Originally published on Small Farm Canada
By Josh Martin
For Ted Zettel, taking over the family farm in Chepstow, Ontario couldn’t have gone more smoothly. With the help of advisors, he and his parents agreed to jointly run their dairy operation for a period of five years, after which time Ted and his wife Christine would assume full control. “It was just almost a seamless and perfect solution,” he remarked at the 2016 Guelph Organic Conference. “Everybody was happy.”
This was 1978. Things are a little different now. With skyrocketing land values in many parts of Canada, fewer children eager to take over the farm and a slew of other factors, passing on the torch today can be complicated. But getting good succession planning right is vital to a happy retirement, happy children and the future of your farm. While there’s no one-size-fits-all approach, there are some key considerations you’ll want to keep in mind as you work through the process.
We get it; the pigs need to be vaccinated, the corn needs to come off and the barn roof isn’t going to re-shingle itself. Of the hundred and one items on your to-do list, planning for retirement may rank pretty low. But starting the succession conversation while you’re still healthy goes a long way in creating a smooth transition to the next generation.
From a financial perspective, starting the succession process early can help ensure you’re not paying more taxes than necessary. Terry Betker, President and CEO of the Manitoba-based farm business management firm Backswath Management, recommends sitting down with your accountant or business advisors five years before you plan to hang up your hat. You don’t need to have all your ducks in a row at this stage, but now is the time to start discussing options.
Of course, much depends on whether your children want to follow in your footsteps. Again, start those discussions early — and don’t be discouraged if your kids don’t leap at the idea of taking over the reins. Fran and Tony McQuail of Meeting Place Organic Farm near Lucknow, Ontario got into the habit of checking in with their children every New Year. For ages, neither of the McQuail children expressed any interest. Then, two years ago, one of them decided she was ready to return to the farming life.
Have some serious conversations
There’s a big difference between casual chats about the farm’s future while you brew the morning coffee and actual meetings with clear agendas and objectives. Formalize the process, suggests Betker. Pull together relevant financial and legal information so that everyone has a clear picture. Take notes and set dates for the next meeting to keep things moving forward.
Transparency and honesty are also key. You can avoid a lot of drama by keeping everyone in the loop whenever possible, either by cc’ing them on emails or sitting everyone down for meetings around the kitchen table. You want to create a safe space so your children can openly discuss their goals and thoughts about the operation. “There needs to be clarity within the family about where they see themselves and the business in the future,” says Betker.
Just remember: it’s not simply a business you’re dealing with. It’s also your kids’ childhood home and all the deep personal attachments that go along with it. Be prepared for some strong opinions and emotionally charged discussions.
Think fair, not equal
A big issue many families face arises when only some of the children want to take over the farm. Parents want to be fair and often assume the only way to do that is to ensure that each child gets an equal share. As a result, they sell the farm and divvy the cash evenly between the kids. That might appear sensible on the surface, but if the kids who want to farm don’t end up with enough land to create a viable operation, you could be spelling the end of a business that’s been in the family for generations.
So what’s a better approach? Agreements come in all shapes and sizes, says Betker. A retiring couple may give the farm to the oldest and take out life insurance policies of equivalent value for the other children. Some farmers transfer land to their non-farming kids with the condition that they can’t sell it out from under the farming sibling for a certain number of years. Others stipulate that if a non-farming family member wants to sell their share of the land, they must do so to the successor at a discounted rate.
When it comes to what’s fair, every child also needs to recognize that inheriting the family business is a massive undertaking. It’s getting up at 4:30 in the morning, fixing fences in driving sleet and working long into the night. And of course, there are the substantial financial challenges. “There’s a lot of risk involved, and that really needs to be appreciated by the non-farming siblings,” says Fran McQuail.
Hand over the reins
Of course, asset ownership is only one half of the equation. The other is management. Your son or daughter might be a whiz at fixing a tractor or willing to work through the night to get the harvest in. But how comfortable are they negotiating the price of cattle or operating the accounting software?
Before you head off on that world cruise, make sure the next generation has the skills they need to get the job done. That may involve insisting successors bone up on their business skills at school, exposing them to all aspects of the farm from an early age or staying on in a management role while they get their feet under them.
It’s also important for retirees to prepare themselves mentally for the transition. According to Betker, one of the biggest challenges parents face is coming to grips with the idea of retirement. That’s why he recommends writing down exactly what you plan to do once you say goodbye to farming, creating a game plan for this new phase of your life.
Think about your goals
More often than not, succession planning is about transitions, not handovers. “I don’t want to be working as hard as I am, but I wouldn’t mind dying with my rubber boots on,” says Ted Zettel. If that’s the case, sit down with your successor and agree on how much you’ll stay involved and how responsibilities might be shared.
Spell out your hopes and expectations for the business going forward. Do you want to continue living on the farm once your successor takes over? Is it essential that the farm stays organic? That said, don’t unnecessarily limit what your successors can do. Yes, this is your life’s work you’re passing on, but your children will undoubtedly have ideas and plans of their own that need to be respected.
Finance your future
Whatever plans you put in place, you’ll need to be able to finance them. That means making sure you have enough money for you to live comfortably — on the farm or off — and cover the costs of potential illness or long-term care. Online retirement calculators are a great place to start, allowing you to input your age, living costs, assets and other details to get some rough projections.
Next, you’ll need to figure out where those dollars will come from. Building up a nest egg of cash investments outside the farm is a good strategy. However, if you’re like many farmers, all your wealth may be tied up in the operation.
In that case, incorporating the farm is one approach to consider. This allows you to retain wealth in the business and offers a number of tax benefits. However, it could mean handing over a significant chunk of ownership to your child. If you’re not comfortable with that, a formal partnership may make more sense, allowing you to leverage income splitting and get a CPP benefit for your spouse, says Betker.
Whichever approach you take, consider keeping the property deeds in the hands of the retirees and renting the land to the kids. This tactic not only gives you an ongoing revenue source and makes succession affordable for the next generation, it also protects the business in the event your successor and his or her spouse split up. “The parents, if they can, should die owning the land. It’s the best hedge against the unknown,” says Betker.
with your team
Whatever direction you decide, factor in all the business, legal and tax implications such as maximizing your capital gain exemption. A good plan should also include contingencies in the event of deaths or disasters, as well as mechanisms for resolving disputes. For example, if more than one child is taking over the farming operation, how will they divide up the responsibilities and who has the final decision-making authority?
To help you develop the best strategies for a smooth transition, lean on the expertise of lawyers, accountants and succession planners. Start early and look for a team that has a background in agriculture and understands your specific needs. And don’t be afraid to shop around. The McQuails met with six different lawyers before finding the right fit.
Back in Cheptsow, Ted Zettel is hammering out partnership agreements with his six kids. They’re taking the time to get things right, exploring everything from long-term lease arrangements to the possibility of establishing a land trust so the farm can be used by future generations but never sold.
Yes, it’s a big undertaking. But they know getting it right will ensure the sixth generation gets the opportunity to carry on the family tradition. “We’ve got this incredible, wonderful asset,” says Ted Zettel. “The last thing we want it to do is to become a disaster for our family.”
There are many examples of farmers who either have no children or whose children simply aren’t interested in taking over the business. In these cases, non-family successions are an option —whether it’s a farmhand you’ve been grooming over the years, the child of a family friend from the farm down the road or a newcomer to the area eager to put down roots. Just remember: while you won’t have the same worries about family dynamics, you’ll still need to work through all the legalities, financial implications and management decisions that come with succession.
Dear Mom and Dad…
We asked young farmers what advice they would give to the older generation about handing over the reins. Here’s what they said:
• “Research! Talk to qualified people to get advice on what to do.”
• “Make a goal, be honest, include the daughter/son-in-law.”
• “Talk to them, to all your children. Give them the opportunity to discuss it as a family.”
• “Start preparing early, consider the position of your next generation, keep them involved.”
• “Don’t force it on them, let them learn to appreciate it and want to do it… Farming is a way of life and has been a good one for us. I’m happy to have it passed to me so I can pass it to my children.”
Succession Planning Module Canadian Farm Learning Centre www.canadianfarmlearningcentre.com
Components of a Farm Succession Plan Ontario Ministry of Agriculture, Food and Rural Affairs
Overcoming Challenges in Succession Planning Farm Credit Canada
Family Farm Business Succession Plan Checklist British Columbia Ministry of Agriculture