Leaving the farm to children: Farm succession advice
© Ing Image “Fair” and “equal” are not necessarily the same thing when it comes to farming succession and passing on assets.
US attorney and adviser John Baker works for the Iowa State University Extension service, which runs a “beginning farmer centre” to help farming families with business planning and succession in particular.
His advice for successful succession planning includes seriously questioning the tendency for parents to want to treat their children equally. Equal is not the same as fair, he says, and splitting business assets can overburden those running the business.
See also: Farm succession advice
“Successors take over management, heirs take on ownership of assets,” says Mr Baker. “However, every business and family will vary in size and complexity; successors and heirs can be the same people, but not necessarily.
“In larger businesses, non-succeeding heirs could have shares in the business that can only be sold to other family shareholders. Such shares would have a capital value but needn’t involve annual dividends.”
Succession tips from John Baker
- A 15 to 20-year succession plan, beginning when successors are aged 20 to 28 and seeing the retiring generation stepping down in its 60s.
- The older generation should take the lead in initiating discussion and, while those discussions should be long-term, they should not be so protracted that no decision is ever reached.
- Even where it is obvious who will succeed, that person’s skills, education and knowledge must be assessed to identify any gaps, rather than relying on having grown up on the farm and in the business as succession qualifications.
Ian Naylor, a partner in Staffordshire law firm Bowcock & Pursaill, says there has to be an acceptance that the division of assets will not be equal and that in most cases the farm has to keep going.
Everyone should be aware of the plans so that there are no nasty shocks when a death happens, he advises.
The issues of fairness and equality in farming succession are ones that Mr Naylor encounters every week. “Most farming businesses can only support one successor,” he says.
“The biggest hurdles are likely to be providing for the retiring generation and non-farming family members.” Good pension planning can help with the former, he says, while there are several options to address the latter.
These include:
- Leave the farm to the farming child or children, with the provision that they pay out certain sums to their siblings/other beneficiaries over a number of years – there’s no arithmetical model for this, every situation is different, but it is important not to place too heavy a burden on the business.
- If there is development potential on the land, provision could be made for siblings to be included in the division of any development sale proceeds.
- Leave the farm to all siblings, with the farming child/children being given a long-term farm business tenancy so the remaining siblings receive the rent. However, this option comes with a warning that fragmented ownership can be complicated.
- Make provision for some land to be sold on the death of the current owner to payout the non-farming siblings/family members. This is not an option in many cases as all land is usually needed for the farm business.
- Residential barn conversions or other dwellings could be left to non-farming children.
- Leave the farm to the farming child/children with the provision that if it or any substantial part of it is sold in future, the proceeds should be shared with their siblings.
- Use life insurance to provide a lump sum on the death of a parent/current owner – this can be expensive.
Pensions and insurance
Insurance can be part of succession planning – whole of life cover or term cover can be useful for some families. It can provide a lump sum to pay non-farming children or other family members, to reduce debt, to pay tax or invest in the business.
It is usually important that life cover is written in trust so that it remains outside the inheritance tax net, says Justin Bentley of Oxfordshire-based independent financial adviser Sandringham Financial Partners.
As well as providing for the retiring generation, any funds left in a pension pot on death can be left to non-farming children free of IHT, points out NFU Mutual.