Inheriting the family farm as a gift

Succession in Agriculture: High land prices are driving innovation in how to distribute your land

Farming without some startup help from your family can definitely mean an uphill climb. But getting the gift of a farm inheritance isn’t always such a blessing either.

Many farmers will tell you it would have been impossible for them to get started in the business if it hadn’t been for a “hometown discount” from Dad or an early bequest from Mom. But examples of self-made farmers aren’t unheard of either.

It helps explain the surprise when ag economist Alfons Weersink at the University of Guelph studied farmland values for the Canadian Agricultural Trade Policy and Competitiveness Research Network in 2011, before the bull market of the last three years.

Weersink found Ontario land values had soared from $500 per acre in 1961 to over $3,500 per acre in 2009. But he also believes many, many farmers never really paid these full prices for their farms and he thinks at least one full generation of farmers across Canada got started with a familial gift of some kind.

“There was a wave of immigrants that came over after the Second World War with very little and started farming,” says Weersink. “But since that time, it has been the next generation of the family that has taken over land.”

Weersink doesn’t have hard numbers to prove what price the land has actually sold for on these farms, but it’s been his experience that some sort of discount is generally involved in passing the farm operation from one generation to the next, largely because of the high asset prices relative to the annual returns.

So the irony is that, while market prices for Canada’s farmland have certainly increased, it may only mean that the size of the gifted portion has increased by nearly the same amount.

It isn’t exactly what our wannabe farmers who don’t have a family property to inherit want to hear, Weersink says.

Young farmers who get a start with discounted land definitely have a competitive edge, Weersink says. And as the size of the gift increases, so does the edge. “It ends up improving their cash flow and increasing the farm’s profitability.”

John Wilkin, director of business development for Allied Associates in London, Ont., agrees that it is much more difficult for beginning farmers who don’t have a spouse, parent, or grandparent to help them get their hands on some family farm assets.

Even so, Wilkin thinks rising land values have also made things a little less rosy for today’s farm heir too.

“The land has easily doubled, or in some cases tripled, just over a very short period of time so the non-farming children suddenly have an interest in what’s going on with the farm,” says Wilkin. “Back 30 years ago, Mom and Dad were eager to have one of the family carry on the farm and the only way that could be accomplished was to eliminate the other children from whatever funds might be left. The perspective is changing; there is a desire to be closer to equal than before.”

Wilkin says he is seeing more families than ever achieve this equalization through the use of insurance policies. Typically a “last to die” policy is purchased to ensure that, upon the parents’ deaths, there will be enough funds to buy out the non- farming siblings.

This can work particularly well in conjunction with a corporate business structure. But Adrian Spitters, senior wealth adviser with Assante Capital Management Ltd. in Abbotsford, B.C., adds a warning. He says that if the corporation buys such a policy and if the proceeds go directly to the parents’ estate to be distributed to the children, these funds could be subject to tax.

Spitters suggests his clients talk to their accountant and their insurance provider about the option of making the farm corporation the policy’s beneficiary. “You want to take advantage of the capital dividend account within the corporation,” he says. “If the money goes into the corporation, you can then disperse it so that the non-farming children get their money tax free out of the dividend account.”

In a heartbeat, Spitters can rhyme off all sorts of creative ideas for gifting the farm. Maybe it’s because British Columbia boasts some of this country’s highest farmland prices. Or maybe it’s because he has already lived through a generational farm transfer in his own family. For whatever reason, Spitters offers a unique lens on the blessings and the challenges involved in gifting the farm.

“I don’t think there’s a way of saying there is a fair or equal way at today’s prices,” Spitters starts with. There are simply too many complexities to consider, in his opinion. For example, he points out that farm rollovers to family carry with them a tax bill which parents often forget about. As long as the children farm until their own children take the operation over, and their children after them in perpetuity, the tax bill just keeps getting passed on. But at some point, someone’s estate is going to wind up paying that bill when you get to the point where nobody in the family is willing or able to farm any longer. “You’re not getting rid of the tax, you’re just passing it on,” Spitters says. “If you’re the one who’s going to sell the farm because the kids aren’t going to take it over, you’re going to have this tax bill to deal with, and you need to plan for that somehow.”

Plus, there’s another little-known curse in disguise, this time for the parents who bestow the farm blessing.

“When you roll over the farm tax free to the next generation, there is no attribution back to the parents if they hold on to the farm for more than three years,” Spitters explains. “But, if the kids decide they don’t like it or they run into financial difficulty and they’re forced to sell the farm within those three years, attribution rules will now make that tax bill payable back to the parents.”

This is why parents need to be protected to the fullest extent possible, says Wilkin. “When we had those high interest rates, there were many situations where Mom and Dad transferred the property and there was no security taken,” he recalls. “They could have easily put a second mortgage on (the farm), and it would have protected them where there were defaults, but instead Mom and Dad got nothing.” Wilkin says this is why it is a good idea for parents and their kids to get independent advice during succession planning. He realizes it is tempting to save a little money up front by sharing lawyers and accountants, but experience has taught him that succession is just one of those areas where an ounce of prevention is really worth a pound of cure.

If it’s starting to seem like the simplest thing to do is just to forget about gifting the farm to any family at all, especially if no one seems to REALLY want it anyway, and if it seems the best thing is just to bite the tax bullet that comes, Spitters offers one last fringe idea worth considering. “Farmers are giving people,” he observes. “Why not give to help young farmers who really, really want to farm?”

Spitters runs into young people who have what it takes to become great farmers, but they need a little help in getting started, and he suspects great alliances could form between such up-and-comers and “heirless” established farmers looking to retire. To his way of thinking, if these farmers could donate to some sort of trust, with the trust responsible for setting up a low-cost loan or guaranteeing a bank loan to get the new farmer started, you would create a win-win situation for everyone involved, and you would also serve a public interest by seeing the heritage of the family farm protected. “Unfortunately, there is no way right now to actually donate farmland and get a deduction,” says Spitters.

Interestingly, Spitters’ idea is mirrored in an ongoing Ontario Farmland Trust Agricultural Gifts campaign, which is also being supported by such organizations as the Nature Trust of New Brunswick and the Land Conservancy of British Columbia. Advocates are calling for the extension of the Ecological Gifts Program, which offers income tax incentives in exchange for voluntary donations of ecologically significant land or conservation easements to designated conservation agencies, to include donations of productive agricultural land.

Spitters believes such programs could solve some of the cost issues that keep so many young farmers out of the industry by transferring land ownership out of the trust as a critical component. It’s a pattern already set by the Maine Farmland Trust. Since 2007, that trust has purchased five farms deemed vulnerable to development, placed conservation easements on them, and resold them to farmers.

This article first appeared as, “It’s all different now,” in a special section called Succession in Agriculture in the September 2014 issue of Country Guide

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Amy Petherick is a Contributing Editor at Country Guide.

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