ARTICLES  &  REVIEWS

Strategies for Transferring Farm Ownership

London Free Press

Transferring the family farm is probably one of the most complex issues in the industry. There are different beliefs about what is fair and each family member will have a different idea.  No matter how you involve the children, the estate is yours, and ultimately the decision of who gets what, falls in your and your spouse’s lap.

There are many ways to accomplish the transfer of the family farm. A common transfer option is to sell the farm to the farming child, and use life insurance to create tax-free dollars for the non-farming children.  The amount of life insurance purchased is the choice of the parents, and reflects what they believe to be fair in the circumstances. 

After the death of both parents, the non-farming children will receive their share of the estate through the life insurance, and the face value would be paid only when the last of both parents die.  This is considered joint life, second to die. 

Another way, if there is an insurability problem with the parents, is for the farm to be sold to the farming child with cash gifts going to non-farming children.  The farm property is sold to the child, with the agreement for sale, requiring annual payments.  The payments are higher for the first five years to provide funds to make cash gifts to non-farming children.  The balance owing is payable on the parent’s demand and forgiven on the death of the last surviving spouse.  The non-farming children could deposit their gifts to an RRSP and receive a tax deduction.  Or you could consider the sale of the farm to the child, and part of the annual payments given to the non-farming children through crop share payments.  This method of transfer is a form of income and risk sharing.  The payments will vary annually, with the level of crop yields and grain prices.  Since payments are likely to occur for many years, the parents could choose to increase payments from the farming child if their income needs increase.  Payments could be given back to the child if the income is not required.

Estate planning certainly has many emotional implications for the people involved, and can often result in family disagreements and feelings of unfair treatment.  Probably everyone has heard bitter stories of hopes and promises being crushed when the will was finally read.  One key to maintaining family goodwill is that no family member should be surprised.  This can be accomplished by open family discussions of all plans.  People should clearly understand where he or she stands, even if the decision isn’t in their favour.  The parents have to decide for themselves what they owe their children.  Some believe they should give everything away, others believe in the bumper sticker that states “I’m busy spending my children’s inheritance”.  Consider the thoughts of one farmer when he said, “Start early in the lives of children explaining that fair is what Mom and Dad want to do with their estate.  What is equal is our love.”

In the families where there are non-farming children, an issue that often gives parents much concern is how to treat their children equally.  A distinction needs to be made between equitable and equal.  Equal means giving every child the same amount; an equal solution is often impossible on the farm, if it is to be handed down as a viable unit.  An equal solution may not be fair to the farming child, who has probably already contributed a great deal to the farm through his or her investment, time, work and commitment.  An equal solution may not take into consideration other benefits or gifts to any other children, such as education, financial gifts, or loans.  So an equitable arrangement may not treat all children the same, but is fair.  It may also ensure that the farm can be passed on as a viable business.

Children’s spouses can also introduce another source of conflict, because spouses often don’t know the families very well, even if they were raised on the farm; it’s often different because as their role changes, so do the expectations. When their husbands or wives come into the house each night, they typically only hear about the problems, not the joys, and spouses may grow jealous over the seeming inequities of family members’ pays and perks.  As a result, even innocent in-laws, may, over time, tend to pull the family apart. 

Throughout the process of coming to grips with what is fair and equitable, it is essential that the lines of communication be kept open.  Each member of the family needs to be given an opportunity to express his or her hopes, expectations or concerns, and to have the others do the same.  So be sure that you have explored and discovered your expectations, and remember to “begin with the end in mind.”