Strategies to reduce the financial pressures of transition
When farmland prices rise significantly over time, the thought of buying out the parents’ farm at full market value can seem quite daunting for the next generation. Especially when, in some areas, increases have been more than 400 per cent in just 10 years. Some clever planning can make transition not only possible, but also probable.
Terry Betker with Backswath Management in Winnipeg, Man., says “I don’t know if there are any farms out there that can generate the profits needed. 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 to sell to their children and what to gift or transfer as part of the estate, Betker says. Before embarking on any transition plan that means the operation has to service some debt, it’s important to look at the farm’s profitability over the past five years and determine if the farm will remain viable with that amount of debt.
There are no cookie-cutter solutions when it comes to succession and estate planning.
There are no cookie-cutter solutions when it comes to succession and estate planning, says Lance Stockbrugger, a chartered accountant and farmer from Englefeld, Sask. Important considerations for one family hardly matter at all to another. Individual solutions must be found, so families are wise to 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. This is because owning the land provides security for them as they age, as well as protection in case of a child’s divorce. It also 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.”
Pressure can be significantly reduced through transferring management, leadership and ownership gradually, over a longer period of time.
“This spreads out the cost of all those expensive assets,” he adds, “so it’s a big help to the next generation.”
- Ideally, your process of transition should match your unique farm and family
- Starting early presents advantages & opportunities
- Spreading out expenses of transfers over time reduces pressure
From an AgriSuccess article by Lorne McClinton.