What if the incoming generation can’t afford the farm?
Farmland prices have gone up considerably across Canada in the past decade. In some areas, increases were 400% or more. In many cases, quota prices have also increased. While these numbers look great when calculating a farm’s net worth, they make it nearly impossible for this generation to buy out their parents at full market value.
“I don’t know if there are any farms out there that can generate the profits needed,” says Terry Betker with Backswath Management in Winnipeg, Manitoba. “So some portion of the succession plan is going to have to deal with this.”
In the vast majority of transfer plans, the younger generation will have to take on some debt to take over the farm.
The question is, how much?
Parents need to decide what’s going to be sold to their children and what will be transferred as a gift or part of the estate, Betker says. Before embarking on any transition plan that means the operation has to service a lot of debt, it’s important to look at the farm’s profitability over the past five years and see if that amount of debt will leave the farm viable.
There are no cookie-cutter solutions when it comes to succession and estate planning, says Lance Stockbrugger, a chartered accountant and farmer from Englefeld, Saskatchewan. Important considerations for one family hardly matter at all to another. Individual solutions must be found, so families should start discussing expectations as early as possible.
When he’s consulting on a farm transition, Stockbrugger often suggests the older generation maintain ownership of the land. First, he says, owning the land provides security for them as they age. It also provides them with protection in case of a child’s divorce. Finally, it lets them be fair to non-farming children in the estate.
“I’m a big proponent of having children set up their own operations when they come back to farm with their parents – not joining Mom and Dad’s corporation right away,” Stockbrugger says. “Instead, they should start by renting or buying their own land and the odd piece of equipment and learning how to make their own management decisions. This way, they can buy Mom and Dad out a little bit at a time so it’s not such a big pill to swallow.”
Since this spreads out the cost of all those expensive assets, it’s a big help to the next generation, he adds.