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Succession planning is the single biggest money management issue your family will ever face, but the way to get to the finish line is to focus on just one step at a time

The next decade will bring huge changes to the farm. thousands more farmers will reach their 60s and beyond. they’ll wrestle with issues of who will take over the farm, when it will happen and what the process might look like. they’ll fret over how to be fair to all their children, and how to be fair to themselves so they can enjoy a richly deserved retirement

But while every farm is unique — and so is every family — the overall principles of succession planning are surprisingly universal.

Below are your first four steps.

None of the experts we consulted is promising that these four steps will make succession planning simple for your family, or that you’ll get all the issues sorted out overnight. But you will know a lot more about what the end result might look like, and how to get there.

What’s more, starting today doesn’t have to mean spending any money. Nor does it have to mean hiring all sorts of professionals, although as you’ll see, professionals worth their salt will save you their fee many times over. Starting your succession plan can be as simple as daydreaming the ideal retirement scenario.

As one advisor told us, it’s time to stop viewing succession planning as such a large and overwhelming task that you don’t know where to start. So start simply, and start small.

By getting started on the small things, such as updating wills, talking with your family about your hopes and plans and exploring different scenarios, you may very well save hundreds of thousands of dollars. More than that, your legacy may be a healthy farm, and an even healthier family. It’s that important.

Step 1

The Hard Look

Would your farm be viable if you passed it on to a son or daughter who had to make mortgage payments?

In a perfect world, the biggest decision you’d have to make when passing the farm on to the kids would be how to divide up the wealth. Unfortunately, reality can be much harsher than that.

Before employing an entire team of professionals to help the farm change hands, it’s important to take a long, hard look at the farm’s current viability and how profitable it would be under a different ownership arrangement.

It’s bound to be an unpopular idea, but Melanie Smith, investment advisor with TD Waterhouse Canada based at Barrie, Ont., explains that not all farms are profitable enough or have enough cash flow for the kids to take over.

“It used to be that I’d start by asking the family to sit down and discuss their personal goals,” Smith says, “but I’ve found that now we take a step back and ensure the viability of the farm as it is before we start talking goals and the mechanics of succession.

“We’ll sit down with their accountant and look at the farm’s viability, using basic measures, such as return on investment, the debt-to-equity ratio and cash flow,” Smith says. “Then we might look at how those numbers will change should the child or children need to take out significant loans to buy the farm business or land.”

Smith points out that many farms are profitable only because of the hard years the parents have put into paying down the farm debt. With little or no debt to service, all income can cover variable and fixed costs as well as provide income. “In some situations, the parents may then consider gifting the business or land to the child or children, which may keep the farm viable, but it does nothing to provide retirement income for the parents,” Smith says.

It’s natural for parents to want to help out their child, but parents should be and need to be fairly compensated for the blood, sweat and tears they’ve put into the farm, Smith says. That’s not to say there’s no hope of passing the farm on to a child or children, but it may mean that significant changes to the business must happen before or during the changing of the guard.

Smith adds that too often, parents aren’t realistic about what they’ll need to live off of. They may have no idea how much they’ll receive through Old Age Security and the Canada Pension Plan.

A financial advisor can put those numbers together to calculate your base level of income, Smith says, but parents need to decide what life they want to live in retirement and what level of income will be necessary to do that. Selling only some of the land may be one way to provide for retirement without toppling the farm.

Step 2

The Estate

If you haven’t looked at your will for years, it’s time to dust it off

There are good reasons to tackle estate planning first, even though you might think that succession planning is all about planning for your retirement, not your trip to the cemetery.

Truth is, many wills (probably this should read, “most”) are sadly out of date. Then too, the inevitable rarely happens at a convenient time.

Peter Boys, financial advisor with Boys Financial Services based at Stettler, Alta., says that wills are most commonly drawn up when children are young. “Most wills are basic. Each spouse leaves everything to the other and in the event they both pass, the estate is split equally between all children,” Boys says.

The problem is, if the children have grown up and only one of them is farming, splitting an estate equally could mean the child who carries on the farm has uninterested and unwanted business partners.

“Equal isn’t always fair,” Boys says. Nor is it always practical.

“Most parents want to provide an estate for their kids, but if only one of three is actively farming, there are arrangements that can be made so that the one child inherits the farm and the other two receive a cash settlement,” Boys says. “Children not interested in farming likely would prefer cash anyway.”

Boys says a situation like this is relatively easy to handle. “Parents can revise the will to leave the business and land to the farming child or children and can then take out a life insurance policy or earmark other funds for the remaining child or children,” he says. “The earlier this is done the better. Life insurance costs less the younger you are.”

Of course, part of deciding who gets what in the will is determined by the intentions of those involved. “It’s important, as an advisor, to get a feel for the family dynamic. I’ll usually meet with the parents first and discuss their ideas of how they see things happening first,” Boys says. At some point, all those involved with the farm do need to sit down and let their wishes and plans be known.

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