Dividing assets between farm and non-farming kids / Focus on farm transition / FCC Knowledge

Dividing assets between farm and non-farming kids / Focus on farm transition / FCC Knowledge


Are you trying to write your will for your farm but struggling to divide your assets, your farm land amongst your children, and just coming up with an I-don’t-know answer all the time? My name is Patti Durand and I’m an Agriculture Transition Specialist with FCC. Hello, I’m Annessa Good and I’m from southern Alberta. Also, with FCC in their transition advisory role. And Annessa, you’re here for a really good reason. Yeah. I’m very passionate about this topic. I think it’s the biggest factor that’s affecting the senior generation when they’re trying to figure out how to take care of their farm business and their family. And then as a junior generation on the farm, I know myself personally, I’m in the succession roller coaster as well with our family farm. That’s a very important factor of my future. So, it’s a big question. Why is it, do you think, that it’s so difficult to divide farm assets? If you divided equally amongst kids, what’s the outcome? It’s just so difficult because when we look at land values today, I know they’re still not exploding like they once were but they’re still very high. So, when we look at productive value versus fair market value, they’re not even close to being in the same region. So, for example in my area, a quarter is 800,000. Let’s say productive value, just for today, depends on yields and everything, 350,000. We have 450,000 dollars of “money” there that parents are trying to divide equally between farming and non-farming children. And it’s just a faux pas number. It’s not there. So, farmland value is really high, that we know that’s not news, but if not cash. Exactly. So, it’s this tool of the business that is getting valued as cash when it’s looked at is an inheritance. Yeah. That’s a problem. And no kidding people are pausing and really reflecting on it. Yeah. And I think that’s the biggest factor, right? Is that we’re intermingling wealth versus income. And those are two very different, different things. So, when we’re sitting down with farm families, we’re coming up against kind of this barrier. This analysis paralysis where moms and dads, they’re trying to write their wills and either they just go ahead and divided equally because they can’t figure out a better way. Or they don’t have a will at all which is also pretty chronic in this industry. At the end of the day when you can’t come to a place where you can find a way to balance your inheritance that you’re passing on but you want to have a tool to permit the farmer to have access to the farmland. I know that you’ve had some experiences with that. Can you share some examples? I think is really important as a family to just have awareness and respect for where everyone’s coming from in this difficult conversation. So, as a younger generation, I’m frustrated because my parents are saying: “Yeah, you know, there’s some ambiguity here. Some of this land might be going to an off-farm sibling.” But what are some of the things that they’re thinking about? Death. What if you were to pass away as the younger generation? Disposition. Just a fancy word for selling it. Divorce. That’s always a big one. And then, debt. And lastly, then if I flip it, as the junior generation, I’m looking to the senior generation saying: “What about dementia? What about if you aren’t you when it comes time to write this will or read this will later on?” I need some clarity now. Absolutely. It’s worthwhile to chat with each other about it and also reach out for some advice from advisers and professionals in the industry. You are far from the only person going through this right now. But also recognize that no matter what-ifs, we don’t have a crystal ball but there are some things that we can put in place. Some conversations we can have that can really set up clarity for the family and success according to what each individual person is aiming for. Based upon the level of pause and hesitation that people have, we really want to try to give them some suggestions. People want to know different ways that they could potentially address a way to get the farming child the land, access to the land and yet still balance inheritance. I know you have a couple of examples that you’ve seen used in your area. Tell me about them. When we’re having this conversation, I always go back to a customer: “What if we had a dairy barn?” We can not cut that up. Right? So, I think sometimes we get overwhelmed with land, exactly as you’re talking about. So, if the balance does seem to be quite uneven and what is going to the farming child versus the off-farm siblings, then yeah, there’s definitely some unique strategies. One that is not new but that I really like, is leasing between siblings and making sure that is a contractual agreement. These can be set up so that… What I really want out of that contract is that we have a rate preset or a scale of how that rate will go. So, for example if farming Dad first generation is 60 and he thinks he’s gonna be in the operation until he’s 75, 80. That’s kind of normal of holding onto land. Then let’s make that lease 15, 20 years. And then that gives the farming child the ownership and the responsibility that they need to start thinking maybe they can purchase that land if there’s sibling in the future or just: “I have 15 years to capitalize on it.” I’ve certainly heard of parents with that intention. They say: “Yeah, you’re going to inherit this land and you’re going to lease it to your sibling for this long.” But evidently, that’s not enough. Formal contract. So that can be set up. What I like to do is kind of remove that emotion of what are we going to set the rate at this year? What’s the neighbours setting it up? We can set what we think the rate is going to be and there’s lots of cool techniques. Talk to your advisor on how to do that. There’s evidence of taking crop insurance index, taking a percentage of that. So, it really takes out the confrontation between what the farming child wants, the lowest rate possible and the off-farm sibling says: “Well, why should I not make a return on mine?” Let’s try to find a balance in the middle and put it in a contractual agreement. So, the other thing that’s different with this is that you’re not waiting for the will for this to take place. This is a conversation, an agreement done with a legal professional ahead of time. So all the siblings are familiar with what the outcome is and then the farmer in the relationship can actually make some decisions based on it because they know they’re going to have access to that land. Cool. So, what else? This was probably one of my favorites that I get the most excited about. If there is a very large value difference in what farm child is inheriting in land value versus the off-farm siblings, the big concern is the quick flip. Right? This is the big concern, if I’m the senior generation and I think if my farming child sells this land, his children or her children are going to be multi-millionaires. Meanwhile the off-farm siblings, they’re kind of just trying to make it through, right? That’s the big scare, if they flip this land. So, you can put a mortgage on specific quarters or specific pieces of land and if the farming child breaks that covenant and sells the land, he owes a portion of the proceeds back to his off-farm siblings. So, it just really slows down divorce. It slows down a rash decision to sell land. And some families have it in there where if the farming child does sell pieces of land but reaquires farm land to run their business, then the mortgage isn’t called in. But if it’s just a quick flip, let’s sell cash, we pay our off-farm siblings. So, that mortgage just sits in place forever? Nope. Usually it’s in your will for a set amount of time, 10, 15 years, you can’t rule from the grave forever, obviously. And then of that point, that’s also a sense of the farm child has earned this. He’s not sold land for any fast cause. You have to put a time limit on there. But as a family, that’s up to you to decide. And this applies to all land on the farm? I really like to see specific quarters or specific land bases laid out so that everyone knows clear communication what that is. And we also have to be really careful that the farming child does have ability to sell land if needed. For example, they come down with an illness or their child has to move into the city to be close to a hospital, we’ve seen all things, they have to have that flexibility. So, specific. Two examples… I think the common bond is not the actual action but the fact that they went and had a conversation. So had a really good look at what the farm did for viability. Talked about what was reasonable expectations for these tools of the business. I think that putting a mortgage on something, you don’t take that lightly. So that is something with a legal professional you want to get really good advice. But there are families that that has been a solution. And so, our goal in sharing this: I think, more than anything, know that there’s some options and something worth exploring but not without guidance and a lot of thought and planning into it. Absolutely. So another thing that I think that I know we’ve talked about and we have seen some really good examples of people doing is just recognizing that maybe waiting until the reading of your will, isn’t necessarily the only way to pass along an inheritance. Do you want to share some ideas on that? Yeah. This idea again just really passionate and excited about because, exactly as you said, it’s bringing the will and reading it today or maybe in five years, just really showing, also as the senior generation, the impact of their work. So, it’s called transformational wealth. Really what that just means is a smaller amount today can have a larger impact and transform lives. So really that’s just going to off-farm siblings and saying: “Hey, we recognize that your farming sibling is getting a lot of help from us today, we want to do the same for you. So, it can be monetary, you know, helping with a mortgage, school loans. Anything that right now at our age that can transform our lives versus exactly as you said, waiting 50 years to then get an impact there. It just helps that relationship because the off-farm siblings are also seeing that their farming siblings are playing a role and contributing to some of that as well. Absolutely, absolutely. I think that at the end of the day everybody would do well to just revisit and recognize that inheriting a farm is not inheriting a bucket of cash. You’re inheriting a ton of risk as well. That being said, looking at the off-farm siblings and an opportunity to provide them with a smaller amount of assistance at a time in their life when it matters more, can have some real impact and really again, help someone find that fairness by helping everybody achieve success. There are ways to equip your farming child with assets for their farm business without giving an unconditional gift. And generally, for every operation it’s going to be a little bit different. It’s gonna be a different combination. But having a conversation amongst your family, together with your professionals, is really the way that you’re gonna get to the point to what your version of success is and we’d love to help you get there. Thanks. We recognize that this topic is both extremely important but also extremely difficult. So if this resonates with you and it’s something you’re experiencing, please “Like” the video, so others know that they’re not alone. If you have questions, we’d be happy to try to address them and if we don’t know the answer we’ll find out. Please comment below and Annessa and I will respond. Thanks.

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