By Peter Boys,CAFA The Financial Coach
Farmland prices have risen exponentially across Canada over the past decade. Some areas have seen increases of 400 per cent or more. Adding to this financial pain, farm quota prices have also increased. These numbers look great when one calculates the current farming generation’s net worth, but it has resulted in it being nearly impossible for the next generation to buy out their parents based on today’s farmland values.
Are there many farms out there today that would have the ability to generate the amount of profit that would be needed to service the debt required to take over the family farm? Or do other options need to be looked at to develop a sustainable succession plan?
For the majority of transfer plans, the younger generation will have to take on at least some debt to take over the farm. Often with the transition of a family farm comes the need to update machinery, fix plants and buildings, or add another home for either the young couple taking over or for mom and dad. You will need to work out all the costs involved to determine how much debt the next generation is able to take on.
When deciding what will be sold to the children and what will be transferred as a gift or part of the estate, the parents will need financial, accounting and legal advice. Before starting into a transition plan that will entail the farm operation taking on a lot of debt, it’s important to review the last five years of farms profits or losses in order to determine if taking on that amount of debt will leave the farm viable.
There are no cookie-cutter solutions when it comes to succession, retirement or estate planning for farms. What might seem to be important considerations for one family hardly matters to another? Because each situation requires individual solutions, families need to start the discussion of everyone’s expectations sooner rather than later.
One option for farm transition might be that the older generation maintains ownership of their land to provide security for them as they age, as it can be rented to the next generation or to third party farms. This also provides protection in case of a farming child’s divorce, disability or bankruptcy etc., and can provide a way to be fair to the non-farming children in the final estate plan.
Another option is for the children to set up their own operations and not be involved in mom and dad’s farm operation right away. Instead, they would start by renting or buying their own land and the odd piece of equipment and learn how to make their own management decisions. This way, they could start to buy mom and dad out a little bit at a time so it’s not such a big pill to swallow.
My advice to farm families out there is get started with the needed discussions now. Don’t wait until you’re backed into a corner due to ill health, disability or death. Effective transition solutions need a fair amount of time to discuss, plan and implement, at the same time working with a team of professionals to cover all the bases.