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Issues to Consider in Finding Ideal Method in Passing on Family Farm

03/03/2016


​​This article was originally published in Western Producer.

In Canada, we are now facing an old-world dilemma. Rising land values have created a new problem where farm families hold a significant amount of wealth and the traditional solution to the estate plan, the use of life insurance and other non-farm assets, is no longer valid. Life insurance and non-farm assets still have a part to play but, when faced with a multimillion-dollar asset, it is difficult to offset that value with other things. So how do you decide who you will leave your farm to? Should business continuity or family harmony be your primary motive and is it possible to achieve both?

The first option is to remain adamant that farm continuity takes precedent over family entitlement. This solution posits that non-farming children have no right to expect to inherit farming assets, that farming children have worked hard and deserve to receive the fruits of their labour and that this is the only way the farm can survive intact.

But if we explore this for a minute, are farming children the only ones who work hard? And what is the value of hard work? What if one of your children is a nurse or a social worker or other low paid caring profession? Do they not work hard? I accept that farming children might not receive an adequate cash compensation for their work but for them to inherit everything challenges my own perception of fair. Remember, hard work and dedication does not guarantee success nor does it make you any more entitled to it.

Alternatively, we can divide all assets equally after any issues of sweat equity have been resolved. We can value the balance of the estate, dividing it equally but giving more farming assets to farming children and more non-farming assets to non-farming children. In this case we may still, in all likelihood, end up with a problem—non-farming children will own some farming assets and can then burden the business with debt by expecting it to buy them out or reduce the productive capacity of the business by selling to a third party.

So is there a third way and what might that look like? If we can accept the concept of inactive ownership governed by rules, it may be possible to solve the conundrum.

It is my view that there is no evidence to support the idea that passing the farm to your actively farming kids gives you a higher chance of long-term continuity. I believe that it may be possible to create a structure where there is joint ownership of assets, which includes the inactive children and creates a true legacy for all family members. It should be noted that “joint ownership” doesn’t mean “equal ownership” nor that ownership confers an equal voice or removes control from the farming children.

This approach doesn’t come without challenges, and it certainly won’t fit all scenarios. Some non-farming kids might prefer a lesser amount of cash and some farming kids might want outright ownership. There may be communication and relationship issues that are incompatible with joint ownership and the whole concept would require a significant shift in conventional processes and structures, which in turn requires the ability to understand and implement new processes and structures. But this is another tool in the toolbox and it deserves further review.

The counter of all this is to take Warren Buffet’s view: “the world isn’t fair, get used to it.”

Before anyone rushes to dismiss these ideas, you should know that they are just that—ideas. At MNP, we have a system of succession planning that allows the family to decide on the way forward, not the advisors. In doing so, we willingly explore options from an informed position. We spend time with the whole family to get to know them and to give them all a voice, allowing us to facilitate and guide the process so you truly end up with the best solution for your family.

Bob Tosh, BSc., PAg., FEA. is a Business Advisor in MNP’s Farm Management Consulting group. Based in Saskatoon, Bob delivers management consulting services and helps implement solutions on a wide range of issues for primary agricultural producers, agri-business, government and other key agricultural agencies. Contact Bob at 306.665.6766 or [email protected].