For farmers, the decision about who from the next generation gets the farm is fraught with peril. However, it’s important to make the right decision as soon as possible. Making the wrong one, or even worse, not making a decision at all, can tear families apart and ruin generations of work.
The family legacy
Chris, a fifth generation dairy farmer, has a dilemma. He has to plan for the future of a farm and he has four children. Chris desperately wants the farm to stay in family hands. His eldest children, Ben and Rachael, have both expressed an interest in farming.
Chris is unsure if the farm, based on its current profitability, can produce enough income for two families.
Chris feels he would have to sell the farm to Ben and Rachael at fair market value. His own retirement is at stake and he wants to see that his younger children are treated equally. The price of dairy land, though subject to fluctuation, is still high. Paying market value will put a big dent in Ben and Rachael’s hopes of farming profitably.
An age-old bugbear
This isn’t a new problem. Farmers like Chris face a problem similar in nature, if not in scope, to one that had horrific consequences in 19th century Ireland.
The potato famine happened, partly, because farms in Ireland were subdivided as passed down to each generation. A man with a small farm and six sons left behind six smaller farms when he died. Potatoes were the only viable crop to grow on such small plots. Eventually, almost five million people became dependent on this barely viable method of farming. Blight caused successive potato harvests to fail from 1841. The result was that Ireland’s population today is about one-half of what it was when the crops started to fail.
This is a good, if dramatic, illustration of the perils of poorly managed succession. A less dramatic example is what unfortunately has, in the past, happened more often than it should when the farmer has deliberately favoured a son or sons, at the expense of daughters (or other sons). This has caused anger and resentment at the unfair treatment meted out to the daughters and has sometimes torn families apart.
There has to be a better way to plan for succession!
Profit: the True North
The figures appearing in the rating valuation or in the financial statements of the farm are one thing, but the real value of a family farm is the income it generates for its owner. A farm that is worth millions on paper is of little real value to farmers and their children when, as a business, it does not produce enough income to service debts and provide a reasonable income.
Facing reality
Ultimately, farmers like Chris can’t have it both ways. It is probably impossible to treat all of the children equally, provide for his and his wife’s future, and ensure the farm stays in family hands. Some special financial assistance will have to be given to those children who will take over the farm.
Of course, if this step is to be taken, there is much farmers can do to minimise the perception of unfairness.
The first thing you should do is to stand back and have a good look at the farm’s business model:
- do you think there is room for growth?
- can you move into a lower-cost model?
- how is the farm protected against fluctuations in income and expenses?
Next, see your lawyer or accountant, who will be able to help you come to an arrangement to help you to achieve your succession goals. They may suggest:
- utilising companies and other ownership structures to protect the next generation from liability, minimise taxation, maximise profit, and give all of the children a ‘stake’ in the farm;
- using trusts to give some assistance to the non-farming children, perhaps for tertiary education or buying a home; and
- ways in which you can use the farm’s assets to develop other investments, or even expand your faming operations, to broaden the base from which you can provide for yourself and your family.
After becoming informed, but before making any decisions, you should have a frank and open discussion with all of your children.
It may not be possible to reach a consensus, but forearmed with your lawyer’s advice, it should be much easier to ease any disappointments, to ‘sell’ a fair solution, and you will have demonstrated that your ultimate solution is rational and well advised.
However, the cardinal rule is that it is the ability of one or more of your children to make a profit from the farm that will be the key to whether it stays in family hands.
© Fitzherbert Rowe
Email: l.hehir@fitzrowe.co.nz
Website: www.fitzrowe.co.nz