How written agreements can save farm families
The human and financial costs can be extremely high if farm enterprises aren’t properly structured with written agreements or if important business decisions are neglected. This can be especially true when a farm is planning to transition.
Commercial lawyer Rick Van Beselaere often sees the impact of poor farm enterprise planning. Based in Regina and a partner in the law firm Miller Thomson LLP, many of his clients are farmers.
“Good legal and accounting advice doesn’t always save families from strife, but the lack of proper agreements can contribute to strife, and certainly contributes to the difficulties resolving or otherwise addressing conflicts,” Van Beselaere says.
You must plan for solutions to problems that might arise.
Kerry Riglin, a financial consultant and farm succession and estate planning specialist based in Wainwright, Alta., agrees.
“Without proper agreements and planning,” Riglin says, “there can be hundreds of thousands of dollars in taxes that could have been avoided, particularly as it relates to the lifetime capital gains exemption.”
Planning for problems
Many of us choose to avoid dwelling on what would happen in the event of an untimely death, divorce or disability, but the possibility of these misfortunes makes planning vital.
What if Mom dies, Dad remarries and suddenly there’s a blended family? Or what if someone in the farm operation ends up with a debt problem?
“You have to think of the eventualities,” Van Beselaere says. “You have to plan for solutions to problems that might arise and you need to have your processes change to match the changes in your operation.”
Van Beselaere cites a case where one of the partners in a farm started building and working on his own farm on the side. This left the other partner – his brother – and the parents’ farm that worked closely with the sons’ partnership, in an increasingly difficult situation. He had become part-time in the farming partnership with divided loyalties, while the other partner was devoting much more of his time and attention to the partnership. There was no partnership agreement to address this situation, and the brothers did not work through the conflicts until it was too late.
Expenditures are another common issue in partnerships. Often there are many individuals spending money on behalf of the business as well as taking money for personal use.
Cover off with agreements
“Partnership agreements should cover the structure, such as whether ownership is split 50-50 or 60-40 between two partners,” Riglin says. “And especially if the partners are not spouses, there should be procedures stipulated for the disability, death, disagreement or the exit of a partner.”
For corporations, Riglin says it’s important to have a unanimous shareholder agreement, or USA, to cover the same eventualities. Unfortunately, he says, most corporations do not have a USA or they have one that isn’t sufficient. While not as critical if a husband and wife are the only shareholders, a USA becomes very important if a daughter or son enters the corporation.
Riglin points out that even if Dad changes his will to not forgive the value of outstanding shares, the USA will prevail.
A valuation process for assets is also needed. An agreed-upon way to determine what the assets and therefore the shares are worth is needed for shareholders either buying into the corporation or exiting. It’s also useful for addressing equalization issues for non-farming children, an issue that has increased in importance as farm assets have appreciated in value.
Rules can be complicated
In sole proprietorships, there’s often an assumption that registering land in joint names is enough to achieve the lifetime capital gains exemption for the farmer’s spouse. However, Riglin points out that to qualify, the person with their name on the title must have two years where the gross farm income exceeds all other income.
In many operations, there is no formal partnership agreement, which could also affect the capital gains exemption.
“In corporations, regular meetings and a definition and understanding of roles and powers are required,” Van Beselaere explains. “Many people don’t realize there are different roles, responsibilities and powers for shareholders versus officers of the company. Many people do not understand the differences between those positions, nor do they understand how the corporation is to be governed in the absence of written shareholder agreements.”
Riglin often finds himself in the role of quarterback working back and forth with a lawyer and accountant to plan work on behalf of a farm client. Van Beselaere works with accountants, succession planners and other experts both in setting up the operations and, in other cases, advising a party when conflicts occur and disputes grow to become all-consuming.
While producers need professional advice and guidance, they need to stay engaged and know enough to ask the proper questions. The rules change and farm operations evolve. For instance, farmland was often included within a farm corporation back in the ’70s and ’80s. Now the advice is typically to maintain land as a personal asset, particularly if it’s free and clear from debt.
Sometimes farmers try to save money on legal and accounting fees. However, those fees can pale in comparison to lost tax exemptions, the legal fees to wind down an operation or the costs (both economic and personal) of fighting legal battles between unhappy partners or shareholders.