Succession planning for the family farm can be highly complex and emotional. The retiring family members have likely invested significant time and money into the property, and it can be hard to let go. Disconnect between the wants and needs of adult children can also be substantial, particularly when there are on and off-farm kids. Even when all the children are on-farm, they may have differing visions for the future and their role in it.
At The Money Edge we help many farming families to create and successfully execute succession plans for their property and farming business. Here are our tips for getting it right.
#1 Start well before retirement
On average, succession plans for the family farm will take 12-24 months to execute, and this doesn’t include the time it takes to get to an agreement. All too often we see farmers starting this journey when they are ready to retire. This urgency puts significant pressure on all involved and may lead to rush decisions.
#2 Communicate early and often
From the outset, your succession planning discussions should include everyone who will be impacted. While it may be more convenient to discuss your plans first with on-farm children who will continue the business, this can create more division and the potential for dispute as the plans unfold.
#3 Be prepared for disagreement
You may have the most harmonious family dynamics possible, but when it comes to succession planning, there is likely to be some disagreement and conflict. It is a complex decision and one that can be highly emotional.
Typically, when we discuss succession planning with a family, we find that it starts with surface discussion that is agreeable, but like an iceberg, the majority of the issues are below the surface. It’s important to get these out on the table and this can take time.
#4 Aim for fair, but don’t confuse it with equal
Your goal for your succession plan should be that it is fair for all your children, but fair doesn’t necessarily mean equal. With farming subject to so many variables, from weather to commodity prices, cash flow can be erratic, so a dollar of farming land isn’t the same as a dollar in your pocket.
In many cases, off-farm children will enter discussions believing that they will receive an equal share of the property’s value because they don’t intend to farm the land. For example, if the farm is worth $4 million and there is one on-farm child and three off, the off-farm children may assume they will receive $1 million. But given the variables in farming it’s not that straightforward. From a financial viability perspective, it’s unlikely that the farm can take on this amount of debt, or that the on-farm child has the resources to pay out the other children against potential future earnings on the property.
Additionally, the on-farm child or children will be working the land to retain its value and a fair plan needs to take that into account. Educating all parties on fair versus equal is an important step to manage expectations.
#5 Mitigate potential risks
Your succession planning can’t just be based on circumstances today, it needs to take into account all of the potential life events that could impact it. In financial planning, this is often referred to as the 4D’s — death, divorce, disability or disagreement. Considering what would happen should any of these circumstances arise is critical to making your plan watertight and ensuring your family farm becomes the legacy you intended.
For example, if you have two children taking over the property, what would happen if one of them was to go through a divorce? Would the family farm become part of the settlement and what would that mean for the other child or even the property itself?
When it comes to death or disability, this should be about ensuring you have the right insurances in place to protect the future of the individual, the family and the property.
Your plan should also consider what would happen if the farming child or children want or need to sell in the future. For example, would the property be offered for sale to family members first? If so, who would get first right of refusal and how would the value be determined?
#6 Formalise your plan
Getting your plans formalised and legally agreed might sound like an obvious tip, but when it comes to family succession planning, too many people trust that informal family agreements are enough. Everyone has agreed to what was proposed, so it may feel like legal costs are an unnecessary expense. However, the reality is that discussions can be misinterpreted or understood differently by different family members based on their own perspective on the situation. Formal documentation is critical to protect your plans and make sure everyone is really on the same page.
#7 Seek expert advice
Working with an accountant and advisor who specialises in family succession planning can help to uncover and address disagreements before they become deal-breakers.
At The Money Edge we work closely with your family and your other professionals, such as lawyers and financial planners, to ensure your succession plan is the right one for you and your family. This starts with meeting with you and family members individually to discuss wishes for the future, and bringing the family together to have an open, honest discussion that brings issues to light in a neutral setting. Starting this way will ensure your succession planning is as smooth as possible and will ultimately lead to successful execution when the time comes.
Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.