We continue our journey through succession with the Hunter Family as we focus on the transition and the details of what this phase of the process looks like for the family. Many of you have reached out to tell us you and your families are gaining a greater understanding since reading this series, which was our goal when we began. Planning for continuity of the farm isn’t easy. It involves tough conversations and asking tough questions about your future and your legacy. We understand that. That’s why families see the benefit in retaining a succession advisor to help quarterback this process. We hope you find some comfort in learning about each stakeholder and their journey through this series.
To recap from last time, we explored the financial side of the family business. The Hunter family gained greater clarity of what their personal financial needs are and the value of the farm and how to leverage its value for succession to the next generation.
We rejoin the Hunter family now with a meeting to discuss three scenarios for them to consider for the transition. A brief outline of those options includes:
• A Fair Market Value Sale. Since Bruce does not have full ownership of the farm yet, this would require two sales — Mary, the mother, to sell to her 50-year-old son Bruce (and Susan); and Bruce and Susan to sell to their daughter Maggie and their son Mark. While this option would ensure their retirement needs are fully funded and capital gains exemptions could be used to eliminate tax, it could trigger significant tax liabilities, and farming income would likely not be enough to pay for this.
• Gifting/Intergenerational Rollover — Full Transfer. Farm assets could be gifted to Bruce and then to Maggie and Mark. Under current rules, a tax-free rollover is available when the farm is gifted to a child. While tax would be nil on the gift of property, assumption of current tax would happen on assets, and farming income would need to be paid to Bruce and Susan, which would be taxable to them. It also doesn’t create an obligation for Mark and Maggie to pay anything for these assets to Bruce and Susan, which is needed to maintain their lifestyle.
• Partial Sale/Gift. This option includes transferring land and buildings on a rollover basis during their lifetime or through wills and rolling the quota, machinery and livestock into a new corporation. This provides a number of advantages including the rollover of assets to occur on a tax-deferred basis, specifying the transfer of what assets and freezing the current value of those assets in fixed-value shares, allowing the purchase to be funded by corporate dollars (at a lower tax rate) and some others. It could also allow for the future growth to be attributed to Mark and Maggie, stopping the growth of the tax attributed to Bruce/Susan.
Maggie asks, “Is it fair that I get the same shares as Mark?” given he has contributed more time and work to the farm in past years.
We talk about each scenario and its advantages and disadvantages. Mary says she is fine rolling her interests to Bruce to manage accordingly as his kids mature into the business. She also mentions we need to consider everyone — including the non-farming son Matthew and his family to be fair.
I then provided an overview of what I consider a hybrid approach, and a best practice for most families.
It’s a partial sale and gift, and it allows us to address numerous concerns that the Hunter family is facing, including the concerns about Mark’s time on the farm. Here’s how I explained it to the family:
- If we look at the partial sale/gift scenario we can address a plan that establishes continuity for both generations.
- This would allow for the rollover of the farming assets to occur on a tax-deferred basis and would enable us to freeze the current value of the dairy business in fixed-value preferred shares. That addresses two key issues: one is the ability to give Mark shares representing his sweat equity, and second, it allows future growth of the farm to accrue to common shares, meaning Maggie and Mark would split the farm’s growth equally moving forward.
- The net earnings from the farm can fund the share redemptions (prior to paying personal tax) and they can be staged over several years to reduce their total tax cost.
- The plan allows Bruce and Susan to withdraw funds from the corporation as needed for retirement while allowing Mark and Maggie to gain a foothold into ownership — giving them both a clear path forward.
- It also allows the family to maximize the use of capital gains exemptions either on the shares or on the future transfer of the land that would be held personally.
I provided an overview of the growth of the farm in the last 10 years, along with a sweat equity calculation for Mark (subtracting what he had been paid during those years) and it came out to 10 per cent of the value.
There were a few moments of silence as each of the family members took the time to digest it all. I asked Bruce for his thoughts. “I am fine with it if Mark is,” he said. “I think its fair, Dad,” Mark replied.
I then spoke to the family about the land.
“If quota, machinery and livestock are in this corporation, let’s keep the land out of the current transition plan at this time,” I suggest. This allows the Hunter family to have a few things, i.e. it gives Bruce and Susan security in the land, while providing Maggie and Mark clarity about their pathway to ownership in the business.
At one of my first meetings with Mary, she spoke about her concerns over the marriage of Bruce and Susan. After working with the family for close to a year, I didn’t get the sense anyone, other than Mary, had concerns about this. I also came to realize that for Mary it wasn’t really about being concerned about the state of their marriage, but rather her feeling a loss of identity with letting go. She agreed to transfer her remaining portion of the land and farm operations now to Bruce, and her house would go to Maggie when she passed (her home farm).
“She could come and live with me and keep me company when she comes back and works,” Mary said. Susan’s eyes teared up, so did Maggie’s. It was a solution that seemed to provide Mary with some comfort and a little more control over what was happening with her family’s farm by knowing the farmhouse would go to her granddaughter. Susan was touched by her mother-in-law’s suggestion. And everyone seemed happy at that being included in the transition plan.
By offering this gesture, we moved Maggie onto Mary’s title with survivorship. They decided to move Mark onto the title of the farm he is living on as well. The home farm would continue to be in Bruce and Susan’s name but with ownership going to Maggie and Mark through their wills.
As we continued to present our tax and transition plan, we then spoke of Matthew, the only non-farming family member at this meeting. This had always been a primary concern of Susan, his mother, to make sure Matthew had some sort of equalization during the transition.
An advantage for the Hunter family was that Matthew had no desire for cash right now. He wanted to ensure the farm continued, and that his children (who are five and four years old) can join the farm if they decide to one day. It wasn’t my place to share the personal savings wealth accumulated by Matthew’s grandmother or his parents’ prudent savings over the years. The wealth portions of both his grandmother and parents, upon their deaths, would go directly to Matthew.
Mary added, “I would like Maggie to get my home on the farm, and from what Darrell tells me, I have more than enough to make it to 120, with at least $1 million left over from my personal savings and insurance.” Mary’s late husband, Jack, had had the foresight for this situation and had planned appropriately.
Importantly for Matthew, the succession plan outlined what a pathway to ownership would look like for any future owners, including Matthew, plus Mark’s first child, expected soon, and Maggie, if she has children in the future.
We then discussed ongoing governance and helped guide the family to co-create their shareholders agreement. The family gained consensus on a decision-making model, meeting guidelines and expectations of how they could buy in and get out if needed.
We worked out roles and responsibilities for each family member. Maggie and Susan were heading up the bookkeeping and financials; Bruce, Maggie and Mark would all manage certain aspects of the business; but ultimately decisions that had an impact on the entire business would be shared and discussed.
Maggie would be leading the milking and herd health, while brother Mark would lead the field and the feed with his father’s continued leadership.
We spoke about the next steps, which were to draw up legal agreements to support these plans and update estate plans.
I asked how everyone was feeling as I packed up my papers.
Susan spoke first. “I feel relieved, we have come so far and now have clarity.”