Succession planning needs to be not too early, not too late, but just right timing for optimum planning.
I have seen families include young adult children in farm land ownership. Young adults are still becoming whoever they are, their life path is more fluid, "starter" marriages or other challenging life events can occur. These will affect the farm land base and operations if adult children are included in ownership of assets too early in their lives and development.
Ideally, the family should consider succession planning when the parents are still actively involved in farm operations and children are at least relatively settled in life. There's no specific magic age.
We've all heard succession planning stories of the 90 year old father who has yet to pass the farm onto the 65 year old "boy". While some planning remains possible then, there is a big risk that the "juice" - the new ideas, the vigour - that the son could have brought to the farm operation if given more formal involvement along the way, has evaporated in the 45 years or so that he has been just a hired hand on the farm.
This is the hardest task for the farm family - but only the family can make these judgement calls.
Often families come to me to ask about the methods or tools of succession planning - "should I incorporate to plan for transition to the next generation"? But before there is any consideration of how to get there, the destination itself, the outcome, must be defined. The family sets the objectives - this child will take over operations, that child's medical school education will be funded by the farm family, the role of the parents will initially be "this" and will change over time to "that", parents' retirement and living choices must be funded.
Settling on all parts of the desired outcome is neither easy nor quick. Sometimes families know what they want for parts of the desired outcome but need to spend time thinking about other aspects of it. It often takes a couple of years to work through that process, usually going back and forth with professional advisors.
Professionals can help with the process by asking questions, "what ifs", so that contingencies can be included in the eventual plan.
Once the outcome is defined, professional advisors then need to apply their knowledge and skills to devise a way to achieve the desired outcome in a tax-effective manner, that all participants can understand, and that has some ability to accommodate future change.
In some families it is easy to identify the family member who is the natural successor, who wants to farm as his or her career and who has the ability to operate the farm successfully, ideally a farm that is profitable.
Some families have an embarrassment of riches, more than one child who wants to participate in the farm business and is capable of adding value to the business. Country Guide magazine has many stories about these families. The key questions there are the abilities of the involved children to work together and the creation of a business model for the farm enterprise that uses the skills and interests of all of the involved children.
Some families do not have a natural successor. Some have a child who could do the work but would actually like to do something else. One sees farm families where a child has shouldered the burden of the farm and the parents' expectations without ever having spoken up about having other interests and feeling unable to express a preference for a different course and disappoint parents. As well one sees successors who want to farm but who do not have the ability to operate the farm successfully. These situations are troubling, because there is no long term prospect for success.
I've seen farms which are excellent business owned by families with well-educated capable children, none of whom want to farm. If there is no natural successor who is capable and interested, consideration must be given to selling the farm. Sometimes in mid-life, a child's interest in the farm re-surfaces, so ideally a decision to sell is made when it is absolutely clear that the children will not ever return to the farm.
Having to exit the farm is not necessarily a terrible thing for a child. Despite the previous commitment and attachment to the farm, there can be a discovery of a life - a good life - after farming. One client who left the farm and got a job, told me he enjoyed the freedom to go to a movie in town on Saturday night, something he hadn't been able to do when tied to the farm.
Any succession plan must ensure, as a first and most basic priority, that the parents or elders can live out the balance of their lives as they wish, with financial security and in comfort, allowing for the potential that their needs and circumstances may change.
I have seen situations where parents transfer the farm to the next generation and expect to live out their days in their existing home on the property, funded only by their old age security and Canada pensions, with no remaining assets to sell if needed, no provision for care givers if needed, no spare capital to move to town if they can no longer live on the farm, and whether they realise it or not at the time of asset transfer, looking at a bleak, insecure and poverty-struck old age - all just to keep the farm going.
If the welfare of the parents must be sacrificed to keep the farm going, unless a succession plan can be developed that does provide security for them, my recommendation is to plan to sell the farm and ensure that enough of the capital generated secures the parent's future needs.
Wills and estates lawyers encounter this thought pattern every day. Kids expect to inherit from their parents and feel that they have the right to have a say in the disposition of their parents' assets.
Not so. Parents' assets are their assets and not the kids' until the point where parents agree to divest themselves of certain assets or until the parents' deaths.
Parents can decide to sell their farm even if one or more children want to take it over. Parents can choose one (or more) of their children, but not other children, to succeed them in farm operation and perhaps ownership, which may not be good for family relations but may be the right thing for the farm. Parents need to make sure that children are not raised with the expectation they will all participate in the farm business. But they should not expect children to work on the farm for little or no compensation indefinitely - or at all.
It is important for children involved in succession planning to express their interests and their views. But I have seen situations where, as a tax advisor once said, "they're carving up the turkey before it's dead."
Transferring farm land to children of any age without a complete succession plan and full consideration of the interests of the parents as well as the children, is a bad idea.
Any succession plan needs to take account of future contingencies.
People's interests change. Their marital status changes, including separation, divorce, death of a spouse, and remarriage, possibly even remarriage late-in-life, or a successor may be unexpectedly unsuccessful and the parents need to step back in.
The expectation that everyone will stay the same, with the same views and interests at 55 as they had at 25, is unrealistic. With the best will in the world, people grow and change.
I have seen parents have to resume ownership of the farm on the failure of a successor, both personal and financial. I've seen unexpected pressure to sell a successful farm enterprise when one of the participants reaches his exhaustion point and wanted to retire. And of course separation, divorce, death of a spouse, and remarriage wreak havoc with farm operations. One family lawyer said to me "ranchers can't afford to get divorced."
A capable tax planner, either a tax accountant or a tax lawyer, is the key professional to figure out how to get from current day to succession plan completion. It is normal for the tax planner to identify the path to achieve the desired outcome, perhaps in consultation with lawyers and investment and insurance advisors and of course with the family.
Implementation and completion of the plan is usually accomplished through the other professionals. But the tax planner is the key person to create the tax-effective strategy to achieve the desired succession outcome, so is the starting point for professional involvement.
Succession and estate planning professionals know that a business with a high capital value and low income is the most difficult business to plan for, because the business has no hope of re-capitalizing itself and producing income for both the parents and the children who operate the business. Far too many farms fall into this category.
I just looked at a Saskatchewan Court of Appeal decision, Carruthers v. Carruthers, a divorce case. The parties' story illustrates the human misery that can come from grinding away to continue a farm business that is financially weak and the personal challenges that can result from the family expectation that the farm is to continue operating, no matter what.
Brent and Janice Carruthers were married in 1983 (anyone who was around at the time will recall this as a dire time for farmers in general and grain farmers in particular). Mr. Carruthers' parents owned a grain and cattle farm with about 25 quarters. They insisted that the young couple move to the farm.
Brent and Janice worked tirelessly on the farm for little remuneration. Both worked off-farm as well. Brent even borrowed money personally to support the farm without having any ownership interest in it.
In 1989 Brent's father had a heart attack and the farm needed Brent and Janice even more, so along with the farm work and their off-farm employment, they built up a custom feeding business in their own names to meet farm financial needs.
The bank called the farm's loans in 1990 and the Carruthers worked through a seven year leaseback to recover ownership of the farm. In order to get financing to repurchase the farm, Brent and Janice's separate form assets were rolled into the farm corporation and Brent and Janice became majority shareholders; Brent's parents were minority shareholders.
Brent moved off the farm and took a full-time off-farm job in 2002, and in 2009 his parents moved to town. From about 2003 on, the parents and Brent and Janice tried to negotiate a buyout of the parents' remaining shares at a reduced price to acknowledge sweat equity. These efforts were unsuccessful.
Despite the strain of their separation, Brent and Janice were committed to making the farm succeed. Janice handled the daily operations and worked part-time off-farm; Brent worked full time off-farm but did farm work on his days off and holidays. He had, however, become an alcoholic.
The family dissolved into litigation with claims by the parents against Brent and Janice, and by Janice against Brent. Eventually Janice was able to finance the purchase of the parents' remaining shares - but still had to settle with Brent.
The court decision in the family litigation is that Brent is entitled to a half interest in the shares of the farm corporation.
If Brent wants to be paid out for his shares, it is likely that the farm must be sold.
I don't know what Brent or Janice think or feel about their situation and their lives since 1983. But to me it looks like nearly 40 years of relentless struggle against the financial odds, with substance abuse and marriage breakdown as part of the cost of keeping the farm. Forty years of effort and perhaps misery to keep the farm going. Only Brent and Janice know if it was worth it.
Farm families planning for succession need to consider what kinds of lives parents and children want to have, as well as what would be good for the farm.