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Let’s Put the ‘Business’ into Farm Business Structures Part One: Estates

02/12/2015


​The Way It Was (Is)

Historically in Western Canada, when a Son returned to or stayed on the family farm, his parents would gradually help him get started in his own operation while he worked on his parent’s farm. Though traditionally it was far more common for the Sons to return to / stay on the farm, today it could just as easily be a Daughter. For the purpose of this paper, please note that “Son” is interchangeable with “Daughter.”

The Son would trade labor for the use of equipment and then begin renting a parcel of land here and buying a parcel of land there, gradually building up his own operation. Then, when Dad trades in the combine and Son has enough acres, they agree to make joint payments on the new combine. This process continues for the life of the farm. The pace of this transition depends upon the personality of the individuals involved and their relationship with one another, but Son would continue to work with Dad and rent / buy more land, gradually increasing his stake in the machinery, piece by piece, over the years.

Is there anything wrong that? Yes. Just as in any other business, it is important that a farm business be structured appropriately for the purpose of estate distributions, marital breakdowns, and, most importantly, the operational efficiency necessary for the farm’s financial success / survival. This is true even (especially) of a family farm business.

Over the next few blogs, I’m going to break down various aspects of business planning when it comes to farm owners, beginning with a closer look at estate planning.

Estate Planning Considerations

Traditionally, these “horse-trading” arrangements of labour for machinery that evolve into “you buy the combine and I’ll buy the sprayer” result in one or both parties feeling like they have been disproportionately benefited or harmed by the arrangement. Consequently, Dad tries to make his Will the great equalizer.

If he feels the Son’s involvement in the business has been a significant benefit and has largely contributed to his overall wealth, Dad will try to compensate the Son in his Will for any shortcomings of their business arrangement. This generally results in the children not involved in the farming business feeling slighted.

Conversely, if Dad feels the Son has had tremendous success owing to the business that Dad handed him, he will compensate the non-farming children in the Will. This most often leaves the farming Son frustrated because, in his mind, he has earned his share of the farm and felt he should be an equal part of the estate.

This family tension is avoided and the process of estate distribution becomes both simple and fair when there is a well understood and logical business arrangement in place.

Estate Planning Rules of Thumb​

  • Separating inheritance from business allows you to come to a fair business arrangement between Dad and a “junior partner” (Son or Daughter) and then leave your estate equally to all your children. Contrary to mathematically inaccurate folklore, most often equal is fair.

  • Though there may be exceptions with respect to assets carrying a sentimental / emotional value, it is best not to assign specific assets in a Will. Assigning specific assets may inadvertently result in unequal inheritance allocations due to the appreciation / depreciation of the assets. The only constant is change and, therefore, an equal assignment of assets based on present values can become a very unequal assignment in only a few years. Though standard protocol is to revisit a Will every five years, one should establish a Will with the intent that it will stand the test of time.

  • Insurance should be paid to the estate rather than to specific beneficiaries. This allows the Will to direct the entire estate, ensuring that each beneficiary receives their allotted percentage of the entire value of the estate. It is especially important for policies with joint beneficiaries where one of the beneficiaries predeceases the others. In this situation, all proceeds go to the surviving beneficiaries. This can be inconsistent with the common intent of testators to have the inheritance apportioned to the predeceased beneficiary go to his / her issue.

Assets to be included in the overall distribution of family wealth that are held outside the estate but still considered in the overall distribution of family wealth, such as insurance received outside the estate or assets held by a family trust, may be addressed by having the Will refer to those distributions in the calculation of the estate distribution.

​For example, there is an estate worth $1.4 million with two children as beneficiaries. There is also a family trust holding assets valued at $600,000. It is the parent’s intent that the family wealth of $2 million is to be split equally between the two children. In this example, Child 1 might receive $600,000 out of the existing family trust. The calculation in the Will would take into account that $600,000 distribution. Child 1 would receive $400,000 from the estate while Child 2 would receive the remaining $1 million. Each child would end up with the intended 50% of the total family wealth.

Stay tuned for the next part of my series where we will look at planning for a marital breakdown and how it may impact your operation.

To learn more, contact Dean Klippenstine, CPA, CA, Director, Primary Producers, at 877.790.7990 or [email protected], or your local MNP Advisor.