Succession planning is often a very complex issue for farm businesses and there are as many solutions to succession planning as there are farming families. However, a well-planned, structured and inclusive plan created by all members of the family in consultation with a lawyer and a financial advisor, will ensure the risk of disputes are minimised, family relationships protected, control is passed on smoothly and seamlessly, and will, in all likelihood, positively contribute to the success of the farming business.
Succession planning involves the transfer of leadership, managerial control and ownership of farming assets from one generation to the next. It is the development of a plan that will allow a smooth transition of the business and any assets with the aim to minimise disruption to the business and, more importantly, to family relationships.
There are three, equally important, parts of the succession process.
1. Retirement planning – transition of labour and management
A good retirement plan should address the approximate date for retirement, sources of retirement income, retirement activities and housing. Therefore, it is important to take the following into consideration.
- The transfer of land (in stages if necessary) should take into account needs such as housing
- There should be a provision for sufficient off-farm assets for the older generation to retire.
- The financial and tax implications of the transfer, including:
- Pension planning objectives:
- the social security five-year rule;
- taking into account ‘foregone wages’.
- any ‘granny flat’ provisions. (For more information go to Granny Flat Agreements)
- What life and other types of personal insurance do you have.
- What are the tax implications of your plan?
- What are the ongoing costs (stamp duty, bank and legal costs)?
Any financial and tax implications should be discussed with an accountant, business advisor or financial planner.
Many succession plans fall apart because of the limited understanding of legal and tax implications of transferring land, income and assets by the purchaser.
2. Estate planning – transfer of ownership of family/individual assets.
The first question that should be asked when beginning the succession planning process is
Do you want your farming business to continue on beyond your lifetime?
If the answer is yes, then consideration must be given to who the farm will be transferred to and what your other family members will receive.
One of the most difficult decisions that farm families need to make when planning for succession is the distribution of the farming and non farming assets. i.e. How can succession be accomplished fairly whilst still ensuring the viability of the farming business. This decision, and all its necessary components, makes up the essence of the succession plan.
3. Business transition
Transitioning a farm business from one generation to another involves much more than simply transferring ownership of the farm assets. It involves passing on the skills and knowledge the owner has acquired over time, and the ability to manage the farm business profitably. The business transition should plan for the following:
- Leadership – how the management of the business will be passed to the younger generation.
- Ownership – how and when the ownership of all the assets will be passed to the younger generation.
- Structure – what is the current business structure and what workable alternatives should be considered when transitioning to the younger generation,
- Remuneration – for those who ‘work’ within the business.
Important points to consider when creating an effective succession plan
Communication is the key.
- Farming families should come together and discuss goals, expectations and aspirations for themselves and for the farm business,
- They must communicate openly with family members and professionals ,
- All family members including spouses, whether on or off the farm, should attend planning meetings, and provide input.
When to start succession planning
A 2016 study conducted by Chapman Eastway and Charles Sturt University concluded that many farmers find the options available to fund retirement are limited if they leave planning too late. This usually occurs because of an under-estimation of the ease of which sufficient funds can be accessed, given tax implications of withdrawing farm income.
Therefore, it’s never too soon to start succession planning. You could start as soon as the farm is passed into your hands, when your children are teenagers or when you are considering retiring. The sooner, the better. Just remember….
You have got to start the planning process knowing that plans are always changeable, and you are ready to change with them.
To get started on your planning today, contact us on (02) 6977 1155 or send us an enquiry TODAY
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