Avoiding the pitfalls of farm succession planning

By Tim Kalinowski


When it comes to passing on the farm sometimes families wait too long to put their plans in motion.

“People tend to avoid having those discussions about succession planning and estate planning, particularly in the agricultural community,” says Stringam LLP partner Stephen Mogdan, a farm succession specialist at his law firm in Lethbridge.

“What that does, in some cases, really create problems down the road for kids to deal with or for other people involved in the farm operation to have to deal with.”

“It is something where the more time you have to plan the more beneficial it is,” agrees Les Scholly, a partner with Pritchard & Co. Law Firm in Medicine Hat, “because it can involve many different people. People want to set up a team, and their team will include their accountant, their lawyer, their financial planner, their insurance agent. Getting everybody on the same page, and defining that plan, will take time.”

Scholly says farmers and ranchers tend to think differently than other business owners, and have different priorities in their succession planning than most.

“There is a strong emotional attachment to the land and the way of life,” Scholly confirms. “There are not too many businesses where you live where your business is so there is always this desire (in planning succession) to say we’d like this, in whatever way it can, to continue on.”

Mogdan says in that sense farmers tend to be traditional in their sensibilities; however, that traditionalism can sometimes be a barrier to opening up important lines of communication with family members and heirs.

“To try to put my finger on it, I would say the biggest cause of that is just more of a traditional type of outlook where people think, ‘When the time comes down the road I will put my plan into effect then,’” Mogdan says. “But until that time, that’s the type of thing which should be held close to the vest because, ‘My parents kept that close to their vest back in the day, and I should do the same thing.’

“But not having discussions until the very end can create problems, and it really kind of ties that hands of professional advisers, and being able to put in place flexible or advantageous plans not only for the elders but also for the kids.

“What we like to see an open dialogue when there are children involved; especially when not all the children may be involved in the farming enterprise. And sort of setting expectations by having those discussions early can really take a lot of problems off the table for down the road,” he adds.

Honest and open communication is fundamental and key to the whole succession process, agrees Scholly.

“Some of the concerns you have that I’ll see is you’ve got some of the children who are working inside the business, and they live on the farm or ranch,” he explains. “And then you have others who are not involved. Then the challenge becomes on that level is how do you be fair to everybody?

“They want to treat their kids equal, but that may not work out necessarily in a farm and ranch succession. Sometimes a farm or ranch owner has to make a decision that is not going to be popular with all the heirs. Communication is important, and that is something I try to stress with clients. Not only is it important to communicate with the next generation on the farm or ranch, because they can be working there without knowing what the plan is— are they worried they are investing their time and effort into something they might not have the opportunity to gain? And then on the family that’s not involved— what’s the communication with them about what their parents are planning to do in regards to the ag business and why they are doing it?

“That communication early on may be the key to avoiding potential strife later among the heirs,” Scholly states. “Most parents want their children to maintain good relations between them after they have passed away.”

Mogdan says a sad reality he has witnessed in his time working with farmers on their succession planning is when that communication isn’t there brothers and sisters, and those left behind, often bear grudges which leads to a break down in the family bonds.

“You do unfortunately see a lot of situations where you have family members who feel they did not get their share, and its most visible in those situations where mom and dad have kind of concentrated on the farming business and preferred the child that’s going to continue on with that business at the expense of children who are not involved,” Mogdan explains. “It does create problems between kids, and between parent and child as well.

“Of disputes that arise, it is a very small portion that actually end up court,” Mogdan confirms. “So we worry about that less than if differing expectations lead to strife and family members not talking to each other.”

Scholly says its about settling expectations before it reaches a crisis point.

“It may not be equal, but if you can approach fair— I think that is a key benefit,” he says. “I don’t think many farmers want to put a plan in place where it’s good for the operation, but the kids won’t go to each other’s place for the holidays.”

And you might have to get a little creative to approach that standard of fairness, Scholly adds.

“Insurance can be a cost-effective way to equalize things,” he suggests. “Insurance, when someone is younger and healthier, can be purchased by the parents or the children buying the farm assets. At the end of the day, a life insurance premium might provide an opportunity to create an asset that goes to the non-farming kids. And typically, insurance proceeds are tax free.”

Taxes are another consideration, agrees Mogdan.

“We want to make sure we are avoiding that by making sure people have done things correctly,” he states. “Nobody likes to pay more taxes than they should, and a little bit of prevention goes a long way in that respect. We do have different (legal) provisions that govern the inheritance of of farming properties, but a person has to make sure to set things up so the property does qualify for those rules. It is possible to do things to disturb that or makes things not possible— that’s one of those areas where a little bit of advice can certainly save a lot of heartache, and hopefully a lot of dollars, down the road.

“One example we see is people have rented out land in a way that takes it out of that special farm inheritance provision.”

Setting up a transition plan before the patriarch or matriarch dies may also be of great benefit to the farm, says Scholly. For example, allowing mom and dad to retire to town when their health begins to fail, or they want to ease back a bit, by working with an accountant to ensure they can live comfortably with all their extra needs being met as leadership of the operation transitions to the next generation.

Land values being as high as they are, it may be the best way to pass on the farm for some families without adversely impacting the farm’s ability to generate income for those who remain, says Scholly.

“Accountants can crunch the numbers to say what’s a payment plan look like for the children who are buying into the farming or ranching operation that still provides that revenue stream to the parents,” he says. “And recognizing what are the retirement costs involved for them? Lots of times the parents have until then lived on the home quarter, so what does it look like if they moved into town?

“Now, they may require an accommodation. What are their monthly expenses?

“I think that’s the kind of thing that can help to say this is the number that provides them with a comfortable retirement, and, at the same time, doesn’t break the bank for the children. There is definitely opportunities for a win-win in that.”

But each situation and operation is different, acknowledges Scholly, and it is part of his job to help families get a plan down on paper which meets all legal requirements and works fairly for everyone involved as much as possible.

“We want to make sure things are properly documented, and so that way we are minimizing the concerns Revenue Canada could have,” Scholly explains. “We want to make sure everything is done correctly that way, and as well we’d like to address the personal succession within the business succession— people’s wills and those kinds of documents. We want to make sure those two things dovetail, and minimize risk where possible.

“So is this going to work legally? Yes, we want to address that. But we also want to address the side of things where we ask: Is anything here going to impact family harmony?”

Mogdan says succession planning can be complex and sometimes a visit to a lawyer can be the first step toward addressing that complexity. And for his firm, Stringam LLP, they even try to make it even easier by holding yearly farm succession planning seminars in smaller centres around Lethbridge every February to really take the firm to the farm.

“Really what we hope is we are showing people there are solutions out there, and it’s not really a painful process or anything like that,” he says.

“When you are guided by professionals who have been around this thing for awhile, we can have those discussions and facilitate those talks with family members and get a place a plan that’s right for you.

“We want to help create success and peace in the family. At the end of the day, that’s really what succession planning is about.”

It also helps to work with experienced firms like his at Pritchard & Co., says Scholly; firms that understand the needs and priorities of local farm families.

“Some people have explained it like the land is the land, and the families who are running those operations are the stewards of that land, and no one really owns that land,” Scholly says.

“So the land will just continue from generation to generation to generation, but the ones who are living and working on the land— those are the ones who will have the opportunity to earn an income and maintain a way of life.”

For more information on Stringam’s upcoming farm succession planning seminars visit stringam.ca. For more information on Pritchard & Co’s farm succession planning team visit their website at pritchardandcompany.ca