Tips for intergenerational wealth transfer on the farm
By ATB Financial 8 October 2021 5 min read
Farmers are great at talking about important business issues like crop choices, land transactions, and market trends.
But it’s often tougher to dig into more personal topics, like who’s going to take over the farm and when, especially with close family members.
ATB provided some practical reminders about the importance of having those transition discussions at AgSmart 2021, at Olds College. The session focused on necessities to successful intergenerational wealth transfer.
In fact, Amanda Vella, business advisory and transition consultant at ATB, points out despite the increasing age of farmers, only 8.5% of Alberta farm operators had a formal succession plan in place, as of the 2016 Census.
“We recognize that it's a very emotional process for business owners and isn't something that's easy for them to do,” says Vella. “But we really think it's necessary because we know only 20% of business transitions happen on the owner's timeline. The rest happen as a result of death, disability, dispute with shareholders and other unforeseen circumstances. So it's really important to protect the family's wealth that these plans are in place.”
Here is some advice on how to protect what you’ve spent so many years building up on the farm for future generations.
Recipe for success
In his extensive career of wealth planning, estate and trust work, Trent Hamans has seen both the benefits of estate planning, and the risks that come from not planning well.
As ATB’s Vice-President of Private Banking and Wealth Planning, Hamans provides guidance for those going through the process.
Hamans likes to compare successful wealth transfer to a great meal.
“There are three components to a great meal. As we know, you have to have great ingredients. You have to have a great chef, and you have to have a great recipe. And if you don't have those three working in concert with each other, you're probably not going to have a great meal. The same applies with wealth transfer,” says Hamans.
The ‘recipe’ includes the estate planning documents, like a will. (Did you know only 60% of Canadians have a will in place?) As well, there is a Personal Directive, the Enduring Power of Attorney, and business documentation such as Unanimous Shareholder Agreements.
But Hamans stresses not only is it important to have these documents, but they must also be kept up to date.
“I'm often asked, how often do I need to go back, have a look at these documents? And I would say, in the least, whenever you have a life changing event. Maybe you lose a parent, maybe you have an addition to your family. There's a divorce in the family. Those are events where you want to go back and have a look at the documents, to make sure that they're still appropriate.”
Ensure the right ingredients
The right ingredients can make or break the meal. For the transfer of wealth, Hamans considers those your assets – land, investments, and business interests. There are also your liabilities, like loans and taxes to be paid on death. Those are elements easily quantified. But in his experience, you can’t overlook something even more valuable.
“So what are my relationships like? What are the values that I want to instill in my children? Those are very, very important ingredients to a successful intergenerational wealth transfer that aren't captured in the will or the personal directive. But they are an essential part of that family conversation.”
Hamans encourages farmers to spend time thinking and talking about what they really want to see happen in the future for their farm, and then be sure they’re living those values they want to pass along.
Bring in the chefs!
As with any great meal, the chefs are the ones to bring everything together. Hamans describes the ‘chefs’ of wealth transfer as those that support you in life, and represent you when you’re gone. They’re professionals, like your lawyer and your accountant. But a critical decision is also naming your executor.
“It's a huge responsibility, the role of an executor,” emphasizes Hamans. “An executor has five different hats. They're going to be a bit of a lawyer themselves. They have to navigate the will and understand what the laws are.”
“They're going to be a bit of an accountant, because they have to report to beneficiaries and file tax returns. They're going to be a little bit of a private investigator, having to look for missing assets or missing beneficiaries.”
“They're going to be a risk manager because if anything goes wrong, they're personally liable for any losses if they've been negligent. So is the house insurance contemporary, is somebody driving the car that they shouldn't? That's risk management.”
“And the fifth component is being a social worker, dealing with family members that may not get along with each other. The executor has to go into that deep end. So, if the party that's passed away hasn't focused on those relationships, and hasn't focused on those values, it's the executor that's probably going to have to be in there to clean it up.”
Communicate, communicate, communicate
Both Hamans and Vella stress the importance of communication as a foundation for farm succession and wealth transfer planning. The process requires clear communication of your plans and desires with the professionals, but also within the family.
“I think it's easy to assume a child or somebody may want the business, but that may not be what they really want,” says Vella. “So it's really important to have those conversations and make sure that everybody in the family is on board. They can be challenging conversations, because every family has unique dynamics. It may be helpful to have somebody to facilitate those conversations, and make sure that is written down so that they know what your wishes were.”
Not all lawyers or accountants want to navigate family discussions, so it may be another kind of advisor whose sole purpose is to facilitate discussion and get a written plan on paper for how you exit your business.
The tax implications of wealth transfer are also important to consider, especially when it comes to using the capital gains exemption. Vella says that can take some time and forward thinking to enact. Plus, there can be government policy changes on the exemption to keep on top of with your accountant.
Guidance for go time
Both experts suggest the updated ATB Farm Succession Guide as a great place to get such discussions underway.
“What I like is it gives a lot of stories that farm business owners will resonate with and can relate to maybe their situation,” adds Vella. “It can start their mind thinking about what makes sense for their family.”
There’s no better time to start farm succession planning than now, because life can happen in unpredictable ways.
“You never know when it's going to happen,” says Haman. “I've met so many people that have said, ‘oh, I'll get it done when I need it’. You don't know when you're going to need it.”
It’s time to make a plan, grab your ATB Farm Succession Guide or speak to an ATB expert.
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