Wills

A will outlines what happens to your estate after death, while powers of attorney are used when someone is alive but unable to make decisions for themselves.

When drafting your will, consider the following:

Executor and alternate executor

• The executor administers your estate.
• You may appoint one or multiple executors. If choosing more than one, an odd number is advisable to ensure a majority decision can be reached.
• Consider whether you will compensate the executor for their time and responsibilities.

Beneficiaries

• Who will inherit from your estate? This could include your spouse, children or others.
• In the event that you, your spouse and children pass away, who should inherit your estate?

Age of inheritance for children

• At what age should your children be allowed to inherit their portion of the estate? This can be in the form of a lump sum or distributed in stages.

Personal effects

• Are there specific items you wish to gift to certain individuals? Be clear about any special bequests.

Guardianship for minor children

• Who do you want to appoint as guardian and alternate guardian for your children?

The will also includes provisions granting the executor the authority to manage the estate and a clause that protects beneficiaries from former spouses. For example, if a beneficiary inherits while married, the inheritance (and any income derived from it) will not be shared with the spouse in the event of a separation — unless the funds are placed in joint accounts or invested in a matrimonial home.

Powers of attorney

There are two key powers of attorney to consider: one for personal care and one for property.

1. Power of attorney for personal care: This document allows your attorney to make health care decisions on your behalf if you lose capacity. These decisions can include issues related to nutrition, shelter, hygiene and safety. Any special wishes, such as whether you wish to be kept alive in a vegetative state, or whether you wish to donate organs, can be specified in this document.
2. Power of attorney for property: This document gives your attorney the authority to manage your property, including banking, real estate and any business interests. Unlike the power of attorney for personal care, you may activate this document even if you retain capacity.

For both types of powers of attorney, you will need to consider two points.

Who will act as your attorney and who will be the alternate?

• You can choose different individuals for each document.
• Multiple people can be appointed, either to act jointly or severally (meaning together or independently).

Special instructions for the attorney

• If you have specific wishes regarding how your personal care should be handled, or how your property should be managed, these should be outlined in the respective documents.

Why are these documents essential?

A will is crucial because, without one, your estate will be distributed according to the rules of intestacy. This means the distribution of your estate may not reflect your wishes and the process could be more complicated for your family.

A will also opens the door to estate planning discussions that could help reduce the impact of probate tax. Probate is a tax levied on the total value of your estate, including cash, real estate and corporate interests. Certain assets, like shares in a private corporation, can be excluded from probate by creating a primary will for personal assets, and a secondary will for corporate shares.

Powers of attorney ensure that trusted individuals can make decisions for you should you be unable to do so. Without powers of attorney, decisions could be made by someone who may not align with your preferences, particularly if the decisions involve your business or other critical matters.

Considerations for farm families

Farm families face unique challenges when planning their estates, particularly when both farm and non-farm children are involved. For children working on the farm, the farm may be their livelihood. It may not be fair to gift a portion of the farm to non-farm children, as they are not involved in the farm’s operation.

This does not mean you should leave nothing to non-farm children. Instead, consider alternatives, such as taking out a life insurance policy for them or gifting assets like a cottage or investments. While the value of these gifts may not be equal to the farm, they ensure that non-farm children are not left without any inheritance.

Wills and powers of attorney are important documents that ensure your estate is handled according to your wishes. These documents not only give you control over the distribution of your estate but also provide clarity and support for your family during difficult times. For farm families, the unique needs of both farm and non-farm children require thoughtful planning, but the effort will make life easier for your loved ones and preserve the farm’s future.

– Jon Barnett and Ashley Podolinsky are lawyers with McKenzie Lake Lawyers located in London, Ont., with offices also in Guelph. Both have extensive experience with agribusiness and succession planning. For details, please view their biographies at mckenzielake.com.

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A shareholder’s agreement is an important document that provides a framework for the governance of a corporation, share transfer restrictions and exit provisions, among many other elements. Anyone who may be affected by their outcomes should be involved in drafting the shareholder’s agreement.

Corporate governance

Corporate governance outlines who will be the directors and officers of the corporation. It also stipulates which decisions will require unanimous shareholders’ approval, such as the sale of specific assets or the majority of assets, equipment purchases over a certain amount and how dividends will be paid to shareholders. Simply put, governance is where managerial responsibilities are assigned.

These provisions are frequently overlooked during preparation of a shareholder agreement, often because the farm plans to continue operating the way it always has based on the premise that “it works good enough.”

But shareholders can avoid a lot of tension and gain efficiencies can be gained by taking a deep dive into business operation responsibilities and by working out a plan for transitioning these responsibilities over time. Milestones such as someone’s age, the date on which a certain number of shares have been transferred, or when the operation attains a certain size, can be used to mark transfer of responsibilities. It’s important to establish a clear date for transferring responsibility.

Share transfer restrictions and exit provisions

A shareholder’s agreement includes restrictions on how a shareholder can deal with their shares. The agreement also outlines the mechanisms for transferring shares to other people.

Typically, shares cannot be transferred without consent of other shareholders unless shares are transferred to an affiliated or related party (e.g., spouse, children), or within a corporation controlled by a shareholder or related family member. Any third party transfers must have consent of the other shareholders. New shareholders should sign a Joinder Agreement which stipulates that they will assume the obligations of the shareholder’s agreement.

Various exit provisions can be included in a shareholder’s agreement, but the most common types are the shotgun clause, right of first refusal or right of first offer, and tag-along, or drag-along, clauses.

A shotgun clause is when one shareholder gives notice to the other shareholders that they will purchase the other shareholders’ shares at a certain price or sell at the same price. The other shareholders can either accept to sell their shares or purchase the shares from the offeror.

Right of first refusal is when a shareholder wants to sell their shares to a third party. Other shareholders have a first right of refusal on the offer prior to shares being sold to a third party.

Right of first offer is when a shareholder must offer to sell shares to other shareholders prior to selling their shares to a third party.

If there are minority shareholders it is beneficial to include tag-along and drag-along rights in an agreement. The tag-along clause allows a minority shareholder to tag along with a majority sale of shares, whereas a drag-along clause allows the majority shareholder to drag along the minority shareholders on a sale of shares.

Based on the situation, other exit provision options can be included in the agreement.

Provisions should also be included for how to handle shares in the event of a shareholder’s employment termination, in the event of death or disability, or separation from a spouse. One option is for the corporation to repurchase the shares in these situations. In the event of death or disability, another option would be for the shares to go to the shareholder’s spouse or child. The best option is whatever protects the corporation.

Life insurance should also be discussed because in the event of the death of a shareholder, life insurance can help the corporation repurchase shares of the deceased shareholder.

Farm-specific provisions

The following are examples of provisions that farm corporations may need to include in their shareholder’s agreement:

• Who will manage the corporation and how management will change over time.
• How retirement income will be handled or how a buyout of retired shareholders will be initiated.
• Housing or dwellings owned by the corporation.
• Measures to protect the exiting shareholder from money owed by the corporation on corporately owned lands.
• Release of guarantees and removal from loan agreements over time.
• How to deal with unexpected circumstances, such as the death of a shareholder or a key shareholder becoming disabled.
• Requirements for life insurance.
• These are just a few of the important topics shareholders should discuss.

Overall, a shareholder’s agreement outlines various terms upon which the parties agree so that the corporation can continue to operate as effectively as possible. This is especially important when multiple generations are involved. Failing to have a shareholder’s agreement in place will significantly harm the farm operation and the ability to pass it along to further generations.

– Jon Barnett and Ashley Podolinsky are lawyers with McKenzie Lake Lawyers located in London, Ont, with offices also in Guelph. Both have extensive experience with agribusiness and succession planning. For details, please view their biographies at mckenzielake.com.

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A retirement plan should be part of the conversation when creating a succession plan. The emphasis of succession planning is typically on transferring the business to the next generation. There is often little consideration for the outgoing generation and the lifestyle they’ll need to finance post-retirement.

Incorporating a retirement plan into a succession plan requires looking at the mechanisms of the farm transfer from the perspective of the retiring farmer. How do they want to retire and how does that fit into the succession plan?

The lifestyle you want

A retirement plan considers both financial and lifestyle aspects. It outlines the desired lifestyle and how it will be financed. Lifestyle considerations include leisure activities, how involved the outgoing farmer will continue to be in the business and the retiree’s living arrangements. The financial component considers any funds the retiree has saved (i.e., RRSPs, RRIFs, CPP, life savings, etc.) and if there are any supplemental funds from the farm operation. These considerations should be part of succession plan legal documents.

A farmer doesn’t have to retire cold turkey. In fact, it’s often best to gradually transition management and control from one generation to the next. Offering a managerial role to the next generation allows a farmer to take a step back and see where they can delegate responsibility. It can be difficult to pass on these management roles, but it’s important that the next generation is more involved. It allows the farmer to slow down but still provide guidance and input on bigger decisions.

Lifestyle depends on the financial stability of the operation and whether there are multiple families pulling income from the farm. It may not be possible for a farmer to step away if their labour helps the farm remain financially viable.

We recommend incorporating the transition of managerial roles into a partnership or shareholders’ agreement with specific milestones, such as the reduction of equity of the outgoing generation below a certain threshold or at a specific time. For example, a farmer may be required to resign as an officer of a farm corporation after 500,000 of their special shares are redeemed.

The finances you’ll need

Many farmers put their life savings into the farm. Passing the farm to the next generation — whether by sale, gift or some other method — means they will most likely require money from the farm to fund their retirement.

A shareholders’ agreement can stipulate how the retiree would be paid from the farm corporation while allowing the farm corporation to remain financially stable. Options include wages, redemption of special shares, or dividends.

Wages are paid to the farmer through payroll and taxed as employment income. The retiree may exchange their common shares for special shares as part of reorganizing the farm corporation during the succession process. The retiree may redeem a quantity of special shares to live off each year. The retiree may be paid by dividends each year, or dividends can be paid out with either common shares or special shares. Tax implications should be considered to determine the best method. We also recommend adding an adjustment clause tying the payment amounts to inflation to ensure the retiree’s purchasing power does not decrease over time.

From a legal perspective, it is important for the retiree to negotiate releases from personal guarantees to any financial institutions. They should also obtain security over assets to ensure financial protection. And they’ll want to ensure there is sufficient equity and cash flow in the operation to fund the lifestyle they plan to have.

A shareholder or partnership agreement should contemplate a reversal of the succession plan if the next generation mismanages the operation. This may seem like a harsh outcome, but so is living on less because the retiree failed to ensure their financial security in retirement.

A retirement plan is a critical part of succession planning, but it’s often minimized during the process. Lifestyle costs need to be within what the farm operation can support and still allow for growth. Ultimately, the goal is to ensure that the incoming generation can survive on the farm’s revenue and that the outgoing generation’s retirement lifestyle does not distress the farm’s financial situation. Everyone must agree on the retirement plan, or it could mean that the scope of the operation needs to change and other assets sold off to support the plan. Once these factors are determined, draft and implement a retirement plan that includes milestones for gradual succession.

– Jon Barnett and Ashley Podolinsky are lawyers with McKenzie Lake Lawyers located in London, Ontario, with offices also in Guelph. Both have extensive experience with agribusiness and succession planning. For full details, please view their biographies at mckenzielake.com.

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There are many different ways to transfer farm assets and the method depends on the type of asset, preferences of the parties and tax considerations. Many farming operations are run through one or more corporations, which adds additional layers of complexity for transferring the underlying assets.

Below, we discuss some of the legal considerations when transitioning a farming operation by directly transferring assets or by transferring the shares of the farming corporations.

Transferring shares of a corporation

A common approach to transferring the farming operation is to transfer the shares of the farm corporation. Many of our farming clients are becoming better versed in corporate law. Nevertheless, a critical understanding is often lost in the details; the corporation is a separate and distinct legal entity.
The Canada Business Corporations Act provides that:
15(1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.

It may seem odd to think of a corporation as a person, but it is helpful for understanding how corporations work and how they are treated in the eyes of the law. Shareholders ultimately have control of the corporation by owning shares. The shareholders then elect a board of directors to oversee the corporation, who in turn appoint officers to run the corporation’s business activities. In many farming operations, the same people fill all these roles. In a succession plan, changing the individuals in these roles over time is a useful planning tool.

Share transfers can be relatively straightforward and there are specific tax exemptions for transferring the shares of farming corporations that defer the taxes payable on the shares from generation to generation. Appropriate advice from an accountant is required to complete the share transfer and to file the necessary returns with the Canada Revenue Agency. The plan should be discussed with the different advisors involved, including bankers, lawyers and accountants.

Once a plan has been developed, we as lawyers draft the necessary documents in order to implement the transferring of shares and to update the corporate minute book. This is typically referred to as a reorganization of the corporation.

A reorganization of shares can involve freezing the corporation to bring in new shareholders, selling the shares of the corporation to new shareholders, or gifting shares. The decision is based on the parties, their status and any tax implications.

Shares can also be split into different types and classes. Generally, there are two main types of shares — common and special or preferred. Common shares are what you typically think of when you discuss shares in a company. Common shares increase in value as the company becomes more valuable. Typically, they also have voting rights and are the default shares that are issued on incorporation. Special or preferred shares are generally fixed in value and have priority over common shares. The different types and classes of shares can be useful in implementing succession plans in larger farming organizations with multiple families involved.

With share transfers, there are additional issues from a legal perspective that may need to be addressed. For example, if there is a shareholders agreement in place it will have restrictions on the transfer of shares and the management of the corporation. It could contain a right of first refusal, a right of first offer, or other restrictions on share transfers. We will discuss shareholder agreements in greater detail in a future article.

Transferring assets

The other general category of transferring a farm operation is through the direct transfer of assets. We tend to look at these transfers in four different categories for both tax and legal considerations. Assets can be transferred:

• from person to person
• corporation to corporation
• person to corporation/corporation to person
• among partnerships

When transferring assets personally to another person or to a corporation, the transfer can be completed on a tax-deferred basis and, when dealing with land, there is typically an exemption from land transfer tax. For example, in Ontario, when transferring farmland from a personal name to a family farm corporation, an exemption from land transfer tax may apply if certain conditions are met.

Transferring assets from a corporation to another corporation creates additional legal and tax issues that should be addressed with an advisor prior to undertaking. From a legal perspective, it must be investigated if there are shareholders agreements that would prevent the transfer, the availability of land transfer exemptions should be considered, and restrictions with any marketing board will need to be addressed for quota transfers. Mortgages and security agreements also need to be reviewed and the bankers consulted to ensure the transfers will be permitted without triggering any pre-payment penalties.

If more than one person is holding a real property in their personal names, generally there are two different ways that the lands are held — either as joint tenants or tenants in common. Joint tenancy is where people hold title all together and there is no undivided share in the property for any one of the owners. If an owner was to pass away, there is the right of survivorship, where the surviving owner(s) will continue to own the entire property. If people hold title as tenants in common, then each owner has a divided interest in the ownership of the property and they can do what they wish with their interest. For example, if three owners own the property with 33 per cent each, an owner can sell their 33 per cent to someone else. There can also be different ownerships with tenants in common. One owner can hold 70 per cent and another can hold 30 per cent. A corporation can also own a portion of the property as a tenant in common, but not as a joint tenant. Transferring property into joint tenants with the next generation can be an effective tool to minimize probate costs while retaining some control over the lands.

If transferring farmland, lawyers will draft the necessary documents and register the transfer online. For transferring other assets, lawyers will draft asset transfer agreements, bills of sale and any other required documents to make effective the transfer of assets. Quota transfers need to be completed through the appropriate marketing board to be effective.

Combined transfers

Often, a succession plan will involve a combination of asset and share transfers to give effect to the intentions of the parties, especially when there are multiple children or other parties involved in the farming operation. Certain farm assets may be transferred to another corporation, and shares from an existing corporation transferred to a child. Often, to ensure unintended tax consequences, there needs to be a delay between the initial transfer of assets and the eventual gifting of shares to the next generation.

As stated throughout, tax implications need to be considered for any of the methods used. A person’s capital gains exemption will typically be utilized and any other tax advantages should be considered when determining the method of transferring assets.

Every farming operation is different and poses its unique challenges and considerations. Engaging knowledgeable advisors from the outset is important in determining these considerations and how they can be leveraged for a successful succession plan. When it comes to the transfer of assets, this can result in substantial tax savings and avoiding headaches down the road from improper agreements being put in place that do not address the concerns of the individuals involved.

– Jon Barnett and Ashley Podolinsky are lawyers with McKenzie Lake Lawyers located in London, Ontario, with offices also in Guelph. Both have extensive experience with agribusiness and succession planning. For full details, please view their biographies at mckenzielake.com.

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The first step is making the succession plan a priority. Succession planning is more than just the transfer of assets, it is also the transfer of responsibility and decision-making, and the sharing or transferring of the physical work. It’s important to begin early.

Legal considerations at the outset

History plays an important role in succession planning. As later generations inherit the succession plans from their parents and turn around to create their own plans, we are finding a lot more complications come about. Control and assets are passing at different times. Existing agreements, such as partnership, trust and shareholder agreements, can become burdensome for future succession plans. We also find that a lot of farmers may not fully understand the paths that their advisors have put them on, or how they can end up being “stuck” going in a certain direction with their plan.

As lawyers, we have adjusted our approach to succession planning. Instead of getting involved at the end to draft documents and prepare the plans, we encourage our clients to get us involved earlier to ensure they are on the right path from the outset. This involves reviewing existing operating agreements, wills and other legal documents, and providing guidance to other advisors on the restrictions created by past plans.

We will often recommend putting a will in place that gives effect to the overall plan early on in case it takes a year or two (or more) to finalize all of the pieces of a plan. Lastly, we sit down and explain the legal ramifications and operations of a succession plan in multiple meetings to ensure there is full understanding and buy-in from all of the interested parties. We do our best to drop the legal speak and explain the intricacies of plans in straightforward language. It is important for your advisors to be able to ensure that everyone fully understands what is being implemented on your behalf.

Who are the interested parties?

The first task when beginning the succession planning process is to determine who are the interested parties or stakeholders in the farming operation and family. Interested parties can be members of the family, such as parents, children and siblings or they can be third parties, such as key employees of the operation, professional advisors and even neighbours. Open and honest communication amongst all interested parties is critical to getting the ball rolling with a plan. This will allow each person to share their values and their expectations as well as their personal goals.

There are some key questions each interested party should answer to determine their involvement in the operation, such as:

• What is each person’s role in the current operation?
• What are each person’s strengths and weaknesses?
• Are there any personality conflicts between any of the parties?
• What are the family business dynamics?
• What are the personal goals and expectations of the individual parties?
• Does any party have any non-negotiables?

Answering these questions will help determine (1) what is the best role for each interested party, (2) whether multiple family members can work together and (3) what structure can be put in place to accommodate competing priorities. If there are conflicts amongst certain family members, that affects the family business dynamics and consideration will need to be made for potential separate divisions or to separate the operation completely. If one person’s strength is livestock and another is cash crop, labour can be split. Or if someone is better at marketing and another at mechanics, they can manage their separate departments but every person should have and know their roles.

What is the scope of the farming operation?

The next step would be determining the scope of the farming operation and evaluating its strengths and weaknesses. Is the operation fully cash crop? Any livestock? Any other divisions of the operation? Are its resources being fully utilized?

The size and assets of the operation need to be evaluated. A list should be put together of all the assets and debts of the farming operation. This would include deeds for real property and financial information (i.e., financial statements, bank records, etc.). The viability and profitability of the farm business needs to be analyzed.

An important question also needs to be asked: Is there enough income to support everyone? For many famers and their families, this is a pivotal moment. Not everyone who wants to farm will have that opportunity.

The potential for future income generation should not be overstated in this step. Based on the age of the family members, there may be time to implement a plan but if parents are ready to retire, a plan will need to be determined in a short period of time.

Make a decision

The last step when getting started will be to generate options for a decision. We generally like to have three potential plans for consideration. The favoured plan may not be as attractive after a detailed analysis, so it is important to have a backup plan or two. There will be other considerations that go into the decision, such as tax considerations and if applicable, how to treat the non-farming family members. There will also be aspects of the plan to be implemented in the short term and others in the long term, which should be evaluated on an ongoing basis.

Professionals such as accountants, lawyers and financial advisors should be involved to help create options. Each professional plays a different role. For example, lawyers can provide advice on business structures, purchases, sales and leases. They can also create and review the agreement and the required documentation for the transition, and they can update wills and powers of attorney.

Jon Barnett and Ashley Podolinsky are lawyers with McKenzie Lake Lawyers located in London, Ont. with offices also in Guelph. Both have extensive experience with agribusiness and succession planning. For full details, please view their biographies at mckenzielake.com.

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