December 10th, 2018
For most farmers, farming is more than just a job -- it’s their life. They’ve worked and raised their family on the farm. It’s no surprise that retirement is typically an afterthought. In fact, Statistics Canada reported in 2016 that 92 percent of farms had no written plan for who will take over when the current operator retires.
However, failing to have a succession plan in place can lead to unintended consequences as well as unnecessary taxes. Farm succession planning should be a continuous process that outlines the transfer of knowledge, skills, labour, management, control and ownership of the farm business between one generation to the next.
The process should first start with open communication to determine if the next generation has an interest in the farm business, and if so, what personal, family and business objectives and goals does the next generation have. If farming fits within these goals, then the successor can be identified and a succession plan can be built.
Components of a Farm Succession Plan
It may seem overwhelming to build a farm succession plan, but in reality, succession planning can be an eye opening, rewarding and exciting process. The succession plan should be a collaborative document where the successor is involved in the development of the plan. This creates a more positive environment where both parties are committed to the same goals -- continuing the success and prosperity of the farm.
The Ontario Ministry of Agriculture, Food and Rural Affairs recommends that a succession plan includes:
- Farm Business Overview
- Strategic Plan
- Retirement Plan
- Management, Control and Labour Transfer Plan
- Ownership Transfer Plan
- Financial Plan
- Action Plan and Implementation Timetable
Let’s take a look at each section of the plan in more detail:
Farm Business Overview
This will set the context for the type of farming business that you operate. It should indicate size and location, type of farm and what is produced, key decision makers in different aspects of the business, and the type of business arrangement for the farm, i.e. sole proprietor, partnership, corporation, rental agreements.
This is where the farmer and the successor will spend time outlining the short and long term business and personal goals. What is the future direction of the farm business, i.e. maintaining the same scale, downsizing, expansion, diversification, value-added, etc.? What strategies will be put into place to reach these goals and the future direction? For example, if the successor’s goal is to increase production by 10% in two years, the strategy to do this may be to purchase a new piece of machinery and/or hire more staff.
You may find that the strategic plan becomes the most detailed component of the entire succession plan, and it’s also where the most discussion will happen. However, once it’s agreed upon, the rest of the plan will flow more easily.
This component is more for the sake of the retiring farmer, rather than the successor. It outlines both lifestyle and financial considerations of the retiree.
From a lifestyle perspective, the farmer will outline how he/she will be involved in the business (if at all) and may also address the living arrangements for the generations, i.e. will the retiree continue to live in the residence on the farm, but not operate the farm itself?
The financial component describes where the retirement money will come from, i.e. sale of the business or retirement-income such as RRSPs and how the money will be spent.
Management, Control and Labour Transfer Plan
This component will outline how the transfer of management, control and labour to the successor will take place and when. It’s also important to consider the ability of the successor to take on the tasks required to run the farm. If training and development is required, that should be identified here and the timing to complete such training should be outlined in the implementation timetable.
Ownership Transfer Plan
This component outlines how the farm business is currently structured and how it will change during the transfer process. This could include scenarios such as: a farm that currently operates as a partnership will become a corporation; the successor will lease some of the farmland; a sole proprietor will become a partnership (common if siblings take on the farm jointly).
This component also explains how the transfer of ownership will be handled, i.e. purchase, gift, bequest, combination, etc.
The ownership transfer plan may also include:
- an explanation of the financing required
- an inventory and valuation of assets and liabilities
- tax implications of the proposed transfer process and a description of how it will be addressed
- the treatment of non-farming children
- insurance requirements
- a description of legal agreements, i.e. employment contracts, partnership agreements, shareholder agreements, buy-sell agreements, etc.
Both the retiree and the successor will have financial requirements and needs. This component will provide a financial analysis of the farm business - past, present and future - to determine the profitability of the business. If profit is an issue, then strategies should be outlined to make it financially viable. The financial needs should be tied to the goals and objectives outlined earlier in the plan. Will it cost more or less to implement the strategies needed to reach those goals? This should be identified at this stage of the plan.
Action Plan and Implementation Timetable
In this part of the plan you’ll outline all the key activities and deadlines to complete them. It’s also wise to assign responsibilities to each activity so everyone knows who is responsible for each action or step.
Once you have a comprehensive plan in place, the last step is to ensure all other actions and documents are in place to support the plan. These may include loan agreements with your financial institution, estate plans, prenuptial agreements, shareholder agreements and other agreements necessary to document the succession of the farm business.
Consult with a Lerners Agricultural Lawyer
Succession planning can be a sensitive topic among families. Past family history, family values, personality conflicts, family relationship dynamics, favouritism and life stage issues may all need to be considered. When creating a farm succession plan, it’s advised to use an outside mediator to ensure the needs of both generations are met.
At Lerners LLP, our Agricultural Law Group specializes in helping clients with all aspects of agricultural law, including farm succession planning. For more information, please contact us at 519-672-4510.