacting an estate freeze for an incorporated farm – where the current value of a farm is locked-in while future growth transfers to the next generation – is an excellent retirement strategy. Doing so puts preferred shares in the hands of the parents to redeem and fund their retirement from future cash flow, which is generated from farm operations.

They add this is often an affordable solution for the next generation, and farmers should talk to their professional advisor to determine how an estate freeze could be enacted in their unique situation.

It’s not a cure-all, though.

Colin Sabourin, a financial planner and investment advisor with Winnipeg-based Harbourfront Wealth Management, says estate freezes don’t address whether the price of the existing, fixed-farm value is feasible for the incoming generation to begin with. For this reason, he says getting children to invest in the farm earlier can allow them to leverage (or access) more of their equity to later buy out parents.

“If you’re looking to pass the farm to the next generation and the value of your farm today is plenty for you to retire on, freeze it, and pass on the future growth to your children” says Sabourin.

Look for feasible discounts

Senko and Sabados say selling farmland to children at an interest-free promissory note can also be an effective strategy. The security of a promissory note will also protect the parent’s equity on farm assets.

Selling farmland to children can take place at an amount that meets the parent’s retirement cash requirements. The selling price can be anywhere from cost to market value and utilizing the capital gains exemption can help mitigate the income tax.

“A capital gains reserve may be used to bring the sale proceeds in over a period of up to 10 years, which could further reduce income taxes,” says Sabados.

Start off-farm savings program

“If you’re afraid your child won’t be able to buy you out outright, and you’d like the farm to stay in the family, then start saving off the farm so you can afford to give them a discount,” Sabourin says.

This, he adds, can be done through any number of avenues including a tax-free savings account, registered retirement savings plan or other non-farm business investments.

Senko says the next generation should be mindful of getting caught-up in unnecessary early investments – namely equipment upgrades. Being conservative, reviewing lease versus straight purchase options, and having a capital replacement plan can do a lot to reduce farm-investment risk.

Overall, Sabourin says saving early is the best way to ensure a balance between the needs of each generation.

“Make retirement projections based on how much you are saving today to see how much you’ll need from the farm. If the equation doesn’t work for a child to potentially buy the farm, it might be a good idea to have a more aggressive savings plan,” he says.

Bottom line

Estate freezes, strategically selling assets and proactive savings plans can help alleviate the financial burden of those buying – and those exiting – the family farm. Discuss options with experts and advisors early to find a balance that works for each generation.

Article by: Matt McIntosh