Preserving harmony on the family farm operation
Preserving harmony on the family farm operation
Want to avoid family disputes over your farm and estate? Start by addressing these common issues.
Steps you take today are critical to avoid an estate dispute
Legal and financial disputes are becoming increasingly common among family farm operations as Canada’s population continues to age. Improvements in health and longevity may see you work well into your 60s, 70s — perhaps even your 80s. But it’s not just retirement some are putting off: key conversations around estate and transition planning are also taking place much later, and sometimes not at all.
The result? More parent-owners of family farm businesses are either passing on or falling ill without proper representation and without communicating their wishes and strategies with all surviving family members. Lacking those key steps, surviving family stakeholders become embroiled in disputes, and turning to the Courts for help.
Get the Estate in order
Estate considerations for family farms can be significant, with the value of assets often reaching multiple millions of dollars after considering for land, equipment, and dwellings — not to mention any cash savings and investments you might have. A valid and current will is the simplest and most straightforward way to distribute your Estate according to your wishes, and to minimize the likelihood of a dispute.
While trends have been changing in recent years, many younger (and even some older) Canadians continue to avoid facing their mortality via the Estate planning process. However, not having the proper planning in place means leaving sole responsibility for dividing your estate in the hands of either the Court, or, if you’ve designated one, your Executor. You need to consider, at a minimum:
- What will happen to the Home Quarter?
- How will you plan to minimize taxes on transition?
- Will land lease arrangements continue?
- How will you transition important assets, such as dairy quotas?
- What will happen to equipment owned and used on the farm?
- Who to trust to continue operations?
Decisions by the Courts will be based purely on the facts on hand and legal precedent, which may not be in line with your intentions. Grief, feelings of entitlement, or frustration with other relatives may cloud a trusted friend or family member’s thought processes, causing disputes and delays in executing a will.
You can avoid these predictable challenges by updating your estate plan whenever there is a material change that will impact your beneficiaries. It’s best if you can take the additional step of reaching out to affected family members following any adjustments to explain how they factor into your updated estate plans and why.
While these conversations can be difficult, you may find them preferable to the animosity that can fester between family members after you have passed.
Tax Effective Transition
When determining an effective estate transition, the tax implications should also be considered. For farm families, there are preferential tax rules around transitioning the farm to the next generation. Two very important aspects of family farm transition include the lifetime capital gain exemption and the intergenerational rollover.
The lifetime capital gain exemption can exempt the first $1,000,000 of capital gains on certain eligible farming and fishing properties (such as real property used in farming, quota, interest in family farming and fishing partnerships and shares in family farming and fishing corporations). This can be used when transitioning assets during lifetime, or on death.
Perhaps even more valuable to the farming family is the intergenerational rollover. This allows certain farming property to pass to the next generation on a tax deferred basis provided the assets meet specific criteria. It is important to plan accordingly to ensure your farm is properly positioned to utilize these roll-over provisions now and into the future.
Many families farm in a corporate structure. If you have a corporation and intend to leave the farm to more than one child, it is suggested that during your lifetime you restructure the existing corporation into one or more farming corporations. This will allow a tax-effective transition where each child receives a corporation with the desired assets and reduces the requirement to make compromised decisions after your passing.
Depending on the structure of your farming operation, there are ways to reduce the amount of taxes that would be owing on the passing of the farming individual(s), through the use of a separate tax return known as a “rights or things return”. In addition, you will want to adequately plan your estate to ensure there is enough cash available to pay any tax obligations that will arise without having to sell off key farming assets.
Give the right person Power of Attorney
You likely have a clear idea in mind for whom you would grant Enduring Power of Attorney if you haven’t done so already. It’s typically a spouse, sibling, child, or close friend — someone you trust implicitly to make the same decisions you would, if you were able.
This makes sense: trust is imperative when you’re in a position where you can’t speak for yourself. And who better to trust than the person who knows you best and has demonstrated years of unwavering fidelity? However, this alone rarely makes for an effective Power of Attorney, as the role is rarely as straightforward as it seems.
More than medical decisions
When choosing your Power of Attorney, you need to consider the full range of responsibilities this individual will assume when you can no longer act in your own affairs. Are they up to the task of managing your financial and business affairs?
It’s no longer just a matter of doing what you would do, because you would rely on decades of experience and well-honed intuition to inform your decisions, which they don’t have the benefit of having. The wrong choice can be costly for you, for them, and for other family stakeholders, such as beneficiaries.
Like your estate planning, you need to keep the lines of communication open with your designated Attorney so they can understand what you might do in a range of situations, and why. You might even start including them in conversations with your lawyer or accountant / farm business advisor, so they have a lens into the innerworkings of your professional world.
Not only will this make for better and more sound decision making, but it can increase the likelihood they, too, will reach out for professional support in times of uncertainty. Moreover, it can help build confidence among other family stakeholders that this individual is up to speed and up to the task.
To err is human
Executing an Enduring Power of Attorney is a heavy load to manage, with many people needing to balance their own professional and family responsibilities on top of representing your interests. The longer they need to act in your stead, the more likely it is things like burnout, carelessness, and poor judgement will creep into the mix.
You need to assume your surviving family members / farm business stakeholders will be especially hawkish about how your Attorney manages your affairs, including business decisions taken. They will scrutinize every detail, every dollar, and every decision. Even the slightest inconsistency can lead to accusations of fraud, embezzlement, or neglect — not to mention permanently fractured relationships and costly litigation.
The other side of that equation is also true: there are countless examples of Attorneys brushing off their duties, helping themselves to Estate funds, or simply making a mess of the paperwork. This is not to say they’re bad people, but difficult and high-pressure situations often cause people to act out of character and in unpredictable and regrettable ways. Or, they may not have the business acumen to execute the role.
Ask yourself, is the person you have in mind for the role up to the task? Trust — at least in the sense of a trusted confidant — is clearly not sufficient. You need to be certain they’ll also be present and available to represent your (and your family’s) interests, be meticulous record keepers, and able to separate decisions from their emotions.
Leave nothing to interpretation
Oftentimes the disputes that arise between family members are a predictable outcome of less than optimally managed farm operations, where the issues are far deeper than lacking a proper estate plan:
- Business and personal finances are in shambles with either incomprehensible or completely nonexistent recordkeeping.
- Contracts are unclear or lack adequate documentation and professional oversight.
- Each family member has a unique farm operation that overlaps with each other, using the same equipment and assets.
- There isn’t a clear succession plan or consideration for the contributions of each family member, save for maybe informal conversations and handshake deals.
All the credit in the world to families who could manage to disentangle such a twisted web of confusion without resorting to disputes, because few would be so fortunate.
Put everything in writing
They say one of the clearest signs of a strong leader is knowing when to ask for help. You don’t have to be the best recordkeeper or business manager to run a profitable and enduring farm business — but you do need good records and documentation.
Take stock of your skills and situation and consider delegating some of these responsibilities to either a trusted family member who is qualified and skilled in this area, or to an agriculture business advisor. This individual can put to paper the great work you’re doing in the field; leaving nothing to interpretation and no room to dispute.
Also, take time to sit down with family members who have played an active role on the farm to formally qualify their sweat equity into a genuine shareholder, compensation, or asset ownership agreement. This may result in some family members being entitled to more than others, but like your estate plan, these agreements can outline why that’s the case and minimize any disagreements down the road.
Get clear on your transition plans early
What do you want to happen to your family farm when you and your spouse either retire or pass away?
What if some of your family stakeholders want to continue your legacy, while others prefer to sell off the assets and divide the proceeds evenly among the surviving individuals?
What if multiple family stakeholders want to take over the farm? What if nobody does?
Your farm transition plan is a journey, not a one-off event. The earlier you can begin planning for the process the better prepared you and your family will ultimately be to execute that plan when the time eventually comes. It also provides time to have the difficult conversations, providing space for everyone to share their thoughts and feelings about what comes next.
This process can be emotional and fraught with disagreements. It might even create divides between yourself and other family members. But with hard work, patience, and time on your side, it’s possible to mend these wounds and build a lasting consensus.
Leaving these conversations until you’ve passed or can no longer speak for yourself robs both you and your family of the opportunity — and can lead to costly rifts that won’t heal so easily.
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